Beth Mooney - Chairman, CEO & President Don Kimble - CFO Chris Gorman - VP and President of Banking William Hartmann - CRO

Scott Siefers - Sandler O’Neill & Partners Erika Najarian - Bank of America Steven Alexopoulos - JPMorgan John Pancari - Evercore Ken Zerbe - Morgan Stanley Ken Usdin - Jefferies Peter Winter - Wedbush Securities Kevin Reevey - D.A. Davidson Saul Martinez - UBS Gerard Cassidy - RBC Bill Carcache - Nomura

Thank you, Operator. Good morning, and welcome to KeyCorp's Fourth Quarter 2017 Earnings Conference Call.

In the room with me is Don Kimble, our Chief Financial Officer; Chris Gorman, President of Banking; and Bill Hartmann, our Chief Risk Officer. As announced in December, Bill will be retiring, and Mark Midkiff will be joining Key next week as our new Chief Risk Officer, so we want to thank Bill for his years of service to Key and all that he has done for our company.

Slide 2 is our statement on 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'm now moving to Slide 3. Before I discuss the details of the quarter, I want to make a few observations.

First, 2017 was a strong year for Key with continued momentum in our core businesses and the successful integration of our First Niagara acquisition, and I believe our business fundamentals and competitive positioning are more favorable than any point in my tenure with the company. Whether it's the quality of our people at all levels of the organization, the depth and breadth of our client relationships from our retail business up through our large corporate franchise, the quality of our customer offering, including product capabilities, expertise, and our commitment to financial wellness, the strength of our balance sheet and our overall risk profile, our strategic focus across every business unit and our reputation within our communities from Maine to Alaska, the fact is we have never been better as a company.

Based on this positioning, as well as our positive outlook for general economic conditions that we expect to benefit our consumer and commercial clients, we are pleased this morning to announce increased long-term performance targets for Key. Specifically, we are revising our cash efficiency ratio target to 54% to 56% and increasing our return on tangible common equity target to a range of 15% to 18%.

These reflect our confidence in Key's competitive positioning and our ability to continue to deliver positive operating leverage and stronger returns. With that, let me move to our fourth quarter results, which at the outset, I would acknowledge are somewhat noisy.

Some of the moving pieces were environmental and industry-wide, including the impact of the Tax Cut and Jobs Act, while others were related to our business model or recent actions we have taken, but importantly, it was a solid finish to a strong year for Key with positive underlying trends. We reported fourth quarter earnings of $0.17 per common share or $0.36 after adjusting for notable items, including merger-related charges and the impact from the new tax law, along with other related actions.

Details on the notable items can be found in our earnings materials, and our remarks today will focus on our adjusted numbers, which are comparable to prior periods. Don will discuss the impact of the new tax law on our results.

We view this as a very positive change that should benefit both Key and its clients by strengthening the competitive position of U.S. businesses, increasing take home pay for American workers and promoting stronger economic growth.

This was our eighth consecutive quarter of year-over-year positive operating leverage and our return on average common tangible common equity was over 13% for the quarter. Revenue grew 3.5% from the prior quarter, driven by continued growth in our fee-based businesses.

The primary driver of the growth in noninterest income was investment banking and debt placement fees, which reached new record levels for both the quarter and the year. In 2017, investment banking and debt placement fees were over $600 million with organic growth of almost 20%.

Other fee-based businesses also contributed to our growth this quarter, including cards and payments which increased 12% from the prior year. Expenses this quarter were elevated and included merger-related charges and tax-related items.

The quarter also reflects higher expenses related to acquisitions completed in 2017, as well as higher incentives that are tied to our strong capital markets production. On our balance sheet, we continue to grow stable, low-cost deposits.

Average loans declined this quarter, which was not consistent with our expectation, driven primarily by our commercial real estate business, where we saw higher debt placements which contributed to our record Investment banking fees as well as elevated loan paydowns. In the fourth quarter alone, our commercial real estate team placed $4 billion of commercial mortgage loans in the capital markets.

C&I loans grew late in the quarter, which is reflected in our period-end balances, but did not benefit the quarterly averages. Overall, I am pleased with how our business model with our broad product offering continues to meet the financing needs of our clients through both on- and off- balance sheet alternatives.

Key is distinctive among regional banks in the breadth of solutions we can provide to our clients, and, in this environment, the capital markets have been very attractive. Capital markets execution enables Key to meet our client’s needs, drive fee income, manage portfolio risk and generate attractive returns on capital.

Importantly, we continue to see strong business activity and pipelines and our teams remained focused on finding the best solutions for our clients. Turning to our full year results, we made a meaningful step forward in 2017.

Most noteworthy was the achievement of a number of significant milestones that we committed to for both Key and our First Niagara acquisition. In 2017, we reached $400 million in annual run-rate cost savings from the merger, with another $50 million expected to be realized early this year.

Our cash efficiency ratio for the year was 60.2%, an improvement of 410 basis points compared to the prior year. We generated revenue synergies which continue to provide significant upside over the next several years, and we increased our return on tangible common equity to 13.1% for the year, an improvement of over 280 basis points versus last year.

This drove the fifth consecutive year of positive operating leverage and a meaningful step change in our performance. One of the standouts for the year was the double-digit growth in noninterest income, driven by record results in our capital markets businesses as well as our 23% increase in cards and payments income.

Additionally, we made a number of strategic investments during the year, including the fourth-quarter acquisition of Cain Brothers. The addition of Cain, along with HelloWallet, merchant services and the build-out of our residential mortgage platform makes us a stronger franchise and will provide significant growth opportunities in the years ahead.

Credit quality remained an area of focus for us in 2017, which resulted in strong credit metrics in the current year and, equally important, should position us well as we move through the next cycle. We’ve also remained disciplined in managing our strong capital position, including returning a significant portion to our shareholders.

Over the past five years, we have repurchased over $2.2 billion in common shares and our compounded annual growth rate for the dividend has been 14%. And in the fourth quarter, we increased our common share dividend for the second time in 2017 to $0.105 per common share.

I am now turning to Slide 4. I will close my remarks where I began with our new long-term financial targets.

These include a cash efficiency ratio in the mid 50% range and a return on average to tangible common equity of 15% to 18%. Achievement of these targets will be another meaningful step forward on our journey to becoming one of the top performing banks.

2017 was a significant and pivotal year for Key. We made a meaningful step change in performance and delivered on our First Niagara commitment.

We grew our businesses and made investments to strengthen our franchise and product offering which positions us well for the future. We also continue to have significant upside across our company including the opportunity to create incremental value from our First Niagara acquisition.

In early 2018, we expect to deliver the remaining cost savings of $50 million bringing the total cost takeout to $450 million and we plan to reach our target of $300 million in run rate revenue synergies by the end of 2019. As we look ahead, we are encouraged by the improving business climate.

I expect 2018 to be another good year for our customers and our community, and with our talented and dedicated team, I believe that Key is well-positioned to continue to grow and deliver returns to our shareholders. I will now turn the call over to Don to provide some additional color on the quarter.

Don?

Thanks, Beth. I’m on Slide 6.

We reported fourth quarter net income from continuing operations of $0.17 per common share. Adjusting for notable items including merger-related charges and the one-time impact of tax reform and related items, adjusted earnings per common share was $0.36.

Our adjusted results compare to $0.31 per share in the year-ago period and $0.35 in the third quarter. The most significant item in the fourth quarter was the impact from the Tax Cuts and Jobs Act passed in December which resulted in Key taking a number of actions including the revaluation of deferred tax assets and liabilities as well as certain tax-advantaged assets.

The revaluation resulted in additional tax expense of $147 million recognized in the fourth quarter. Noninterest expense increased by $29 million in the quarter related to the impairment of certain tax-advantaged assets and additional contributions to the employee retirement accounts.

Importantly, the tax reform provisions will result in a lower federal income tax rate for Key going forward. As part of our outlook for 2018, we expect the effective tax rate between 18% and 19%.

I will cover many of the remaining items on this slide in the rest of my presentation so I’m now turning to Slide 7. Total average loans of $86 billion were up 646 million compared to a year-ago quarter and down $808 million from the third quarter.

The decline reflects higher loan paydowns and clients taking advantage of attractive capital markets alternatives. Importantly, Key’s business model positions us to be able to offer our clients a wide range of alternatives both on and off balance sheet and capture the capital markets fee income that is generated.

The decline in average balances this quarter was primarily driven by our commercial real estate business which saw $870 million higher debt placements and loan paydowns compared to the average of the first three-quarters of this year. This is an area that we continue to leverage our business model to drive fee income, manage portfolio risk and generate higher returns.

This year we had a record level of $11.5 billion of commercial mortgage loans placed in the market including $4 billion in the fourth quarter. In addition, average commercial loans declined slightly during the quarter due to lower line utilization.

This decline in utilization reduced our commercial balances by $540 million during the quarter. On a period-end basis, commercial industrial loans increased $712 million much of the growth occurring late in December.

Year-over-year loan growth was driven by commercial and industrial loans which were up 4.5%. Continuing on to Slide 8.

Average deposits totaled $104 billion for the fourth quarter 2017, a decrease of $893 million or 0.9% compared to the year-ago period and up $693 million or 0.7% on annualized compared to the third quarter. The cost of our total deposits was up three basis points from the third quarter driven by a change in the overall deposit mix.

Our cumulative beta continues to remain below historical levels as we are maintaining pricing discipline in all our markets. On a link quarter basis, the change in deposit balances was primarily driven by growth in noninterest-bearing deposits from seasonal inflows and growth in CDs offset by declines in NOW, money-market accounts and savings deposits.

We continue to have a strong core deposit base with consumer deposits accounting for 60% of our deposit mix. Turning to Slide 9.

Taxable-equivalent net interest income was $952 million for the fourth quarter 2017 and the net interest margin was 3.09%. These results compared to a taxable-equivalent net interest income of 948 million and a net interest margin of 3.12% in the fourth quarter 2016 and $962 million and 3.15% in the third quarter.

Purchase accounting accretion contributed $38 million or 12 basis points to our fourth quarter results. This compares with $48 million or 16 basis points in the third quarter.

From the fourth quarter level, we expect purchase accounting accretion to decline by approximately 10% per quarter in 2018. Excluding purchase accounting accretion, net interest income was up $58 million from the fourth quarter of 2016.

The increase was largely driven by higher interest rates and well-managed deposit betas. This would imply asset sensitivity in excess of 5% over the past year.

Assuming deposit betas in the 25% to 50% range and some continued benefit from swaps and securities cash flows, we believe our asset sensitivity will remain in the range of 3% to 5% over a 200 basis point increase in the short term interest rates. This is higher than our previous asset sensitivity range, reflecting lower deposit betas for an extended period of time.

We have included a new slide in our appendix with additional detail on our interest rate risk management. On this slide, we point out that each 25 basis point increase in rates translates to approximately $12 million in higher net interest income per quarter.

Excluding purchase accounting accretion, net interest income was stable compared to the prior quarter, as the benefit from higher rates and relatively low betas was offset by lower loan balances and increased liquidity reflected in the $1.5 billion increase in short term earning assets during the quarter. We expect our core net interest margin, excluding purchase accounting accretion, to move modestly higher in 2018 compared to the full year 2017 which assumes continued growth in our balance sheet and one rate increase in the middle of the year.

Moving to Slide 10, 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 debt placement fees which were $200 million, up $43 million from the year-ago period.

We benefited from strong growth across all capital markets areas, but the largest drivers of this quarter was a commercial mortgage banking, reflecting the $4 billion in placements, along with our acquisition of Cain Brothers. 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 from higher credit card and merchant fees and the strengthening equity markets.

These increases were partially offset by a decline in other income which reflected an impairment of $7 million related to tax-advantaged assets. This charge was offset by lower 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 prior quarter.

Operating lease income and other leasing gains increased $9 million related to the lease residual losses in the prior quarter, and slightly offsetting these increases were a decline in other income. Turning to Slide 11, Key’s noninterest expense was $1.098 billion for the fourth quarter of 2017 and reflected a number of notable items including merger-related charges and the impact of tax reform and related actions.

Merger-related charges included $26 million of personnel expense and $30 million of nonpersonnel expense mostly reflected in net occupancy, marketing and other expense. The impact of tax reform and other related actions had an impact of $29 million on expenses for 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 the notable items, noninterest expense was unchanged from the prior-year ago period at $1.013 billion. Expenses related to our acquisitions including Cain Brothers totaled $45 million for the quarter.

We also had higher operating lease expense and other temporary costs that were elevated. Offsetting these increases was the realization of First Niagara cost savings.

Excluding notable items, noninterest expense increased $57 million from the third quarter of 2017. The increases in personnel expense was largely the result of the acquisition of Cain Brothers early in the fourth quarter which added $36 million of total 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 increase in net occupancy and operating lease expense. The increase in operating lease expense was primarily related to net charge-offs of certain accounts.

Turning to Slide 12, our credit quality remains strong. Net charge-offs were $52 million or 24 basis points on average total loans in the fourth quarter, which continues to be below our targeted range.

The provision for credit losses was $49 million for the quarter. Nonperforming loans were down $14 million or 3% from the prior quarter and represented 58 basis points of period-end loans.

At December 31, 2017, our total reserve for loan losses represented 1.01% of period-end loans and 174% coverage of our nonperforming loans. Turning to Slide 13, capital also remains a strength of our company, with common equity Tier 1 ratio at the end of the fourth quarter of 10.08%.

The impact of the tax reform reduced our common equity Tier 1 ratio by 14 basis points in the quarter and there will be no change in our previously announced capital actions. Consistent with our 2017 capital plan, we declared a dividend of $0.105 per common share in the fourth quarter which was an 11% increase.

This was our second common share dividend increase in 2017. We also completed common share repurchases of $199 million during the fourth quarter.

Slide 14 is our outlook for 2018 along with the long-term goals that Beth had covered earlier in her remarks. We expect average loan balances to increase to the $88.5 billion to $89.5 billion range with the pace of loan growth increasing during the year.

Deposits are expected to grow slightly less than loans. Net interest income is expected to be in the range of $3.9 billion to $4.0 billion with our outlook assuming one additional rate increase in the middle of the year.

In our appendix we’ve provided a new slide that can be used to adjust for different interest rate and balance sheet assumptions. For a reference, again, each 25 basis point increase in rates translates to an approximately $12 million higher net interest income per quarter.

I would like to point out that our first quarter results will also reflect a lower day count, and we expect to see normal seasonality in areas such as loan fees and corporate owned life insurance. We anticipated noninterest income will be in the range of $2.5 billion to $2.6 billion as we continue to drive growth from our core business and deliver First Niagara revenue synergies with substantial progress on these synergies made in 2018.

We would expect first quarter results to be below our fourth quarter run rate due to the normal seasonality and a return to more normal levels of investment banking and debt placement fees from a record performance in the fourth quarter. Noninterest expense is expected to be in the range of $3.85 billion to $3.95 billion.

There should be no First Niagara merger-related charges going forward. We expect to see normal seasonal trends and expenses which should result in a decline in the first quarter from the fourth quarter current levels.

We also expect to realize the remaining $50 million in First Niagara cost saves in early 2018 with a majority in the first quarter, and we will continue to identify additional efficiencies to generate positive operating leverage and continue to make progress on our efficiency ratio targets. Net charge offs are expected to remain below our targeted range of 40 to 60 basis points.

Our loan loss provision should slightly exceed our level of net charge offs provided for loan growth, and we’ve adjusted our GAAP tax rate down to 18% to 19%. I will close with a message consistent to that that I talked about earlier.

It was a good year for Key with a step change in performance that moved us to a level consistent with our previous long-term targets. Importantly, we have revised our guidance to reflect our improved results and stronger outlook.

With our improvement in our efficiency ratio of over 400 points, we have moved our new target to a range of 54% to 56%. And with our return on tangible common equity improving by 280 basis points to over 13%, we set a new target of 15% to 18%.

Coming off a strong year, we believe we are very well positioned as we head into what is shaping up to be a much more positive operating environment. I’ll now turn the call back over to the operator for instructions for the Q&A portion of our call.

Operator?

Let’s see. Don or Beth, I was just hoping you could provide a little more color on the loan growth outlook for next year.

Appreciate the commentary about the year ending strong, particularly in C&I, but I guess as I’m looking at things there’s been a couple quarters of sluggish growth and just to get to the $88.5 billion to $89.5 billion range would require a pretty substantial ramp in growth throughout 2018. So just curious in your view what would generate that kind of acceleration to give you comfort that that’s the appropriate range?

Sure, Scott. I’ll start with that and then ask Beth or Chris to jump in with the additional color.

But I think you hit some of the key points. One is that we are starting off from a point from C&I where the end-of-period balances were stronger.

And what’s important to note there was that those were core business relationships that wasn’t being influenced by bridge loans or other things that might be more temporary in nature, and so we’re feeling positive about that. Our pipelines are strong going into the year.

And the other thing to keep in mind too is that throughout 2017, we had a very good year as far as originations and what really changed was a trend in the market, which translated to much stronger capital market fees for us by our company’s accessing the capital markets and higher pay downs. And so, we would expect those to continue, but probably not at the same pace and, as we’ve said in our notes, that we expect loan growth to build throughout the year.

Okay. That’s perfect.

Thank you very much. And then, if I could jump to the deposit side for just a second.

I’m just curious if you can provide a little color on sort of the nuance in there. You’ve been holding the line really well on pricing for most of the individual categories, but CDs have been your biggest grower and the area that.

as you would imagine, have seen the highest rate increases. So just curious what the overall philosophy is.

I guess my first inclination was you might have been trying to moderate your rate sensitivity a bit, but based on your comments, Don, it does not sound like that’s the case. So just curious your thoughts there.

We’re seeing stronger customer preference for time deposits now that rates have come up a little bit. And you’re right, what we’re seeing is the impact of the new rates coming through with growth in that product and it’s translating to an increase in that overall rate on deposits paid for time deposits.

Even with that, though, our cumulative beta is only 21% since the first rates started to come through, and I would say that mix shift into that time deposit category is really the only category where we’re seeing increased deposit costs for us and we would expect that trend to continue.

Okay. Perfect.

Thank you, guys, very much.

Hi. Good morning.

My first question is on some of the long-term targets that you’ve reset today. So as we think about the cash efficiency ratio target of 54 to 56 and compare that with 2017, where you range from 59 to 61, could you walk us through how you would get there in terms of what you would need to see environmentally versus key, specific goals that you could execute upon to get to that range and noting that you mentioned that we’re entering the year with a very positive view in the operating environment.

Great. And a couple things there.

One, Erica, is that we expect to get there without much benefit from rate increases, that our longer-term forecast does not show the rate increases that we might be seeing from some other economic forecasts and so that’s not a big contributor to this. It really is continuing to operate on our business model and continuing to generate positive operating leverage.

It does require us to achieve the remaining $50 million in expense saves from First Niagara. It does require us to achieve the $300 million in revenue synergies, and we’re only assuming basically a third of that goes through in the form of additional cost, and it does continue to assume that on a core basis we can generate revenue growth at a faster rate than expense growth.

And that will help drive our efficiency ratio down, and we believe that we can achieve that over the next two to three-year time period.

And to follow up on the ROTC target, what kind of CET1 is embedded in the 15% to 18% target? And also, Beth, if you don’t mind chiming in, as we think about a different “sheriff” in charge at the Fed, how are you thinking about what the near-term outlook would be for capital return both on an overall payout basis?

And when would be an appropriate time to get closer to the longer-term targets on dividend payout?

Thank you, Erika. I will give you some observations and then turn it over to Don to talk a little bit more about the underlying assumptions on our movement in the return on tangible common equity target.

And I would tell you that it is early days for the new heads of both the OCC and the Federal Reserve, but I do think you’ve heard a tone that has been consistent over the last year of a move towards a more quantitative view of capital return as they extend the CCAR results. So while we have not yet received implicit guidance or otherwise about what I would call concrete expectations for the 2018 CCAR examination period, it is clearly our belief, and as we have discussed in other forums, our goal is to start moving our dividend payout to more of a 40% to 50% return to our shareholders.

We believe that is consistent with what is a good level of payout of stronger earnings for regional banks and also aligns with the interest and rewarding our shareholders and investors. So I would tell you that as we look at next year, these CCAR results are going to be obviously not subject to a qualitative review – they will be based on quantitative results – and that we will be looking to our return of capital to our shareholders with that lens.

Just to follow up onto that, you had asked, Erika, as far as the longer-term assumption for the CET1, and we’ve talked about guiding that down over time to the 9% to 9.5% range. And that would be incorporated into achieving the kind of return thresholds here.

And the other benefit is the impact of taking that effective tax rate down to that 18% to 19% level, and that will add over a point to our return on tangible common. And we closed the fourth quarter at a 13.5% level so I think we’re on a good path to get there.

Thank you.

Hey. Good morning, everybody.

Morning.

Morning.

I wanted to start looking at the new tax rate, the 18% to 19% in 2018. The new guidance implies most of that falls to the bottom line in 2018, but Beth, how are you thinking about using the lower tax rate over time?

Thanks, Steve. I would tell you that clearly it is our expectation that the Tax Reform and Jobs Acts of 2017 will be positive for the business environment, our clients, and our industry specifically as well, and I believe over time it will also be something where we’ll be able to reward our shareholders with the increased earnings power in the industry and within Key.

As we look at investing for growth, I think our company has been very consistent over recent years of talking about and demonstrating that we are willing to invest for future growth in both people, products, and capabilities both through our internal investments as well as things that we did in 2017 such as HelloWallet, our Merchant Services business, our residential mortgage platform and then culminating in the fourth quarter with Cain Brothers. We talk about it in that it needs to be driven by positive operating leverage, and over the years we’ve always said it needs to be bounded by a view of the economic environment as well.

So as we look forward, there is indeed no change in our 2018 plans per the level of investment, and I think we’ll invest as opportunities are appropriate that are consistent with our business model and also are consistent with our stated goal of continuing to drive positive operating leverage.

Just to follow up on that, as you look at things like the employee benefits you currently offer, tech spend, I’m trying to get a sense how much long term will fall to the bottom line. And will this impact, when we think about 2019 expenses, the level of yearly expenditure from Key?

As you saw in our press release, we did do a one-time contribution to our employee retirement accounts. We’re very proud to do that, and it will be beneficial to some 80% of our employees.

But as in all things, we consistently benchmark both pay, benefits, and on the technology front are consistently trying to organize our priorities to make sure that it is promoting growth as well as balancing cyber security and our core systems. So again, as I look at it I don’t feel constrained, and I’ll let Don talk about how he thinks it flows through the next couple of years.

No. I would agree, Beth, and I think the message here is we’re continuing to operate our model.

And that model does result in us investing in a number of things both from the technology platform and also our people. And those types of investments are embedded in our guidance, and we’ll make sure that we can continue to achieve cost savings to help fund some of those future investments as well.

Okay. Don, can I ask you one unrelated question?

On the investment bank line, how much did Cain Brothers contribute to revenue? You gave the expense number, but what was the revenue number?

And how should we think about a new base run rate including Cain? Thank you.

Sure. The total Cain revenues for the quarter were about equal to the expenses that we talked about as far $36 million.

As far as that Investment Banking debt placement fee line item, it was $30 million. Now that was a very strong quarter for Cain.

It was a very strong quarter for Key and so we’re very pleased with those results. Cain typically would probably be something in the $15 million to $20 million per quarter as far as total revenues and so you would have to adjust for that.

And then as far as Investment Banking debt placement fees, our objective would be on the core legacy Key footprint. We would be able to grow Investment Banking debt placement fees and with the addition of Cain Brothers, it would be additive on top of that with the additional growth.

And in the fourth quarter, it was our first full quarter of Cain being part of Key so the expense run rate or the expenses that we announced for the fourth quarter would not be consistent with the run rate of Cain. It also included some onetime and other expenses related to bringing them on board.

That’s an important point, Beth, because we did not segregate those merger-related costs into our merger category. Those came through our business as usual for the impact of Cain.

And how much were those?

I would say that they were a portion of $36 million, probably in the 20% range ballpark.

Okay. Thanks for taking all my questions.

Thanks, Steve.

Good morning.

Good morning.

Good morning.

On the back to the margin, I know you’d indicated for the trajectory in 2018 to see a modestly higher margin through the year. I just want to see if you can kind of give us a little bit of color in terms of how that could play out in terms of the amount of expansion we could see.

Is it fair to assume that we could see a couple basis points per quarter of expansion as you see the benefit of rate hikes continue to exceed the lagging betas? Thanks.

As far as our comments, we talked about the net interest income excluding purchase accounting accretion showing modest improvement. And so as we would think about it and some of the conversations we had earlier, for each additional rate increase it adds about $12 million of net interest income and then so that’s roughly three to four basis points.

And so our current guidance would have one in the middle of the year that we also have the full year benefit of the December rate increase that hasn’t been reflected in the current numbers. And so between those two items, you would see a pickup in margin throughout the year related to that activity.

In addition, we are expecting some margin pick up just because of the impact of our investment portfolio and swap book maturing and rolling over and current rates for those would be additive to our net interest income as well.

And, Don, what is the monthly cash flows coming off the bond book?

The quarterly is about a billion four for the bond and then on the swap book it’s about a billion three a quarter.

Okay. Great.

And then in terms of your loan growth commentary, just want to get a little bit of your color around your updated thoughts for growth in certain areas, more specifically the C&I. If you could just talk about where you’re seeing some pick up there and then your appetite to grow commercial real estate.

And then lastly, if you have any comment around resi mortgage because I know you’d been commenting on the buildout of that capability. Thanks.

Sure. This is Chris speaking.

With respect to C&I, we sort of, as we look at the pipelines which are stronger on a relative basis and stronger on an absolute basis than they were at this time last year, it’s really across-the-board in C&I so we see strong pipelines there. With respect to real estate, to go back to something that Don mentioned earlier, as we look at 2017, you know the originations and the amount of new clients that we brought on and the amount of financings we did for existing clients were every bit as strong in 2017 as they’ve ever been.

What was differentiated about 2017 versus some of the other years is in so many cases, we went to the markets whether it’s FHA, whether it’s Fannie, Freddie, the CMBS market, the Life companies, et cetera, we have very good pipelines in real estate and we have a very good client base. We’ll continue to serve those clients in whatever is in their best interest and so we have good backlogs there.

One area where you aren’t going to see us really ramp up our exposure is in construction and that’s been by design and as you know, at one point, we had a higher level of construction. Right now we’re running at about 12% construction but real estate very important business for us and what we’re doing for our clients continues to expand.

You brought up residential mortgage which is going to be a really interesting area for us going forward. That’s a business, just to remind people, we weren’t really in.

We had outsourced that business. We have a run rate of about $2 billion currently in annual originations.

We think over the next, say two or three years, we can increase that by as much as an additional $5 billion. And if you think about kind of our franchise and our 3 million customers, if we just do one additional $250,000 mortgage in each of our branches a month that doubles that business.

It’s also, by the way, very important to financial wellness as we think about how we’re differentiating ourselves in the marketplace because buying a home is obviously not only very important to our clients, but if you think about it from our perspective, with all of the data and the analytics capabilities that we have, it’s just a treasure drove of information. So that’s kind of how we’re looking at each of those three areas you had asked about.

Okay. Great.

Thank you.

Great. Thanks.

Is there any way you guys can quantify sort of the net present value of earnings from a client choosing to do a capital markets deal with you guys for like debt placement versus that same client doing a similar amount of taking out a loan with Key? I’m just trying to get a sense of like how much better or worse is a loan versus the fee line.

Thanks.

This is Chris again. You’d have to look at that completely through the cycle because it’s sort of a trade-off, right?

And if you think about it, you get a fee upfront which generates, obviously, a high ROE, a high returns, but it’s one time and you don’t have the benefit of the annuity. Conversely, with a loan you get the benefit of an earning asset, but you also get the benefit of tail risk.

It’s a very interesting question that we look at a lot, but until you go through the cycle, it’s hard to really say with certainty.

Yes, Ken, I would just add that the important thing here is serving the customer and keeping that relationship. And as you look at the full breadth of that relationship, the area that has the lowest return on equity for us is the loan.

And so as long as we can continue to support that customer and develop that relationship and expand the relationship, the loan is less critical as far as driving the total return.

And I would just add that, because it was implicit in my comments, Ken, that as I talked about the business model, Don hit on it when he said serving the client. I think some piece of the trade-off is if a client opts to a capital markets execution, and we saw particularly favorable market activity in pricing and spreads last year, the alternative is they may seek the market through another intermediary than Key.

And to me, that is where you would then not even capture the revenue with the relationship. And as we’ve mentioned in the fourth quarter with our commercial real estate, it had significant flows into the capital markets, we led 90% of those transactions.

So to me it’s about capturing client need and retaining the revenue within Key.

Right. And our rule number one is we do what’s in the client’s best interest every time.

Got it. Okay.

And then just on the NIM, the $1.5 billion of shorter duration, presumably low yielding securities you guys added, how does that play into your concept or your expectation for modestly higher NIM in 2018? I mean, essentially it seems like you’re assuming no change in those higher, shorter duration balances.

Is that right?

Well, essentially those short-term assets were in cash balances with the Fed, and so it’s short term in nature and that did penalized our margin. We would expect that over time that that would wind down to more normal levels as the loan growth picks up.

Got it. Okay.

So you got at least three basis points of higher NIM in 2018 just from that piece going away, so maybe – I’m going to say the rest of the business is even a smaller-core NIM expansion?

That’s correct.

Okay. Okay.

Thank you.

Hey. Good morning.

This is [Rob] from Matt’s team. On fee income outside of investment banking fees, I was just curious if you could talk to your expectations for growth for some of your major line items for the year?

But if you look at our guidance range for next year compared to the reported 2017 ex-notable items, it’s north of 5%. And so as we mentioned, investment banking debt placement fees will be a strong area of growth for us.

Cards and payments revenues will continue to be a strong area of growth for us. Trust and Investment Services, we expect to continue to see some positive momentum there as well, and so I would say that those are the primary areas of growth and other categories will do fine, but those are the primary areas of investments in the last couple of years for us.

Okay. And then just separately on your cash efficiency target of 54 to 56.

Getting down to that level I guess conceptually, how much of that improvement will come from revenue growth versus additional expense improvement? And then, any sense of timing to get there?

Our model really is based on generating positive operating leverage, and so we expect it to be able to continue to drive revenues at a faster pace than expenses. What we’ve talked about historically in the slower growth environments where the GDP is between the 2% and the 3% range, that we would be able to grow the revenues at that kind of a general pace and keep expenses relatively stable.

And so that helps drive the efficiency ratio down. And as far as our timeline, the long-term targets are really on a two-to-three-year type of time horizon as far as our ability to operate inside those ranges on a consistent basis.

Okay. Thank you.

Thank you. Good morning.

Hey, Don, I just want to make one clarification: 3.9 to 4.0 on NII, is that on an FTE or non-FTE basis?

It’s on an FTE basis.

FTE basis. And then can you talk about how much the FTE will change, given the change in taxes from the 56ish that you had this year?

I don’t have the number off the top of my head, but it’s a fairly small amount to begin with, but it will come down because of the tax rate. You’re right.

Okay. So then when I think about your point about the PAA roll off of about 10% per quarter off of the 38, the core NII growth embedded is still quite strong.

And I think you’ve been very clear about where the loans are, about the core NIM moving the right way and so I just wanted to really come around on how you expect the overall balance sheet to traject. Should it follow loan growth this year?

Or you’re still expecting loans to grow faster than deposits? But are you expecting to grow the securities portfolio?

Or is the benefit from the securities portfolio more from the swaps roll off and the benefit there? Sorry, that’s a jumbled question, but I’m really just trying to understand the final part of average earning asset growth helping the core NII.

Our outlook would assume that the loan growth would provide the majority of the earning asset growth of the investment portfolio. It would be relatively stable, and the benefit that we mentioned there is really just the roll-off of the current cash flows being re-priced at today’s market rate, so which would be a lift for us.

Right. So the core NIM benefit is both rates and the swap benefit and then we’ll see what mix may bring?

That’s correct.

Okay. Thanks a lot, Don.

Good morning. Of the expenses, if I annualize the fourth quarter expense and look at it relative to the guidance, it would assume that expenses are flat to down relative to 4Q being annualized.

So is that assuming that the first quarter there’s going to be a big drop off in expense?

We would expect to see normal seasonal trends, which would show that the expenses would be down in the first quarter. And, as we highlighted, a good reason for why expenses were up this quarter is because of the success of the capital markets revenues, and we would not expect to see that same $200 million in the first quarter of next year.

We also tend to see some seasonal increases in the fourth quarter, which go back to more normal levels in the first quarter. And so our outlook would assume a decline in the first quarter.

Could you give a range, by chance?

We haven’t provided specific quarterly guidance. I would tend to look at how the trajectory occurred throughout this year and see some of the seasonal trends continue at that kind of pace.

Okay. And then just a follow up on a different note.

We’ve heard a couple of banks talk so far about with these borrowers having such high levels of excess liquidity that paydowns or going to the tech capital markets could continue into the beginning of the New Year. But you guys are seeing nice growth end-of-period, but do you worry about that, especially when I look at the loan guidance that you gave?

Peter, this is Beth. I will give some commentary on what we’re hearing from clients and then what I think is generally the industry’s view, and Don may have some additional comments or Chris.

I think a number, if you listen across the industry and as we’ve all talked about it, everyone believes that the tax reform and what has transpired is constructive for the business environment. I don’t think anyone thinks it’s like a light switch that will alter behavior one way or another as we go into the year.

I think these will be trends that develop, and implicit in that is a belief that there could be more investment in expansion than we have seen over the last several years because as we look at GDP as well as client commentary, that has been somewhat muted for the strength in where we are in this particular economic cycle. So I think it will layer in over time, and I think the expectation is that we saw strong pipelines, we had good growth as we said in our period-end loans, and that we did see I think a theme of 2017 across the industry was elevated pay downs and more capital market activity than we had seen in prior years.

But I think as those roll through in 2018, there’s still a belief that there will be demand for on balance sheet bank loans throughout the year.

Great. Thank you.

Good morning.

Morning.

Morning.

So, Beth or Chris, I was wondering if you could give us kind of what the line utilization number was at the end of the fourth quarter versus where it was at the end of the prior quarter? And I know it’s early in the first quarter here – if you’re seeing any trends upward in that number?

This is Don. I’ll take that.

As far as the total line utilization for all credit, we were midrange, 50% range, and it was down about 1.5% compared to where it was the previous quarter, and similar trends within the C&I book where we saw most of the decline.

And that indeed as we pointed out in our comments was about $500 million in average balances for the quarter, so that 1.5% decline in utilization was meaningful to the balances.

And I would say that as far as the 2018 impact so far, I think it’s too early to draw any conclusions from that. The numbers I provided were end-of-period 2017.

If utilization had been relatively flat over the last couple of years, so it was a tip down, if you can think about sort of business activity in general, some of the increases in the cost of commodities, I would anticipate that utilization would reverse back to where it’s been over the last couple of years.

And then a couple comments we’ve heard from banks that have reported thus far, they’re seeing some irrational price competition. Are you guys seeing any of that at all in any of your markets?

This is Chris. We’re really not seeing a change in pricing over the last three months or six months.

It’s been actually pretty steady, frankly both on the loan and the deposit side. Go ahead, please.

I was going to say and then my last question is related to any industry clients that you expect to benefit more than others from the recent cut in the corporate tax rate?

Well, I think it’s pretty broad, but if you think about it, a big part of our client base are small mid-sized businesses, a lot of pass-through entities. On a relative basis, they were pretty full taxpayers, so they clearly are going to be significant beneficiaries.

And the other thing that's interesting about our business model whether it’s Key at work or it’s our private bank, those shareholders of those companies and their employees are also clients of ours as well and they too will benefit.

Excellent. Thank you.

Thank you.

Hi. Good morning.

Morning.

I just wanted to drill down on the impact of Cain Brothers again and just make sure I have the numbers straight. Don, did you mention that on a more normalized level, Cain Brothers contributes something in the way of $15 million to $20 million to IB fees per quarter?

I suppose that’s the run rate that’s sort of embedded in your guidance?

Total revenues from Cain would be in that range. That’s correct.

And what about expenses? Obviously this quarter you had the merger cost, and I presume abnormally high because of good activity.

But how should we think about sort of the more normalized expense contribution?

I would, as I suggested that the onetime merger-related costs were in the 20% ballpark range and so you’d probably use that 80% as a general rule of thumb initially and that wouldn’t reflect the merger savings or increased business resulting from the combination of the two companies.

Does Cain contribute to the bottom line or is it sort of breakeven?

This current quarter it was a breakeven. Prospectively, it will be a contributor to our bottom line.

Okay. Fair enough.

And I guess just I guess a broader question, how much in the way of the revenue synergies are embedded in the 2018 numbers so far?

What we talked about is that we would be at that full $300 million run rate by the end of 2019 and think about that as a kind of a steady progression up to that level so kind of a straight-line move. So we would assume that by the end of the year, we would be close to that 150 kind of run rate.

Okay. All right.

Great. Thanks a lot.

Hi, Beth. Hi, Don.

Good morning.

Good morning.

I apologize if you’ve addressed these questions. I’ve been jumping on a few calls, but I assume you guys talked about the betas for deposits.

Can you give us any color on the breakout between the different types of deposits of where the betas are for consumer deposits versus high net worth versus commercial? And then what you guys think will happen to each one of those betas as we move forward and a Fed funds rate environment that probably will increase two or three times this year?

As we look at the betas right now on the retail side, the only beta we’re seeing is the impact of mix shift as far as the preference going over to time deposits for our retail customers so we’re really not seeing much in the way of contractual rate changes or any new pricing on the retail deposits. On the high net worth, they tend to be a little bit more rate sensitive and so we’re seeing a little bit more activity there, probably not at the same pace or level that we see on the commercial deposits, but we have seen more demand for higher rates in that category.

And then on the commercial side, our betas have been a little bit north of 40% and in large part contractually driven but we are continuing to see more customers and more of the competitors offering up higher rates for commercial deposits. And as we would start to see those betas move up, we don’t see that occurring near-term, but we would expect over the long-term to start to see all of those products migrate to the mid-50s kind of beta and start to see that translate to additional rate competition, but our guidance assumed and our asset sensitivity assumes that for the next couple of rate increases it’s going to remain relatively low compared to what our longer-term targets are.

Very good. And the second you guys obviously indicated that the average commercial real estate loans were down primarily because of customers going into the debt capital markets and refinancing their outstanding with you.

What percentage of those customers actually have been refinanced in the debt capital markets by KeyCorp Securities and the investment banking side of the house?

Gerard, this is Beth. We - I said it a couple answers ago but 90% of the movement from our clients into the market, Key was roughly…

Great.

And we had $4 billion of placements into the commercial mortgage bank from our commercial mortgage banking group in the fourth quarter alone.

Very good. And this is kind of I know it was unusually strong year quarter in investment banking, 200 million, which you’ve addressed.

Do you ever get to the point, again this is an odd question, where it could get too large and the volatility then increases? Have you guys given any thought to that of where would you want it to kind of top out?

I don’t know we have any caps per se. I think again, what we’re trying to do is continue to focus on our customer relationships and meet their financial needs, and I would say that this is just a period where we’re seeing increases and their desires to access the capital markets and we’re glad that we have the products and capabilities to support that.

Great. Thank you so much.

Thanks. Good morning.

I had a follow up on your financial targets. Based on the trajectory that you’re on and your other comments during the call this morning, is it reasonable to expect that you can reach your ROTC target of 15% to 18%, at least the lower end of that range by 2019 timeframe?

I would say that we're probably going to be in that operating range faster than we would be on the efficiency ratio and we haven't given specific timelines, but I think that generally in the late 2018, 2019 time period would probably be a relative good assumption as far as our ROTCE target.

That's very helpful. Thanks.

And then I also wanted to follow up separately, I heard your earlier comments about the residential mortgage build-out and also the trajectory of revenue synergies, but perhaps taking a step back just more broadly, can you discuss your confidence level in being able to use those revenue synergies and the trajectory of revenue synergies that you expect to offset declining purchase accounting accretion benefits?

Well, a couple of things that we have going forward, one, is the revenue synergies, which you highlighted and that should be a big help for us, but the other thing is if you look at our guidance, a purchase accounting accretion would come down year-over-year about $80 million. And also taking a look at the impact of the fourth quarter of 2017 rate increase on net interest income at $12 million a quarter would generate $48 million, and then a mid-year rate increase would be $24 million so that the rate increases by themselves are $72 million.

And so that essentially offsets the purchase accounting accretion loss we’ll have for the year, and so we think that there clearly is movement there that can be beneficial to help drive the earnings going forward.

Thanks for taking my questions.

Thank you.

Again, we thank you for taking time from your schedule to participate in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team at 216-689-4221.

And that concludes our remarks. Thank you again.