2. Business Combination

First Niagara

On August 1, 2016 (the “Acquisition Date”), we acquired all of the outstanding common shares of First Niagara, the parent company of First Niagara Bank, for total consideration of approximately $4.0 billion and thereby acquired First Niagara Bank's approximately 390 branch locations across New York, Pennsylvania, Connecticut, and Massachusetts. The merger with First Niagara enabled us to expand in the New England market and into the Pennsylvania market, improve our core deposit base, and add additional scale in our banking operations. The results of First Niagara’s operations are included in our consolidated financial statements from the Acquisition Date.

Under the terms of the merger agreement, each outstanding share of First Niagara common stock was converted into the right

to receive 0.680 KeyCorp common shares and $2.30 in cash, for a total per share value of $10.26, based on the $11.70 closing price of KeyCorp’s stock on July 29, 2016. In the aggregate, First Niagara stockholders received 240 million shares of KeyCorp common stock. Also under the terms of the merger agreement, First Niagara employee stock options and restricted stock awards converted into options to purchase and receive KeyCorp common stock. These options and restricted stock awards had a fair value of $26 million on the date of acquisition. Our methodology for valuing employee stock options is disclosed in Note 17 (“Employee Benefits”) under the heading “Stock Options.” Our methodology for valuing restricted stock awards is disclosed in Note 17 (“Employee Benefits”) under the heading “Long-Term Incentive Compensation Program.”.

In addition, at the time of the merger, each share of First Niagara preferred stock, Series B, was converted into the right to receive a share of KeyCorp preferred stock, Series C, a newly created series of KeyCorp preferred stock. Additional information on this series of preferred stock is provided in Note 23 ("Shareholders' Equity") and Note 26 (“Subsequent Events”).

On October 7, 2016, First Niagara Bank merged with and into KeyBank, with KeyBank as the surviving entity. Systems and client conversion also occurred during the fourth quarter of 2016 in connection with the bank merger.

The acquisition of First Niagara constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, the liabilities assumed, and the consideration paid were recorded at their estimated fair value as of the acquisition date. These fair value estimates are subject to change for up to one year after the Acquisition Date as additional information becomes available.

The following table provides the purchase price calculation as of the Acquisition Date and the identifiable assets purchased and the liabilities assumed at their estimated fair value. These fair value measurements are based on internal and third-party valuations.



in millions
Consideration paid:
KeyCorp common stock issued			$	2,831
Cash payments to First Niagara stockholders			811
Exchange of First Niagara preferred stock for KeyCorp preferred stock			350
Total consideration paid			$	3,992

Statement of Net Assets Acquired at Fair Value:
ASSETS
Cash and due from banks and short-term investments	$	620
Investment securities	9,012
Other investments	297
Loans	23,645
Premises and equipment	245
Other intangible assets	385
Accrued income and other assets	1,430
Total assets	$	35,634

LIABILITIES
Deposits	$	28,994
Bank notes and other short-term borrowings	2,698
Accrued expense and other liabilities	490
Long-term debt	846
Total liabilities	$	33,028

Net identifiable assets acquired			2,606
Goodwill			$	1,386

Measurement Period Adjustments

We estimated the fair value of loans acquired from First Niagara by utilizing the discounted cash flow method within the income approach. This methodology aggregates the purchased loans by category and risk rating. Cash flows for each category were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of First Niagara’s allowance for loan losses associated with the loans we acquired. The valuation of the acquired loans was not final prior to December 31, 2016, due to the relatively short time frame in which we had to complete the acquisition as well as the complexity involved in valuing loans. An estimate was recorded during the third quarter of 2016 based on the results of a valuation exercise conducted as of December 31, 2015, and applied to the August 1, 2016, balance of loans acquired from First Niagara.

During the fourth quarter of 2016, we continued to analyze the valuations assigned to the acquired assets and assumed liabilities. Our third party valuation firm provided revised valuations for loans based on the August 1, 2016 balances, which impacted the valuation estimates for loans and unfunded lending-related commitments. As of December 31, 2016, we continued to analyze the assumptions and related valuation results associated with the acquired loans. Due to the complexity in valuing the loans and the significant amount of data inputs required, the valuation of the loans, including unfunded lending-related commitments, is not yet final. As a result of revising the loan valuation, including unfunded commitments, the purchase accounting accretion and unfunded commitment amortization amounts are also subject to change. We anticipate finalizing the valuation during the first quarter of 2017. Depending on when the valuation is finalized within the first quarter, we may not be able to adjust the value of the acquired loans, if deemed necessary, until the second quarter of 2017. In addition, adjustments were made to fixed asset balances based on new information resulting in the revised fair values displayed below. Based on the revised valuations and new information, we updated our estimated fair values of these items within in our Consolidated Balance Sheet with a corresponding adjustment to goodwill. These changes are gross of taxes and reflected in the following table:



in millions
Acquired Asset or Liability	Balance Sheet Line Item	Provisional Estimate		Revised Estimate		Increase (Decrease)
Loans	Loans	$	23,504	$	23,645	$	141
Premises and equipment	Premises and equipment	276		245		(31		)
Unfunded lending-related commitments	Accrued expense and other liabilities	24		67		43

The changes to the estimated fair values also impacted various income statement line items. The amounts shown in the table below represent the increase (decrease) in the respective line items in the Consolidated Statements of Income for the previous reporting period had the revised fair values been recorded at the Acquisition Date.



in millions		Portion Related to
Acquired Asset or Liability	Income Statement Line Item	Previous Reporting Period ^(a)
Loans	Interest income	$	34
Loans	Other noninterest income	1
Premises and equipment	Depreciation expense	(1		)
Unfunded lending-related commitments	Other noninterest income	3


(a)	Represents the change in amount that should have been reported compared to what was actually reported in the September 30, 2016 Consolidated Statements of Income.

Information about the acquired First Niagara loan portfolio as of the Acquisition Date is presented below, and excludes lines of credit:



in millions	PCI
Contractual required payments receivable	$	1,378
Nonaccretable difference	189
Expected cash flows	1,189
Accretable yield	205
Fair value	$	984

At the First Niagara Acquisition Date, the contractual required payments receivable on the purchased non-impaired loans totaled $22.6 billion, with an estimated corresponding fair value of $22.2 billion. The estimated cash flows not expected to be collected at the Acquisition Date were $399 million. These amounts do not include loans held for sale and the loans that were divested as part of the 18 branches that were sold on September 9, 2016.

Intangible assets consisted of the core deposit intangible, the commercial purchased credit card relationships, the consumer purchased credit card relationships, and other intangible assets. The core deposit intangible asset recognized as part of the First Niagara merger of $356 million is being amortized over its estimated useful life of approximately ten years utilizing an accelerated method. The commercial purchased credit card relationships recognized as part of the First Niagara merger are being amortized over their estimated useful life of approximately six years utilizing an accelerated method. The consumer purchased credit card relationships recognized as part of the First Niagara merger are being amortized over their estimated useful life of approximately nine years utilizing an accelerated method.

Goodwill of $1.4 billion was recorded as a result of the transaction and is not amortized for book purposes. $1.1 billion of goodwill was assigned to our Key Community Bank segment and $277 million of goodwill was assigned to our Key Corporate Bank segment. The goodwill recorded is not deductible for tax purposes. The following table shows the changes in the carrying amount of goodwill by reporting unit.



in millions	Key Community Bank		Key Corporate Bank		Total
BALANCE AT DECEMBER 31, 2014	$	979	$	78	$	1,057
Tax adjustment resulting from Pacific Crest Securities acquisition	—		3		3
BALANCE AT DECEMBER 31, 2015	979		81		1,060
Acquisition of First Niagara	1,109		277		1,386
BALANCE AT DECEMBER 31, 2016	$	2,088	$	358	$	2,446

Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity. The fair values of savings and transaction deposit accounts acquired from First Niagara were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand.

Direct acquisition costs related to the First Niagara acquisition were expensed as incurred and amounted to $44 million for the twelve months ended December 31, 2016. Professional fees and charitable contributions comprised the majority of these direct acquisition costs, which also included franchise and business taxes and other noninterest expenses. These direct acquisition costs are part of our total merger-related charges.

The following table presents unaudited pro forma information as if the acquisition of First Niagara had occurred on January 1, 2015. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles, and related income tax effects. Merger-related charges related to the First Niagara merger that we incurred during the twelve months ended December 31, 2016, and 2015, are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had KeyCorp merged with First Niagara at the beginning of 2015. Cost savings are also not reflected in the unaudited pro forma amounts for the twelve months ended December 31, 2016, and 2015.



	Pro forma
	Twelve months ended December 31,
in millions	2016		2015
Net interest income (TE)	$	3,599	$	3,564
Noninterest income	2,231		2,206
Net income (loss) attributable to common shareholders	1,161		1,187