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 Acquisition Date. Our methodology for valuing employee stock options is disclosed in Note 16 (“Stock-Based Compensation”) under the heading “Stock Options” on page 179 of our 2016 Form 10-K. Our methodology for valuing restricted stock awards is disclosed in Note 16 (“Stock-Based Compensation”) under the heading “Long-Term Incentive Compensation Program” on page 180 of our 2016 Form 10-K.

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 18 (“Shareholders' Equity”) of this report.

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.

The following table provides the final purchase price calculation as of the Acquisition Date and the identifiable assets purchased and the liabilities assumed at their fair value. These fair value measurements were 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	23,590
Premises and equipment	245
Other intangible assets	385
Accrued income and other assets	1,467
Total assets	$	35,616
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			2,588
Goodwill			$	1,404

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 ALLL associated with the loans we acquired. The valuation of the acquired loans was final at June 30, 2017.

Based on the final valuations, we updated our fair values within our June 30, 2017, Consolidated Balance Sheet with a corresponding adjustment to goodwill. There were no measurement period adjustments during the third quarter of 2017.

The amounts reflected in the following table represent the change in the fair values of acquired assets as of June 30, 2017:



in millions
Acquired Asset	Balance Sheet Line Item	Provisional Estimate		Final		Increase (Decrease)
Loans	Loans	$	23,645	$	23,590	$	(55	)
Tax adjustment on previous fair value measurement ^(a)	Accrued income and other assets	1,449		1,467		18
Unfunded lending-related commitments	Accrued expense and other liabilities	67		65		(2		)
Deferred compensation ^(a)	Accrued expense and other liabilities	39		41		2


(a)	The fair value adjustment did not have any impact on the income statement for the three and six months ended June 30, 2017.

The finalization of the fair values also impacted various income statement line items on the Consolidated Statements of Income. The amounts shown in the table below represent the increase (decrease) in the respective line items for the previous reporting period had the final fair value been recorded at the Acquisition Date for the nine months ended September 30, 2017.



in millions		Portion Related to
Acquired Asset	Income Statement Line Item	Previous Reporting Period ^(a)
Loans	Interest income	$	42
Loans	Provision for credit losses	1
Loans	Other noninterest income	(3		)
Unfunded lending-related commitments	Other noninterest income	(4		)


(a)	Represents the change in amount that should have been reported compared to what was actually reported in the December 31, 2016, Consolidated Statements of Income.

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 of $356 million recognized as part of the First Niagara merger 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. Of this total, $1.1 billion of goodwill was assigned to our Key Community Bank segment and $280 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, 2015	$	979		$	81		$	1,060
Acquisition of First Niagara	1,109			277			1,386
BALANCE AT DECEMBER 31, 2016	2,088			358			2,446
Tax adjustment on previous fair value measurements	(15		)	(4		)	(19		)
Loan adjustment on previous fair value measurements	30			7			37
BALANCE AT JUNE 30, 2017	$	2,103		$	361		$	2,464

Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. 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. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.

Direct acquisition costs related to the First Niagara acquisition were expensed as incurred and amounted to less than $1 million for the nine months ended September 30, 2017. 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 nine months ended September 30, 2016, 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 nine months ended September 30, 2016.



	Pro forma
in millions	Nine months ended September 30, 2016
Net interest income (TE)	$	2,674
Noninterest income	1,625
Net income (loss) attributable to common shareholders	849

For information on the Cain Brothers & Company, LLC, HelloWallet Holdings, Inc., and Key Merchant Services, LLC acquisitions, see note 12 (“Acquisition, Divestiture, and Discontinued Operations”).