KeyCorp
Q1 2015 Earnings Call Transcript

Published: 2 Nov 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to KeyCorp’s Conference Call to discuss the acquisition of First Niagara Financial Group. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session [Operator Instructions]. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host Chairman and CEO, Beth Mooney. Please go ahead.

[Beth Mooney:]

Thank you, Operator. Good morning. And, thank you for joining us to discuss Key’s acquisition of First Niagara Financial Group. Joining me for today’s presentation is Don Kimble, our Chief Financial Officer, also in the room is Chris Gorman, president of our Corporate Bank, who will also be leading this important integration effort and Bill Hartmann, our Chief Risk Officer. Slide 2 is our statement of forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call. I am now turning to Slide 3. We are very excited about this compelling strategic opportunity to combine two great companies. Key and First Niagara are a powerful combination that will benefit our clients, communities, employees and shareholders, and create a high performing regional bank. Together, we will be the 13th largest commercial bank, headquartered in the United States with 135 billion in assets, 100 billion in deposits and 3 million clients. The transaction strengthens our core operating and financial metrics. Upon full realization of cost savings, our return on tangible common equity will increase by 200 basis points, and our efficiency ratio will strengthen by 300 basis points. With this acquisition, Key will be the leading bank in Upstate New York with a strong presence across the North East, Midwest and Pacific Northwest. Together, we will have number one retail market share in Buffalo, Albany, Syracuse and Rochester and establish Key in some attractive new markets, including Pittsburgh, Philadelphia, Hartford and New Haven. I think Key’s business model will resonate here and we look forward to the opportunity to introduce ourselves to clients and prospects in these adjacent markets. Key and First Niagara have complementary capabilities and business model and we believe the combination will allow us to deepen client relationships and grow revenue by deploying a broader suite of products across our combined client base. This acquisition provides attractive financial returns to Key and is an efficient use of our capital. Don will discuss the financial impact in his remarks, including return metrics that are well above Key’s cost of capital with an IRR of approximately 15%. The transaction is also solidly accretive to our earnings per share. Slide 4 is an overview of First Niagara. I know many of you are familiar with this great company, and we have had respect for them for a very long time. They operate many of the same businesses and in markets that are core, contiguous and attractive to Key. Key has had a presence in many of these markets for over 100 years and we are very excited about the ability to become the top retail bank in a number of our existing markets. And while we have always admired First Niagara, I will share that our respect has grown significantly as we got to know them even better during our due diligence. Gary Crosby and his team are good bankers who operate with values and behaviors that are shared by Key. We look forward to welcoming them and their clients to Key. We also look forward to having three directors from First Niagara join the KeyCorp Board when the acquisition is completed. With that, I’ll turn the call over to Don.

[Don Kimble:]

Thanks, Beth. I am on Slide 5. To provide more color on the transaction as shareholders of First Niagara we’ll receive $2.30 in cash and 0.68 shares of Key stocks for each of their common shares. Based on the Key’s close last night, this represents $11.40 per First Niagara common share. We also highlight transaction multiples which are generally in line with present transactions of this size. This slide also depicts the key assumptions underlying our analysis including in the presentation. These assumptions include; cost savings of approximately $400 million or about 40% of First Niagara’s current non-interest expense saves. We’ll talk more about the cost savings later this morning, but they are a significant source of value created by this transaction and they are substantial rigor behind our estimate. We feel confident in our ability to achieve these savings. One-time merger cost of $550 million and a loan mark of 3%. Result of combining the two companies drives very compelling financial results and accelerates our growth and progress toward becoming a high performing regional bank. These results include; 200 basis point improvement in our return on tangible common equity; the improvement in ROTCE will drive a higher price to tangible book value which more than offset the dilution associated with the transaction; a 300 basis point improvement in our cash efficiency ratio and 5% in EPS accretion. The transaction also produces an IRR of 15% which is well above our cost of capital. This meaningful improvement reflects the benefit of the full realization of cost savings. It also reflects the impact of purchase accounting adjustments and expected balance sheet adjustments coming from the acquisition. It is important to note these projections do not reflect the benefit of identified revenue synergies which are also significant and add to the performance of combined company. I'll cover the other line items in the rest of my presentation. Thus highlighted from a clear benefit from combining the two companies and on Slide 6 we start to provide some additional details. First the combined companies are 3 million customers resulting in the leading market position across the I-90 Corridor from Toledo to Albany, New York. This high density markets are complemented by our higher growth Western markets. The combined product offerings of both companies will allow us to better serve our existing customers and provide a compelling value proposition to attract new customers. They also provide significant revenue opportunities as we will discuss later. Continuing on to Slide 7, the combination of the two company’s results in a leading retail market share in several upstate New York markets. This presence provides the density to maximize our brand and commitment to these key communities. Key is operating in some of these markets for more than a 100 years and is exciting to be able to deepen our presence and expand our client base in what are already very good markets for us. As Beth mentioned we also think our business model will play well in all of First Niagara's markets. On a pro forma basis we will have a northeast deposit franchise of approximately $50 billion. Turning to Slide 8, First Niagara has had a focus on developing the commercial banking business showing strong loan growth and investing in many product capabilities to better serve these customers. The targeted customers submit aligns closely to the commercial portion of our community bank and we are excited for the combination and the opportunities that we'll provide for growth in our commercial business. First Niagara's bankers are very productive today and we think that given a broader product set including more robust commercial payments, capital markets and private banking products they will be able to provide their clients with an even broader solution set on our platform. This should lead to deeper more profitable client relationships and incremental revenue. Slide 9 reflects the value created from the unique opportunity of this transaction. We have a high degree of market overlap with over 30% of First Niagara's branches being within two miles of existing Key branches. We also have a benefit to leverage our existing technology to drive significant expense synergies. First Niagara had undertaken a strategic investment plan to enhance their technology platform which was built in more of an outsourced environment. That program was performing as expected and will ease the conversion to Key's technology infrastructure which is a significant source of cost savings. Other projected cost savings approximately 40% are related to technology and third party vendor contract savings. Our cost savings estimate results from an extensive review of all operational and back office functions. We have very granular plans and time tables for the cost savings and are confident in our ability to achieve these plans. The combination of all these expense synergies drives the reduction of $400 million per year. The savings capitalized at a 12 multiple results in a value to shareholder of $2.8 billion or 67% of the deal value. The potential to leverage to combine product offerings is one of the more exciting aspects of this transaction. As we mentioned before First Niagara was on the path to build up many of their commercial products and services. This transaction accelerates that development and offers significant opportunities in treasury management and investment management areas. First Niagara has also grown a nice insurance business that we can leverage across our customer base. We believe the potential revenue synergies are real and have identified in excess of $300 million in value. But they have not been included in our analysis and in the financial results presented year end. We believe the benefits of these synergies will accrue to our combined shareholders. Turning to Slide 11, as we stated this acquisition accelerates our progress towards becoming a high performing regional bank. First our efficiency ratio benefits from over 300 basis points and this transaction can drive Key's cash efficiency ratio to mid-50s. Even if the rates remove at the low level it will generate roughly 300 basis points of improvement versus our standalone results. Second a return on tangible common equity will improve by over 200 basis points, well in excess of our cost of capital. And our EPS accretion would be over 5%. These factors combined with a solid IR and return on invested capital produces attractive financial results delivering against the revenue synergies will further enhance these returns. Again we believe these results and the benefits of the combination are a compelling investment story. The improvement and the return on tangible common equity will drive a higher price to tangible book value which more than offsets the dilution associated with the transaction. Turning to Slide 12, capital ratios remain strong post the transaction reflecting the impact of the balance sheet mark, the cash provided in the structure and the projections during the interim periods. Our dividend will continue for the next two quarters at the current $0.075 per share then increase to $0.085 cents per share in the second quarter of 2016 as originally included in our 2015 plan. Although we are suspending our share repurchase effective with today's announcement we would expect to request share repurchases as part of our 2016 CCAR submission. Moving on to Slide 13, our diligence was comprehensive and focused, we involved over 200 employees from Key to assess critical areas such as credit compliance, legal, technology, operation, finance and accounting. We reviewed the credit files of over a thousand borrowers representing over 50% of total commitment. Through this review we were able to confirm their credit underwriting and credit management processes resulting in a validation of their overall credit rating assessments. The best result of our due diligence was that it confirmed the commitment of First Niagara to its clients and communities. It is a solid bank with good people throughout and we look forward to combing our companies for the benefit of our clients, communities, employees and shareholders. The integration of the two companies is critical. We know this is the area that we have to remain very disciplined and focused. We plan to include some of our strongest leaders from both organizations to drive to a successful outcome. We have selected Chris Gorman, President of Key Corporate Bank to lead this effort. Our expectation is this transaction will close in the third quarter of 2016 and our conversion and much of the consolidations will be completed in late 2016. Now I’ll turn the presentation back over to Beth.

[Beth Mooney:]

Thank you, Don. And I am now on Slide 14. As we mentioned earlier, we really grew on our respect for First Niagara over the course of our due diligence. They have a strong franchise and a similar commitment to our community, and we look forward to building on their commitments to our shared communities as we go forward. And turning to Slide 15, today is a very exciting day for Key. The strategic opportunity to combine with First Niagara is compelling and will benefit our clients, communities, employees and our shareholders, and create a high performing regional bank. Key’s franchise will be forever stronger and we look forward to working with our new teammates to deliver strong service and great products to our combined base of 3 million clients, and doing so in a way that is more efficient and rewarding for our shareholders. Additionally, Slide 18 contains important information about where you can find additional information about the transaction. With that, I’ll close and turn the call back over to the operator for instructions for the Q&A portion of our call. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Erika Najarian with Bank of America. Please go ahead.

[Erika Najarian:]

So my first question, and I know it’s not part of the math on the accretion. But on the revenue synergies that you mentioned, if I look at the lack of overlap in terms of products that you noted the Key has investment banking and commercial banking servicing -- commercial mortgage banking servicing. I get it when you bought Pacific Crest you needed to add a subsector. But why would you need First Niagara to generate more revenues from this side? I never saw that this needed a branch to expand. So I just don’t understand the revenue synergy part of this equation.

[Don Kimble:]

Erika this is Don. And as far as revenue synergies, I would look at back I think it’s Slide 10 if I remember right. But really to highlight some of the areas where we think there are opportunities. First it really revolves around the payment space, and First Niagara was in the process of really enhancing their commercial treasury management products and services and starting to launch that with their customers. This accelerates that capability for them that currently within Key’s community bank that we’re performing about 3 times the level that First Niagara is for that products and service. We see similar opportunities in investment management private banking for our customers. We see opportunities in derivatives and FX. And so we think there are lots of benefits there. One area that we did mentioned though is commercial real estate and I think the combination of the two companies should be very accretive from a revenue opportunity perspective there as well as we offer their clients further opportunities to be able to access different types of capital market transactions to support their businesses. So, we’re very excited about this just really areas that we highlighted on Slide 10 we believe that there is $300 million revenue synergies and that will drive real value for us.

[Operator:]

Our next question is from Scott Siefers with Sandler O’Neill. Please go ahead.

[Scott Siefers:]

Don, could you please run through a little more of the math regarding the EPS accretion and then also the tangible book dilution earn back. The Broad question on the EPS accretion is, if I just atom-smash, very simply, the two companies together and add back the cost savings, the accretion looks like it should be well in excess of the 5% that you have done. Are you assuming any runoff or degradation in the FNFG earnings power or what is behind that, number one. And on the dilution, if we were to use the 5% EPS accretion and slice somewhere around $0.07 or $0.08 annually accretion, but the 12% tangible book dilution comes out to about $1.35 or so. If I just very simply divide one into the other it looks like a very, very long tangible book earn back, close to a long time. I'm just curious how you about that dynamic as well?

[Don Kimble:]

As far as the EPS accretion, I think the piece that you wouldn’t have in there is some more alignment of their balance sheet with ours, mainly on the securities portfolio and so we're adjusting the mix to be more LCR compliant from that perspective and so there are some adjustments from that initially and I think you'll see the balance sheet look a little bit more like Key and it might have historically because of that difference. As far as the tangible book value dilution payback period, what we've looked at here is if you were to add in the revenue synergies that we would expect through 2018 and you've had a part of the competition we think that the payback period is around six years. And so you're right that by excluding the revenue synergies the number would be north of the six years so we think those are very real and part of our targets and feel that’s a much better picture as far as the payback period.

[Operator:]

Our next question is from Geoffrey Elliot with Autonomous Research, please go ahead.

[Geoffrey Elliot:]

Hi, it’s Jeff Elliot from Autonomous, thanks for taking the question. On the whole integration process you're going to be going through over the next few two months, does that present any challenges with next year's CCAR submission, given that you are going to be midway through integrating First Niagara when you submit, or when you are midway trying to get the deal closed, when you submit?

[Don Kimble:]

We have had a number of conversations with our regulators and CCAR has been a prominent topic as part of that conversation that we would expect 2016 CCAR to reflect both Key on a standalone basis and also the adjoining impact of First Niagara, so that will be something that we'll be working through as part of the integration and utilizing some of the models and data that they already have available to help facilitate that.

[Geoffrey Elliot:]

And given that first Niagara has had a few hiccups over the past few years, does that create any need to be a bit more conservative when you are thinking about that submission?

[Don Kimble:]

I would say that if you look back historically at First Niagara their credit performance through the last cycle was very strong, and so I think that as we went through our due diligence process, we were very thorough as far as the scope of the due diligence and the review of the credit portfolio, and so we would believe that we'll be well positioned as far as the CCAR process to include First Niagara.

[Geoffrey Elliot:]

Lastly, the hiccups they have had more on the systems and processes side, how have you felt comfortable that that is not going to create issues down the road?

[Don Kimble:]

First as far as systems I would say that I don't know if you would classify that as a hiccup, they've been making some investments in their strategic investment plan and that has been on target and on plan and they are seeing some tangible benefits from that across many of their business products and it's also helpful to note that it's in alignment with how we take care of our technology strategy as well. And so we think there are synergies from that perspective. I think in connection with the other items that you might be referring to, we've done a thorough review of those areas and are comfortable with the positions they're in as far as addressing those.

[Operator:]

And our next question is from John Pancari with Evercore, please go ahead.

[John Pancari:]

Just regarding the bond portfolio restructuring, can you just give us a little bit of color what you are looking at doing there, the size of the scale back in First Niagara's book, and what type of charge you are assuming as you take this steps to exit some of these investments?

[Don Kimble:]

The investments generally have some high quality assets that aren't LCR friendly and so they would have some investments in some CMBS and also CLO transactions that we would expect a changeover to our Ginnie Mae's and agency securities. And so not anticipating any charge that the fair value of those investments are very close to what their carrying value is and some of those have a fairly short duration so we would see those line down over time, but it's more just a repositioning to align the balance sheet to more fit our current liquidity requirements.

[John Pancari:]

Okay. And then on the accretion question, on the accretion topic, I know you give us the color on where you expect accretion to be on longer-term, but where do you see the impact on EPS for 2017 and possibly 2016? I just want to get an idea of how this is going to impact your overall earnings levels as we get some of these benefits of the cost savings realized, et cetera.

[Don Kimble:]

2017 ex-onetime charges we would expect it to accretive to the combined organization so we wouldn't be full 5% accretive, though we've talked about for '18 and beyond but that we do believe that we'll see EPS accretion with our timeline as far as third quarter as far as completing the transaction and later in the year as far as the consolidation, I think there's going to be some noise in 2016 related to onetime charges, so I don't want to imply that there is a good estimate as far as what the general EPS impact would be there.

[John Pancari:]

All right, thank you.

[Operator:]

And we have a question from the line of Matt O'Connor with Deutsche Bank, please go ahead.

[Matt O'Connor:]

Just circling back on some of the assumed revenue loss. Thinking about the divestitures, have you sized how much that might be in terms of branches or businesses they may no longer want to be in, and what is the revenue impact from that?

[Don Kimble:]

We’ve also included that in the model well I should have highlighted that less than around that we have included a very modest assessment as to what we think the amount would be and I would probably be in one, maybe two markets but it would not be of significant size.

[Matt O'Connor:]

And then just to circle back because I am not as familiar with First Niagara. But just circling back with some of the issues they had on the regulatory or accounting side of things. I mean is it possible not just to look at yourself but to engage third party or regulators to get more comfortable with that?

[Beth Mooney:]

Matt this is Beth. Good morning. We have had in our due diligence process extensive conversations and were able to have some robust understanding. And I will tell you that we have a high degree of confident around self-identified problems, remediation plans, and the status of the company to proceed to this point, and we are looking forward to the future.

[Operator:]

And next question is from Ken Usdin from Jefferies. Please go ahead.

[Ken Usdin:]

Bigger picture Beth for you, and maybe just your context from the Board about just uses of capital and deciding to add a company this big to the four as opposed to other uses of capital. I know you’ve been frustrated just with ability to use excess capital here you’re using about 100 basis points in part to be helped by suspending the buyback. So could you just give us how this came together in your minds versus other things that you might have been able to contemplate over time? Thanks.

[Beth Mooney:]

Ken, as we looked at it, we do believe this is an efficient use of capital and as you’ve outlined it does utilize approximately 100 basis points of our capital yet keeps very well capitalized, which I think is important as we talk about 2016 CCAR and beyond and our ability to continue to return capital to our shareholders in the future. But for right now as we evaluated uses of capital, what was compelling is as we looked at this opportunity is what it also does for the future financial performance and metrics of the Company that we actually will be accretive we will see growth both through we’ll realize significant value through the cost synergies, we see growth opportunities in the revenue synergies. And at the end of the day, in key performing metrics you get substantial improvement which should drive the higher return on tangible common equity and greater returns for our shareholders. So as we looked at it, this created an opportunity for our shareholders that we thought was compelling across a number of fronts, and believe that it was not only an efficient use of capital but a strong investment in our future.

[Ken Usdin:]

Next follow up on the six year tangible earn back with synergies. Can you give us a, with and without, just trying to understand I think people are wondering just how big those synergies can actually be?

[Don Kimble:]

What we talked about is a total that’d be over $300 million and the assumption here is that around half or so are included in that revenue assumption.

[Ken Usdin:]

Okay, got it. Understood. Thank you.

[Beth Mooney:]

But are not included in our financial model, that is an opportunity.

[Ken Usdin:]

Yes, got it. Understood. Thanks.

[Operator:]

We have a question from the line of Sameer Gokhale from Janney Montgomery Scott. Please go ahead.

[Sameer Gokhale:]

I have a question about Slide nine. I thought that it was a good slide just to break out overall the benefit from the cost synergies, and then you have the remaining part of it. I wanted to just parse that a little bit. I think, Don, you had referenced about 40% of that $2.8 billion coming from technology benefits and renegotiating vendor contracts, et cetera. The rest of it, the bulk of them, are those going to be from branch consolidations? I just want to clarify, or is there further detail you can give us on the components there. And then aside from the cost synergies, if you look at the pink part of that graph seemingly you have revenue synergies baked in there, but on top of that do you have any other benefit? I know you have used up from excess capital, which is a good thing, but is there a benefit from the use of that capital that you factored into that remainder of the benefits you expect to realize? I just want to get some more detail on that other part, as well, so if you could just parse that for us that would be great.

[Don Kimble:]

If you take a look at the expense savings, you’re right it’s a leading category really is technology and third party contracts. We talked before about having over 30% of the branches within a 2 mile radius and really that is the next category. We also have other efficiencies that we can drive through other uses of space and occupancy cost. We have certain back office functions where we gain synergies there as well. And lastly we even have a slight benefit from the FDIC rates that would accruing to us versus First Niagara on a standalone basis. And so each of those are additive, we have very detailed plans as to how will we get there and the time lines so we’re very confident in that. The 2.8 billion is just the fair value of the cost savings, the 4 billion is what we’re planning for the entire franchise so there’re core operating earnings. And also the revenue synergies which are not included in our model or additive to that $2.8 billion and so that’s really what gets us excited about the transaction is the potential of what we can add as a result of being a combined company as opposed to what’s available to us on a standalone basis.

[Sameer Gokhale:]

Just a quick follow-up, if I may. Usually in these types of acquisitions the bigger issue seems to be the ability of the banks to realize cost savings, but in this case it seems like there is a lot of low hanging fruit on that front. But the revenue synergies and I've got a couple questions on this front. If you could just remind me, how quickly do you expect to realize the full run rate of those revenue synergies, is it by the beginning of 2017? Do you expect to have those fully baked in, or do you do you think that will take longer than that?

[Don Kimble:]

In many categories, this three to five years I think to have the full type of benefit included that depends on the nature of the business and sales cycle and just to get everything ramped up. Again we’re quite confident in being able to achieve those and I’m sure that we will identify other revenue opportunities as we continue to work through the integration.

[Beth Mooney:]

And Sameer, this is Beth. One of the areas that gives us confidence too, is we’re building on our brand in share markets, where as we said the company is done business key bank for over a hundred years. So between leading market share and as well as the opportunity to go into contiguous with new markets that are fit for a business model and we look at our complementary products that we have a high degree of confidence again that we are uniquely position to unlock the value those revenue synergies relatively quickly. And then also a core deposit franchisees is very valuable in the combine company, we’ll have 63% of its deposits in core retail deposits, which over time should become more valuable as well.

[Operator:]

Our next question is from Bob Ramsey with FBR. Please go ahead.

[Bob Ramsey:]

Do you have handy the dollar amount of total goodwill and intangibles that are being incrementally added on the combined basis?

[Don Kimble:]

We’ll get that too you, I don’t know that I have it right now. But it’s about $1.4 billion in total I believe. But we’ll get more detail to you on that.

[Bob Ramsey:]

And could you talk a little bit about the evolution of this process. I am curious if it was a negotiated transaction, or an auction and who approach who and how it came together.

[Beth Mooney:]

Bob, this is Beth and I think this is a situation where it has been reported that there was a process for the company to entertain the potential of a strategic option and looked at potential partners and we were proud that through that process again uniquely Key was the right opportunity for First Niagara.

[Bob Ramsey:]

Okay. I guess last question. You talked about pausing on the buyback front in the near term here. Was taking those share repurchase out factored into the EPS accretion? I mean was it accretion versus where you would be if you had continued buybacks?

[Don Kimble:]

It absolutely was, yes.

[Operator:]

Our next question is from the line of Matt Burnell with Wells Fargo Securities. Please go ahead.

[Matt Burnell:]

Good morning. Thanks for taking my questions. Maybe a couple of forward-looking questions. You mentioned that the buyback is suspended, however, you are in good position given your estimates to request further buybacks in the 2016 CCAR cycle. I guess I am curious given your recent payment pay out rate has been North of 85% last couple of quarters. How are you thinking about that payout ratio just maybe in a range, going forward, given your announcement today?

[Don Kimble:]

We will be assessing that is part of the 2015 CCAR submission. We do believe that both common dividends and share buybacks will be prominently featured as part of that for the capital actions going forward. I think it’s too early to say, it could be 84% or something in that range. So we’ll provide more insight later.

[Matt Burnell:]

Okay. And then possibly just a second question on the potential opportunity. This acquisition gives you a branch presence in a couple big markets in Pennsylvania, which if I am correct, you have not historically had a big presence in. But it still leaves you at relatively modest market share in those two markets. I’m curious as to what you're thinking is going forward about potentially increasing your share in those markets, possibly via inorganic transaction.

[Beth Mooney:]

Matt, this is Beth. And yes we will be picking up contiguous new markets and we will be more like a top five share in those new markets, which we have other markets where we have the opportunity to not necessarily the number one, two or three in share and have found that our business model with our complement of business banking, commercial middle market, private banking and leveraging on the retail presence that bringing our fuller community bank mode has been successful for us. And so we look forward to that, we feel this is, these are contiguous, yet complementary to our business model and we’re excited about our starting price in those markets in our ability to effectively serve the clients and expand our opportunities there with targeted clients and prospects.

[Matt Burnell:]

And if I may, Don, a question for you. Are you funding the cash portion of this transaction with any debt issuance, or is that just going to come from available liquidity?

[Don Kimble:]

We have plenty of liquidity at the holding company. I will not be issuing any additional debt with this transaction.

[Matt Burnell:]

Great. Thanks very much.

[Operator:]

And our next question is from the line of Ken Zerbe with Morgan Stanley. Please go ahead.

[Ken Zerbe:]

Don, first question, just to come back to the revenue synergies, the $300 million, just want to be super clear on this, is that the present value of the revenue synergies or is that a $300 million annual number that you guys are thinking about?

[Don Kimble:]

I make that more clear, it is $300 million of annual revenue. So it’s not the present value it is the actual revenues that we should be able achieve on a run rate basis.

[Ken Zerbe:]

Got you. And then presumably if you get those revenues then your expense base also goes higher?

[Don Kimble:]

That's correct, that reflected in it. That's correct.

[Ken Zerbe:]

Okay. Totally understand and then just to be super clear on page nine, the $2.8 billion, the highlighted synergies. I’m just trying to reconcile that versus the roughly $0.08 of EPS accretion that you get, the $2.8 billion that you list here that's not including any of the shares that you are actually issuing, correct? Is this just the dollar amount and then the pre-share obviously is lot lower than that?

[Don Kimble:]

All that's really doing is taking a look to 400 million in expense savings, taking the after tax amount of that and saying that if you capitalize just that value alone at a 12 multiple that gives us $2.8 billion in value after backing out the one-time cost and so we’re saying that's the incremental value of putting these two organization together and the expense reduction that are achieved from that.

[Ken Zerbe:]

Understood. Then you issue shares to get that number. Okay. I'm good. Thank you.

[Operator:]

Our next question comes from the line of Nancy Bush of NAB Research. Please go ahead.

[Nancy Bush:]

I would, one of the rationales you give here is the concentration that it creates and the Northeastern and Midwestern part of the franchise and I would certainly agree and I would say you’ve been primarily a Northeastern, Midwestern Company for a while now. Is this the finally, Beth, going to afford you the ability to sort of re-think the geographic configuration of the company and maybe shed some parts and if so would that process have to take place after this deal has completed or could it be ongoing, as the integration proceeded?

[Beth Mooney:]

I will tell you as we look at uniquely unlocking the value of the company, I will tell you that yes it does create a concentration and higher density markets in the Midwestern and Northeast, but we also outlined our high growth market in the west and that's on Slide 6, and I think what’s important there is we have invested in those market over the years, built new branches there, we’ve increased our market presence, we’ve added to our capabilities between our strengthening our commercial middle market, bankers or business banking, built our private banking model and those have been attractive markets as well for our corporate bank and their investment banking and debt placement fees activity. So I look at it as the combined company has a very strong presence and high dense Midwest and Northeast with new clients and complimentary capabilities that we can grow, but we also have these high growth markets in the west, where we are successfully competing as number five in branch here, but with our broader business model in these attractive growth markets in the west with very compelling demographics. So I think of it as an interesting balance if you will and I think over the past several years as we’ve seen the geographic diversity of our franchise as a business strength and that these, while they are not geographically aligned, they are aligned from a business model and returns for our shareholders.

[Nancy Bush:]

So that would lead me to ask if you are looking for similar sized, if you would be looking for similar sized opportunities, then, in the Western market?

[Beth Mooney:]

I would say we are excited at the opportunity that we have in front of us and our ability to successfully integrate it and realize the benefits of the synergies both and cost revenue would be the number one priority for our company.

[Nancy Bush:]

Thank you.

[Operator:]

Our next question is from the line David Eads of UBS. Please go ahead.

[David Eads:]

Maybe if you could talk a little bit about First Niagara's loan book, and it has a little bit of concentration or focus in some areas where you aren't big. Indirect Auto being one, they are pretty big in CRE. I am wondering if that gives you opportunities to expand into some of those markets, or if there are areas where you might like to pull back on what they've been doing historically?

[Don Kimble:]

One, for the commercial real estate book, we did have our team take a look at their business and we’re very impressive with people and also the product they were able to provide as part of that area and so we’re excite about the combination there and we think one of the synergies really could be just leveraging some of our capabilities we have on the commercial real estate capital markets area. So that could be an essential synergy that we really haven’t even quantify into the summary. As far as the indirect auto, that first Niagara did pick up a very quality team here, few years ago and they have been originating indirect loans in the right way and their focus on super prime type of paper in the high 700 FICO score range and so we came to be very good, comfortable of what they are doing and how they are doing about it, and then we’ll look through. See how we can continue to leverage that going forward.

[David Eads:]

All right. Have you disclosed any kind of credit mark, or are you taking any credit mark?

[Don Kimble:]

We talked about 3% credit mark as assumed in models.

[David Eads:]

Okay.

[Don Kimble:]

That was based on our due diligence effort.

[David Eads:]

Great. Thank you.

[Operator:]

We have a question from the line of David Darst with Guggenheim Securities. Please go ahead.

[David Darst:]

So I guess, when you acquired the HSBC branches that they were the divesting in the transaction that was about $2 billion in deposits? Is that a reasonable number to think you may have to divest or should we look at the Albany market more specifically?

[Don Kimble:]

When we take a look at 2 billion isn’t a bad proxy as far as general assumptions, that’s probably little on a conservative side based on what we would be thinking. But that just taking a look at primarily the Buffalo market is where we see the greatest impact on overall market presence.

[David Darst:]

And then would you expect any gain or how are you thinking about that sale as it relates to your tangible book value dilution?

[Don Kimble:]

We have not modeled any significant gain as part of the divestitures.

[David Darst:]

And then how about that deleveraging component as part of your ratio expectations on capital?

[Don Kimble:]

That is assumed in the financial projections and as far as the capital impact it would have had a very modest impact to those overall ratios.

[David Darst:]

And then just is there anything -- I know you can’t speak for them on the next year. But would you expect them to slow their technology spending, or do anything else to better accrete capital on their balance sheet part of the closing?

[Don Kimble:]

Our expectations are that they continue to run business and we will be working with them as far as their plans and making sure that those parties are actively getting prepared for the integration effort. And so for them and for us it will probably mean some reprioritization of things that are in plate right now. So we’ll make sure that we’re coordinate that together.

[Operator:]

And our next question is from the line of Lana Chan with BMO Capital. Please go ahead.

[Lana Chan:]

One question on the 2018, 5% accretion. Just want to clear does that adjust for not doing buybacks for the next couple of quarters? And how are the cost savings phased in on those estimates?

[Don Kimble:]

The accretion does factor in the change in the buybacks and then comparison with us on a pro forma basis with what we would be on a standalone basis assuming that those would have continued. So, that does reflect that impact. As far as the expense synergies, as we talked before that we would expect most of the consolidations to occur late in 2016 and so we’ll start to see the majority of those savings in ’17 and should be fully effective in 2018, so the full $400 million should be recognized during 2018.

[Lana Chan:]

And just a follow up on the prior question in terms of the CCAR as for next year. Would we assume that M&A could potential take a higher priority versus share buybacks going forward in your CCAR thinking?

[Don Kimble:]

I would say that we’re going to be extremely focused on making sure we do this transaction right. So I don’t think this is going to be a first of the series of transaction for us that we’re very excited about this potential or this combination and believe that it will drive value for our shareholders and we want to make sure that we can demonstrate that through this focus on this individual transaction.

[Operator:]

Our next question is from the line of Mike Mayo, CLSA. Please go ahead.

[Mike Mayo:]

I think correct my thinking here, what I think is unique here is that you’re doing a deal one-third your size using mostly stock and stock that’s trading close to book value, so it seems like you’re really using a depressed currency for the biggest deal in your Company’s history. So I am just looking for some clarification on some numbers that you gave. So as it relates to six year payback for tangible book value dilution that assumes revenue synergies, if you don’t have revenue synergies is that payback period 10 or 15 or even 20 years, if you could clarify that? And the flip side of that your 2018, 5% EPS accretion I think does not include revenue synergies. So what would that 5% number for accretion in 2018 be if you included revenue synergies?

[Don Kimble:]

The revenue synergies included in the EPS accretion will be more than doubling of what the EPS accretion would be without those, so you’ll be looking something closer to 10% plus and the tangible book value payback period is closer to 10 time period that you talked about without the revenue synergies versus the 6 with the revenue synergies.

[Mike Mayo:]

So as a follow up cut given such a long payback period, your tangible book value dilution, 10 years if you had don't assume revenue synergies, what could be the conservative way to do that? Can you consider another way to fund this transaction? This is a lot of stock that you are issuing and you are also adding three new states to your 13-state footprint. In fact, we've had this conversation that predates you about the disjoint footprint which you are now adding to. Why not sell your five Western states to help fund this purchase? That would be a home run, and I think the amount from selling those five states would be about that $4 billion, based on our estimate. So why not consider some asset sales? Beth, I know you are asked that question, would you shed assets, but why not?

[Beth Mooney:]

As I look at our franchise Mike, I think the west is an important and core part of our franchise and is worth much more than what it would take to lighten up the asset load to help pay for this. I believe for our shareholders we will bring compelling returns significant improvements in our financial metrics and drive value with this. And part of that value will be the inclusion of a high growth Western franchise where we have invested and are achieving higher than average growth than we realized across our other markets and see it as a very attractive part of our franchise.

[Mike Mayo:]

If I could add one more follow up?

[Beth Mooney:]

Yes.

[Mike Mayo:]

A lot of the times investors say, how does management get paid? And lot of the metrics for your pay relate to factors other than say tangible book value dilution. Will there be any special compensation or any special incentives related to this merge or what are the key metrics you’re focused on that drive top executive pay?

[Beth Mooney:]

That would be a discussion and a decision for our Board of Directors to make as part of our compensation plans which they will approve. We have not had those discussions and I think as you know we are definitely focused on creating total shareholder return, return on equity, return on assets and achieving our financial performance and commitments. And I am sure all of that will be taking in consideration. But we have not articulated nor has our Board undertaken a process to create new financial plans which will be part of 2016.

[Operator:]

We have a question from the line of Terry McEvoy with Stephens. Please go ahead.

[Terry McEvoy:]

A question for Don, the 3% loan marker about $700 million, at least on the surface sounds high in light of your comments about their more favorable credit history and what we’ve seen in other acquisitions. Is there something in the portfolio that contributed to that mark? And then as a follow up, in your earnings accretion outlook do you take any consideration purchase accounting accretion at all?

[Terry McEvoy:]

Terry as far as the market I would say that we want to make sure that we’re conservative in that initial estimate and that’s really what drove the 3% mark that we did not uncover any carriers that caused any pause or real concern. And so net of their allowance it’s 0.5 or so, so it may not come across as big as it might otherwise seem. And as far as the purchase accounting accretion and other impacts, they are reflected in our purchase accounting -- in our 5% earnings accretion.

[Operator:]

And the next question comes from the line of Marty Mosby with Vining-Sparks. Please go ahead.

[Marty Mosby:]

Beth, I wanted to ask you more of a strategic focus, I mean you’ve been talking about how we’re tearing down the branch network, you’ve been one of the more aggressive ones that are being closing branches and really focused on the corporate commercial banking with acquisitions prior to this. As we move back to more of a regional retail focus, are we not really diluting the momentum and strategic focus that you have or what’s been working so well the last couple of years and getting back to traditional regional banking again?

[Beth Mooney:]

Marty I will tell you that I do not think this diminishes our focus on our commercial bank, in many ways it’s part of the complementary product capabilities and client set used in our core commercial middle market which is part of our community bank as well as some -- will create some opportunities for our corporate bank. But I do think that there is value in becoming a more balanced franchise particularly from a funding point of view in an LCR world and therefore in a period of time where potentially rates start rising, I think core retail deposits are very attractive and that balance will be good for our balance sheet and our franchise as I’ve stated earlier we will be 63% core retail funded. And as we look at that part of the value here as we do have overlapping branch network. So we can efficiently and synergistically enter these markets in a very cost efficient way and augment the core funding of the Bank. The customer base across the consumer as well as the business and commercial clients will be part of the opportunity to drive revenue and synergy as well. But I think the balance is also going to be and through time a good reflective mix of how we will drive value as well and we’re pleased to become more balanced.

[Marty Mosby:]

And then Don you said agree that this transaction is a way to use excess capital. It seems like you had more room to use cash and could have enriched it versus let’s say selling other branches going in and actually just using more of the capital, so you don’t have to do another deal down the road to get to be even more efficient. You could have done enough cash in this deal to basically get to a point where you would have been done with the excess capital and have that completely off your back. What are the constraints or things that you were thinking about when you came up with the amount of excess capital that you could deploy into this particular deal?

[Don Kimble:]

We take a look at -- on more of a holistic basis and assess where we would want to use leverage as far as the transaction, number of stakeholders that we would assess as far as the level of capital including where we are from a CCAR perspective which we think would still position us extremely well and also rating agencies and others to make sure that we still show our capital as a source of strength. And this allows us to continue to go back into the market with future share repurchases and the 2016 CCAR process as well.

[Marty Mosby:]

And does this get you to where you want to be from a capital ratio, or is there -- would you still consider a 9.5% excess capital still loaded into that ratio?

[Don Kimble:]

I would say that 9.5% is still a strong level of capital. And then so not sure what the long-term appropriate level is but that we say that 9.5% still in area of strength for us and still gives us opportunity to leverage that in the future.

[Operator:]

Our next question is from Erika Najarian with Bank of America. Please go ahead.

[Erika Najarian:]

Hi. If I could just want two follow-up questions please. The first is a follow-up on Marty’s question on the LCR. Beth, I don’t understand how this benefits you from an LCR perspective. You are already 70% retail funded in the deposit side before this deal and clearly you are going to add HQ LA, but just adding deposit is actually HQ LA dilutive. I guess help me understand that comment more, in terms of helping you balance for the LCR. And Don, how much does this is dilute your LCR?

[Beth Mooney:]

Balance is more about balancing our franchise between product set as well as sources of revenue between commercial and retail, that was my reference to balance. And I do believe in a strategic importance of retail deposits and core funding overtime as being part of, A how we’ve talked about our company and I think quality for retail deposits are a strategic value to the company.

[Don Kimble:]

And Erika the 70% I think you are referring to is really the Community Bank portion of our total deposits book. And so First Niagara brings a higher percentage of their core deposits in retail categories, and from an LCR perspective, retail deposits have the lowest consumer attrition rate. So they are of higher value then even a core commercial operating account and so there is value there. And then as far as the combination of the two companies and the impact on LCR, once you shift over the investment portfolio to look more like what we have that we will be well in excess of our LCR requirements and be able to maintain 15% type of cushion going forward.

[Erika Najarian:]

Got it. It just a follow-up question Beth, I know that you and Don have already spent almost an hour talking about the benefits of this transaction. But let me just ask this question more directly. Could you give us a sense of what the decision tree was in terms of buying a franchise at nearly 2 times tangible book after the mark, especially since it’s averaged about $9 over the past two weeks, versus buying back your stock below 1.3 times tangible book. I mean I know that you can’t return 36% of your market cap to shareholders because of the CCAR. But just help us understand that decision tree?

[Don Kimble:]

Erika, this is Don. I’ll take a first crack and then ask Beth if she would add anything too. But that essentially one right now that we don’t view that we’re going to see a lot of change as far as the ability to return back significant portions of capital through the CCAR process. So we’re not seeing or here in changes there that would create that opportunity or window. As we take a look at this transaction, we think there is a lot of fundamental improvement. Really this takes us to a different platform as far as top performing regional bank. If you look at our efficiency ratio improving. You look at the return on tangible common equity, you look at the ability to grow and benefit the bottom-line from both the expense savings and also the revenue synergies. This was unique to us as far as how we could help unlock some of that potential and that is why we are excited about it and that is why our board is excited about it and believe that this is a good way to leverage our capital going forward.

[Beth Mooney:]

And Erika I would just underscore what Don said as I look at the opportunity to invest in the ability to be more efficient, our return on assets, our return on equity, our market presence ability to add clients and grow and efficiently deploy some of our capital. We felt like this with a very strong investment for Key and our shareholders.

[Erika Najarian:]

Okay. Thank you.

[Operator:]

We have a question from the line of Gerard Cassidy with RBC. Please go ahead.

[Gerard Cassidy:]

Can you guys and I apologize if you have already discussed this, but can you share with us the conversation you have had with the Federal Reserve in light of what some of your larger peers gone through

[Beth Mooney:]

We’ve obviously had discussions with our regulators both locally in Washington. And I think the Federal Reserve was clear post the M&T announcement that their expectation is that as banks enter into these transactions that they will act on the applications and work with us and how to do our capital plans as we go forward. But it is their application that they have make public if there was some reason why the acquiring bank would not be able to complete the transaction, they would expect them to stand down and we have no indications of anything other than our belief that we will work through this process in a timely manner, which has been running about eight or nine months and that would be in line with expectations.

[Gerard Cassidy:]

Do you think, I agree with especially with the M&T disclosure what they said about the application? Do you think they would have said to you or others not just you folks, but not to do a deal if they don’t think you could completed it before it’s announced or do we run the risk that the application is not accepted at some point down the road?

[Beth Mooney:]

We obviously kept them advised and they know that we have entered into this agreement and they are expecting an application from Key and to work collaboratively with them to get that through process.

[Gerard Cassidy:]

And then just, Don, one quick question. You were talking about the earnings accretion and you mentioned that when we all look at the numbers on the outside we all had higher accretion, but you pointed out that the changes in the LCR were making the First Niagara asset more LCR compliant, which means lower yielding asset. How much of the earnings were impacted by that fact that you have to build up the LCR because of what you are bringing on the books?

[Don Kimble:]

I would say that they have about a $3.5 billion portfolio of non-agency or non- Ginnie Mae securities and we’ve look to switch that over and so our assumption would be bringing that back to more of a normalized run rate.

[Operator:]

And our last question comes from the line of Jack Michiko with SAG. Please go ahead.

[Jack Michiko:]

The acquired company had a considerably higher cost of deposits than Key. So the three-part question would be, do you think you can get that down in line with your number, which in the accretion assumption around the cost of deposits, and then does it really materially changed your beta assumption that 50 to 60% range?

[Don Kimble:]

If you would look at their deposit base, it has a higher concentration of savings and time compared to non-interest bearing checking accounts. One of things we talked about as far as revenue synergies was additional penetration of their commercial customer base with deposits and other treasury management services and so on a blended mix overtime, we would expect that to drive that cost of funds down initially in our baseline assumption, we are not assuming those revenue synergies and so we’re keeping those intact, I would say that the overall beta that we have are fairly consistent with what we are seeing from First Niagara to a customer base. So I think that we’ve a very similar range as far as changes.

[Jack Michiko:]

Okay. Thank you.

[Beth Mooney:]

All right as we close our call this morning. I’m going to turn to Slide 15. And first I want to thank you for joining us this morning. Today is a very exciting day for Key. The strategic opportunity to combine with First Niagara is compelling, and we’ll benefit our clients, communities, employees and our shareholders and create a high performing regional bank. Key’s franchise will be forever stronger and we look forward to working with our new Key mates to deliver strong service and great products to our combined base of 3 million clients and doing so in a way that makes us more efficient and rewarding for our shareholders. Additionally on Slide 18, it contains important information about where you can found additional information about the transaction. So we thank you again for taking time to participate and if you have any follow-up questions please address them to our investors relations team at 216-689-4221 and that concludes our remarks. Thank you.

[Operator:]

Ladies and gentlemen this conference will be made available for replay after 10.30 AM today running through November 9, 2015 at midnight. You may access AT&T Executive playback service at any time by dialing 1800-475-6701 and entering the access code 372745. International participants may dial 1320-365-3844 and again the access code is 372745. That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.