Keycorp (KEY) — Q3 2017 Earnings Call Transcript

Thank you, Operator. Good morning and welcome to KeyCorp's third quarter 2017 earnings conference call. In the room with me are Don Kimble, our Chief Financial Officer; Chris Gorman, President of Banking; and Bill Hartmann, our Chief Risk Officer. 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 am now moving to Slide 3. This morning, we announced third quarter earnings of $0.32 per share or an adjusted $0.35 per share excluding merger-related charges and other notable items. My comments this morning will focus on the adjusted results, which are comparable to prior periods. This was our seventh consecutive quarter of year-over-year positive operating leverage and a return on average tangible common equity was just over 13%, which is consistent with our long-term target of 13% to 15%. Our results this quarter included a number of moving parts. Most notably, a large commercial loan recovery that impacted our provision, which was largely offset by lease residual losses in non-interest income. Don will walk you through these line items in his remarks. We were pleased that net interest income excluding purchase accounting accretion was up $27 million from last quarter with the core net interest margin increasing by 2 basis points. Average loans grew 0.4% linked-quarter driven by commercial and industrial loans, which were up 2% unannualized. Our business model and middle market focus enabled us to continue to add clients and take share, resulting in growth in both C&I loan balances and fees. Our total average loan growth this quarter reflects higher paydowns, especially in September, and relatively stable trends in our consumer portfolio. Commercial real estate balances were impacted by clients continuing to take advantage of attractive capital market alternatives, which helped contribute to our strong investment banking and debt placement fees. We also remained disciplined with new deals and have reduced construction loans and project financing, which is counter to some market trends. We expect loan growth to be stronger in the fourth quarter based on seasonal trends and a strong pipeline. For the full year, we expect average loan growth of around 3% excluding the impact of First Niagara. That's lower than we originally expected at the beginning of the year, but reflective of the environment and consistent with our moderate risk profile. Other positives for the quarter included strong fee-based income across our businesses. As I mentioned earlier, investment banking and debt placement fees continue to grow, and we are well positioned as we head into the final quarter of the year, which historically is one of our strongest periods. Cards and Payments had a record quarter, up 7% from the prior quarter, reflecting the investments we have made in the businesses, our recent merchant services acquisition, and some of our early successes with First Niagara clients. Most of the other fee categories showed good growth both year-over-year and linked quarter. Our cash efficiency ratio remained under 60%, and we believe we can move that lower with or without the benefit from higher interest rates. Expenses remain well managed, with our quarterly results reflecting our recent acquisitions of HelloWallet and Merchant Services, as well as some seasonal trends. Credit quality remains strong with a net charge-off ratio of 15 basis points, which as I said before included a large C&I loan recovery. We have 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 billion in common shares, and our compound annual growth rate for the dividend has been 14%. In the third quarter, we repurchased $277 million in common shares and paid a dividend of $0.09 and $0.105 per share. Overall, it was a solid quarter that reflects our success in executing on our strategic priorities, growing our business, and delivering on our commitments. As we look ahead, we expect to complete the First Niagara cost savings by early 2018 and remain confident in achieving our targeted revenue synergies. We continue to see organic growth and momentum across our Company and we have made investments in our people, products, and capabilities to support our relationship strategies and drive future growth. Most recently, early in the fourth quarter, we completed the acquisition of Cain Brothers, a leading healthcare-focused merger and acquisitions investment bank. The move will significantly expand our existing healthcare verticals and further enhance our ability to serve our clients with the strength of expertise and capabilities. I will now turn the call over to Don to provide some additional color on the quarter.

Thanks, Beth. I am now on Slide 5. We reported third quarter net income from continuing operations of $0.32 per common share. This compares to $0.16 per share in a year-ago period and $0.36 in the second quarter. Our results this quarter included a $0.03 impact from merger-related charges and an adjustment to the merchant services gain. Excluding merger-related charges and notable items, earnings per common share was $0.35, up 17% compared to the prior year and up 3% on a linked-quarter basis. As Beth mentioned earlier, excluding notable items, our cash efficiency ratio remains below 60%, and we had a return on tangible common equity up over 13%. I would also like to highlight a number of quarter-specific items that impacted our results. First, we had a large C&I recovery which reduced our net charge-offs and resulted in a lower loan loss provision. In non-interest income, we also recognized impairment losses on some equipment leases, most of which matured in 2018 and later, as we thought it was prudent to reflect current market conditions. These two items were essentially offsetting, and as such did not impact our core earnings for the quarter of $0.35 per share. Professional fees were elevated due to several short-term initiatives, and while our recent acquisitions of HelloWallet and Merchant Services will be accretive over time, they added $8 million of expense in the third quarter. I will cover many of the remaining items on this slide in the rest of my presentation. So I will now turn to Slide 6. Total average loan balances of $87 billion were up $9 billion or 12% compared to the year-ago quarter and up $312 million or 0.4% on an annualized basis from the second quarter. Compared to the year-ago period, average loan growth primarily reflects the impact of the First Niagara acquisition as well as ongoing business activity with commercial and industrial loans continuing to be a driver. Sequential quarter growth in the average balances was driven by commercial and industrial loans, which were up 2% on an annualized basis, as we continue to take share in the areas we have targeted. Our C&I portfolio grew despite higher levels of loan paydowns. Commercial real estate loans declined this quarter due to payoffs toward the end of the quarter and planned reduction of certain acquired loans. Home equity loans also continue to experience elevated levels of paydowns which exceeded our loan originations. During the month of September, loan paydowns increased, resulting in a decline in the period-end balances of $450 million during the month. We would typically see growth during September, given the paydowns from the last month of the quarter as well as our pipelines and expected activity. We've updated our guidance and now expect fourth quarter average balances in the range of $87 billion to $87.5 billion. Continue to Slide 7, average deposits totaled $103 billion for the third quarter of 2017, an increase of $8 billion or 9% compared to the year-ago period, and up $326 million or 0.3% on an unannualized basis compared to the second quarter. The costs of total deposits was up 2 basis points from the second quarter, driven by contractual rate increases on commercial deposits and a change in the overall deposit mix. Our beta of 17% in the third quarter continues to remain below historic levels as we are maintaining pricing discipline in our markets. Compared to the prior year, third quarter average deposit growth was driven by First Niagara, as well as core retail and commercial deposit balances. On a linked-quarter basis, the change in deposit balances was primarily driven by non-interest bearing deposits from commercial deposit inflows in short-term escrow balances. Growth in CDs also helped offset our managed exit of certain public sector deposits. We continue to have a strong deposit base with consumer deposits accounting for 60% of the total deposit mix. Turning to Slide 8, taxable equivalent net interest income was $962 million for the third quarter of 2017, and net interest margin was 3.15%. Purchase accounting accretion contributed $48 million or 16 basis points through the third quarter results. This compares with $58 million or 19 basis points in the second quarter. The third quarter decline of $10 million from the second quarter level was primarily driven by $7 million lower benefit resulting from prepayment. The second quarter also benefited from an additional $42 million due to the finalization of purchase accounting. Looking ahead, we continue to expect to benefit from the accretion to trend down into the range of approximately $40 million in the fourth quarter of this year and further reducing by approximately 10% per quarter in 2018. Excluding purchase accounting accretion, net interest income increased to $145 million from the prior year, largely driven by the impact of First Niagara and higher earning asset yields and balances. Growth of $27 million in the prior quarter resulted from higher earning asset yields, which was partially offset by higher funding costs and lower loan fees. Excluding the impact of purchase accounting accretion, our net interest margin was 2.99% for the third quarter, increasing by 2 basis points on a linked-quarter basis as we saw the benefit from the higher interest rates. For the fourth quarter, we expect our core net interest margin excluding purchase accounting accretion to be relatively stable. Loan yields in the fourth quarter are expected to be stable while deposit costs will continue to increase. We do anticipate the benefit from our investment portfolio as yields on the new purchases are expected to be approximately 50 basis points to 60 basis points higher than the maturity. Moving on to Slide 9, non-interest income in the third quarter was $592 million. During the quarter, notable items included an adjustment to our merchant services gain of $5 million. Excluding notable items, non-interest income of $597 million was up $36 million from the prior year and up $5 million from the prior quarter. Growth from the prior year reflects the impact of the First Niagara acquisition as well as broad-based organic growth, which helped offset lower investment banking and debt placement fees relative to our record third quarter level last year. We continue to be on pace for another year of growth in investment banking debt placement fees, reflecting the success we've had in growing this business. Compared to the second quarter, the increase in non-interest income largely reflects continued growth in our fee businesses, including another strong quarter in investment banking, debt placement fees, and cards and payments income, which as Beth mentioned reached a record level as we continue to benefit from the investments we are making, including the recent Merchant Services acquisition. Momentum in our business was offset by lease residual losses of $13 million during the quarter. As I said earlier, these equipment leases have maturities that primarily extend in the next couple of years; however, we thought it was prudent to recognize a loss to reflect the current market conditions. Last quarter, as is typical, we had gains in this line item. As of the third quarter, lease residual losses or cash efficiency ratio in the third quarter would have improved to 59.2%. Turning to Slide 10, reported non-interest expense for the third quarter was $992 million, which includes $36 million in merger-related charges. Compared to the third quarter of last year, and after adjusting for merger-related charges, non-interest expense was up $63 million. Growth primarily reflects the full quarter impact of the First Niagara acquisition, as well as ongoing business investments and the recent acquisitions like HelloWallet and Merchant Services. Linked quarter expenses adjusted for merger-related charges and other notable items were up $21 million. Third quarter expense levels mostly reflect the recent HelloWallet and Merchant Services acquisitions, which added $8 million, as well as seasonal trends in marketing and personnel, which collectively added $10 million. We also had $3 million of business services and professional fees related to short-term initiatives that we would not expect to continue going forward. Excluding these items, expenses were down on a linked-quarter basis. We'll also interact to realize the remaining $50 million of merger-related savings by early 2018. Looking forward, the Cain Brothers acquisition will add approximately $20 million to the fourth quarter's expense and revenue levels. Turning to Slide 11, net charge-offs were $32 million or 15 basis points of average total loans in the second quarter, which continues to be below our targeted range. The third quarter provision for credit losses was $51 million. As I mentioned earlier, we had a large C&I recovery during the quarter, which benefited our net charge-offs and provision by $20 million. Despite this recovery, our portfolio continues to perform well, and charge-offs remain below our targeted range. Non-performing loans were relatively stable, up $10 million or about 2% from the prior quarter and representing 60 basis points of period-end loans. At September 30, 2017, our total reserves for loan losses represented 1.02% of period-end loans and 170% coverage of our non-performing loans. This quarter, we've broken up the allowance for the acquired loan portfolio. As you can see on this slide, this allowance has grown as we build provision to coincide with the turnover in the acquired loan portfolio and the associated wind down of the loan losses. Turning to Slide 12, our common equity Tier 1 ratio at the end of the third quarter was 10.26%. Capital levels in the third quarter benefited from a change in our methodology related to risk weightings for multipurpose facilities, specifically commitments that can also be used for letters of credit. As Beth mentioned, we repurchased $277 million of common shares during the quarter. Slide 13 provides you with our outlook and expectations. We remain committed to generating positive operating leverage. However, guidance remains the same with the exception of loans reflecting the results through the third quarter. As I mentioned earlier, we now expect fourth quarter average loans to be in the range of $87 billion to $87.5 billion. Again, the remaining guidance for the full-year has remained unchanged. We continue to expect average deposit balances for the year to be in the range of $102.5 billion to $103 billion, and net interest income is still expected to be in the range of $3.8 billion to $3.9 billion. Our outlook continues to assume no additional benefit from rate increases this year and that betas will remain low, well below their historic levels. As I mentioned earlier, purchase accounting accretion will trend down over time reaching approximately $40 million in the fourth quarter. Quarterly impacts should then decline at a rate of approximately 10% per quarter in 2018. We continue to anticipate that non-interest income will be in the range of $2.35 billion to $2.45 billion, and non-interest expense should be in the range of $3.7 billion to $3.8 billion. Included within this range is approximately $20 million in added expense from Cain Brothers, which closed early in the fourth quarter. In addition, expenses related to HelloWallet and Merchant Services acquisitions as well. We expect merger-related charges, which are not included in our guidance, to continue to trend lower. In 2017, net charge-offs should continue to be below our targeted range of 40 to 60 basis points, and provision should slightly exceed our level of net charge-offs to provide for loan growth. Our GAAP tax rate is expected to be in the 26% to 28% range for the year and remain committed to our long-term financial targets stated at the bottom of the slide, including continuing to generate positive operating leverage, operating at a cash efficiency ratio less than 60%, maintaining our moderate risk profile, and producing a return on tangible common equity of 13% to 15%. I'll now turn the call back over to the operator for instructions on the Q&A portion of the call.

Good morning.

Good morning.

Good morning.

I want to circle back to the cash efficiency ratio target. You're just below 60% this quarter on an adjusted basis and that's in line with the year-to-date. As we think beyond the fourth quarter and you've got a couple of these deals that obviously are a drag on the efficiency ratio, you still got the $50 million savings coming in. Any early thoughts on what to expect in 2018?

Matt, we would expect to continue to drive the efficiency ratio down from here. As you highlighted, the most recent transactions are not helpful in that case, but we do believe that there are opportunities between the additional expenses savings that we have remaining of $50 million from First Niagara, which we expect to realize early in 2018. The additional revenue synergies that we'll be achieving from that acquisition and just the organic growth where we continue to drive positive operating leverage will help drive the efficiency ratio down in 2018.

And then just quickly on the purchase accounting accretion. I guess to take that $40 million for the fourth quarter and shrink that 10% per quarter for next year, and I guess you're getting the kind of 120 to 125 ranges for the full-year?

That makes sense in that range, yes.

Okay. Thank you very much.

Thank you.

Good morning, guys.

Good morning.

First one is just sort of a ticky-tack one on that PAA. I think the expectation before had been for a quest like $48 million a quarter for a while. It seems like a fairly large change in the expectation, just curious what drove that change and thinking there?

I think as far as the future expectation, we expected that purchase accounting accretion will continue to wind down year after year and continue to get us to the point where, in four years from now, it would not be adding any benefit at all. I would say that the current quarter came in lower than our expectations as far as that $48 million number because the purchase accounting benefit from the prepayments came in lower than what we would have expected. And so that's the only difference from that perspective and just our outlook will continue to reflect that as our new starting point.

Okay. And then Don, when you've given the margin guidance, I think you used that core including the PAAs would be stable. Was that the reported margin you expect to be stable in the fourth quarter or the core the way we would think about it without the PAA?

What we had said in the script was the core without the PAA. That even with the PAA that will still be in that same general ranges because when we say stable we say plus or minus a couple of basis points and we would expect the purchase accounting to have that kind or an offsetting impact.

Okay, perfect. I think I just misheard that, so apologies. And then final question just on the - you've got some puts and takes in the loan growth and then it looks like sort of the ongoing growth is pretty strong particularly in the commercial portfolio, but then we've got these kind of unexpected paydowns. I know it can be difficult, but to what extent do you have visibility into the paydowns or I guess more to the point to what extent have you incorporated such phenomenon continuing into the updated guidance?

In our updated guidance, we have assumed that the prepayments or paydowns would be higher than typical. That's why we're showing loan growth getting us to $87 billion to $87.5 billion for the fourth quarter. As far as our insights, we were a little surprised by the level of paydowns we saw in September, so I wish our crystal ball is a little clearer than what it is right now, but I would say that that came in higher than expectations and so our updated guidance would reflect that we would see some continuation of some of those higher levels of paydowns.

Okay. All right, I appreciate the color. Thank you.

Thank you.

Great, thanks. I guess first question just in terms of the expenses - the expense guidance. I just want to make sure; I'm using kind of the right numbers here to get your $3.7 billion to $3.8 billion of total expenses. If I put instead of this similar numbers this quarter into the fourth quarter, I get at the very high end of that range. Is that how you're thinking about it or is there - I did see those items that you mentioned in the HelloWallet and Merchant Services, et cetera? Should we back out all those $20 million or whatever million dollars in the fourth quarter, so the number would be $20 million or something million dollars lower than where it is now? Any clarity would be helpful.

Good comment. As far as our outlook, we're not backing out any of the impact from HelloWallet or the impact of Cain Brothers, so those were included in the numbers. So you're right, if you would add in a similar number for this quarter and the impact of Cain Brothers, we would be at the higher end of that guidance range. I would say that an outlook for the fourth quarter would assume that the core expense levels and Cain Brothers would probably be a little bit below the third quarter level, but when you add in Cain Brothers it would be higher than the third quarter level of 956.

Got it. Understood. Okay. And then just a quick question in terms of going back to the loan balances, I guess that you are expecting the prepayments or the payoffs to continue at this level. But if I just look at like CRE, on an average basis down a percent and a half, construction is down a lot more, if the paydowns continue at this point like what point can you actually drive growth in those particular lines?

I would say one is, as we've been counting on and continuing to show growth in our C&I book. I would say that CRE and our construction portfolio did show a decline this quarter. We would not expect that level of decline to continue; we would expect to be more of an ongoing stable look to that portfolio in the future. That we have seen some decline, especially in the construction portfolio, and would expect to see that continue to trend down a little bit.

All right. Great, thank you.

Thank you.

Hi, good morning.

Good morning.

Good morning.

If I fully appreciate the guidance on the efficiency ratio, but as you both know the conversation with investors sometimes always focuses a lot on dollar expenses. So, on the back of Ken's comments, as we think about some of the core growth that you expect for next year relative to the cost savings from First Niagara? Don, how do you expect that the quarterly trend line on absolute expenses to go sort of in the first half of next year versus the second half?

And we'll provide more clarity at the first quarter call's or 2018 outlook. But I would say generally that we would see the remaining $50 million realized in the first part of 2018. Also think about as our revenue synergies would be realized. We've said that that would be $300 million over the next two to three years. We'll also have expense added to the tune of about $100 million to support that $300 million in growth. And so, we would see that kind of proportionate throughout the next few years to grow to that level of additional revenue levels. I would expect core expenses, absent those kind of trends and adjusted for these recent acquisitions would be relatively stable. What we've tried to do is continue to drive the positive operating leverage by achieving cost savings to help offset some of the expense increases and allow those investments to drive the revenue growth, which generates positive operating leverage.

Got it, and this next question is for Beth. Beth, as you recall there was a lot of consternation in the last quarter's call about some comments that may have been misconstrued on your part about your strategy. I'm wondering if you could - back with this big audience in front of you, you could give us a sense of how you're thinking about capital management for 2018 and 2019 for Key? And I'm asking that purposely in an open-ended way.

Yes, and I appreciate the opportunity to be clear on point. As we look at Capital Management for 2018 and beyond, I think our priorities are very clear. First and foremost, our ability to use our capital to support our organic growth is our top priority. The ability to continue the dividend increases that have been outlined in our capital submission is expected to continue as we submit next year’s CCAR as we talked about migrating our dividend payout more to the 50% range as a priority and then to continue to repurchase our shares to the extent they are attractive for our shareholders and return capital to our shareholders. From there strategically, our priority would not be M&A. That is not a priority and yet on that front, we do not yet feel like we are fully complete realizing the value of First Niagara for our shareholders. So first and foremost, we believe it is critically important that we complete the job there and make sure that our shareholders realize the full benefit. To the extent we undertake investments in our people, products, and capabilities, those are things that we continue to look to enhance our relationship strategy as well as our capabilities for our customers. Cain Brothers would be a recent example of that, and within the second quarter, HelloWallet and the purchasing of our Merchant Services business would be examples of other areas where we feel like investments support our strategy and enhance our growth.

Great, thank you.

Good morning.

Good morning.

If I could just follow-up on Erika's question about the expense that that $100 million in expenses added to support the revenue synergies, would you expect the revenue synergies to come through in 2018 and be above that or is there some type of delay?

I would say as far as our revenue synergies, it's a total of $300 million a year, net building proportionally throughout 2018 and 2019 and into 2020 a little bit. We would expect the incremental expenses to be proportionate to that revenue realization. So we don't think there will be any further early build-out of those expenses, and so we would expect to see that net benefit continue to build throughout the next two to three-year timeframe.

Okay, and just a quick follow-up. You added $19 million to the reserves this quarter, which it looks like it mostly went in for the acquired loans. Is that a new pace that we should expect going forward?

Yes, the $19 million included both the allowance and the reserve for unfunded loan commitments. The $22 million for the newly acquired loans was a little bit higher this quarter. I don't know that I would signal that's a new pace for us as far as having provision exceed charge-offs by $20 million; we do expect to continue to build that allowance at about a 1 basis point per quarter. So you will see some increased provision to account for that.

Thank you.

Hi, good morning. Appreciate the commentary on the revenue synergies and the benefits you get there. But can you just talk a little bit more about how that's progressing? It does seem like it's something that it does take time free to penetrate and really extract value from those clients. But can you talk a little bit about what you're doing there and how you see that $200 million net run rate playing out and start to filter through the results over time?

Hi, Saul. It's Chris Gorman. Good morning. It's really a few areas where we're principally focused, and those areas are - and I'm going to come back to residential mortgage in a minute, it's residential mortgage payments that made a couple of comments about the trajectory of our repayments business where we have a pretty broad portfolio that we're doing a pretty good job penetrating. Next is private banking. If you look at the legacy First Niagara footprint, there is a lot of wealth in that footprint, and our key private banking business can do a good job and we think of penetrating that. Next we've got a lot of activity in the commercial banking capital markets area. It's kind of fun for me as I'm out in the market calling with people - you really can't differentiate kind of the way we're going to market in the new areas in the legacy area. So I think we're making really a lot of progress there. Lastly, and importantly, I mentioned residential mortgage - that's a business that First Niagara had that's a business that we - that Key didn't have and we're building, and we think it's a significant opportunity. If we just get our fair share of the 3 million clients we have that are taking out residential mortgages, we think that can be a pretty significant growth business. On that point, we've added - if you look at our MLO count just in the last quarter, we've added 20% for that sales force. So that gives you maybe a little bit of the flavor of kind of where we're focused.

That's helpful and in terms of when we actually start to show up in the results of this? This sounds like it's a long-term process. You guys have talked about it being a multi-year kind of framework and there's a lot of blocking and tackling obviously. But is this a 2018? Is this a 2019 story? How should we think about what you just said in terms of it actually filtering through in results and in topline momentum?

I would think that you start to see that build in 2018. As Chris said, we've been building out that residential mortgage business, and we'll start to see the benefits there. We're already seeing some of the benefits starting to show some sprouts as far as the payment business and the capital markets-related activities. Those will continue to build those annuities for us going forward and should start to pick up in 2018.

That's helpful. If I could change gears a little bit and ask about capital. Your CET1 is now above 10%. I think you correct me if I'm wrong. You guys have talked about a target of 9% and 9.5% as an optimal CET1 ratio. Any updated thoughts on capital? It seems like you have a lot of room to rationalize capital and if you could just comment also in relation to that how many changes in SIFI threshold would influence your thinking there?

Sure. You're right. We talked about our long-term target for that CET1 to be in that 9% to 9.5% range. Past year’s CCAR submission reflected the impact of our acquisition, which has some punitive impact to it as far as how the math works. Our expectation is that we should be able to continue to step up that dividend and have share repurchases to help manage those capital levels down toward that 9% to 9.5% targeted range. We're optimistic that we can take those steps here in the next CCAR submission. To your point, as far as the SIFI designation and what type of benefit that might have. Last year, we started to see a little bit of relaxing of some of the payout levels, and before we had constraints as far as the payouts couldn't exceed 100% of total earnings. So we think that if that SIFI designation would change that could even loosen those restrictions even further. Our objective continues to be a strong level of capital, and we believe in that 9% to 9.5% range that would position us very well respectively.

That's helpful. Thank you very much.

Thank you. Good morning, guys.

Good morning.

Don, can you share with us and looking at your earning asset yields, particularly in the commercial loan portfolio, you see that they dropped from about 4.34 in the second quarter of 2017 to 4.11. In particular, the construction loans really dropped as well as commercial real estate. What are you guys seeing in that market for the yields to come down like that?

Gerard, unfortunately, what you're seeing in there really is some noise related to that purchase accounting true-up that we had in the second quarter. That was about $42 million, most of which hit those categories that you talked about. If you would adjust for that, our commercial loan yields were up 15 basis points linked quarter, which reflects the impact of the increased LIBOR for the quarter. So we're seeing on a core basis; it just makes it more difficult for you all to see it on a reported basis.

And do you guys find that the underwriting standards are being maintained in those lines of businesses or are you seeing something changes there by chance?

Gerard, it's Chris. So as you think about - specifically since your question was about real estate, what you're seeing is sort of what you would expect at this point in the cycle, so I don't think the underwriting standards are changing dramatically. I will say though, with the capital markets being as wide open as they are, our customers have a lot more opportunity to look at taking 10-year no recourse, 10-year paper. I'm thinking of Fannie, Freddie, FHA/HUD, the Life companies, and a CMBS market has been open. So clearly there are opportunities for our customers, but in terms of what people are putting on their balance sheet, we haven't seen a huge change.

Very good. And then Chris speaking of just real estate, the investment banking and debt placement fee line, obviously $141 million is a good number. Can you break it out between the debt placement fees and pure investment banking? And then second, as part of that, are you able to capture any business from the First Niagara customers in the quarter?

So in terms of the breakout, Gerard, we've never provided a breakout by product with respect to that number. So that number has a trailing 12 run rate of about $550 million; it's obviously a big business for us. We've grown it each of the last several years and we anticipate continuing to grow it this year. As it relates specifically to some penetration into First Niagara, we have had some successes which really gives us, frankly, a lot of comfort. One of the areas of success is in commercial mortgage. So far, we placed about $300 million of commercial mortgages, things that were on our books that first and foremost serve the client better because it's a better deal for the clients. We make a fee; we de-risk our balance sheet, so that's one area. We've also had some wins in terms of things like straight-up financial advisory type work, which is pretty early to already have been engaged in to complete those. So we feel pretty good about that trajectory.

Great. Thank you, guys.

Thank you.

Thank you, Gerard.

Yes, good morning. I was wondering maybe Don, I know the auto loan book is a small percentage of your overall loans, but a key focus of investors' attention, if you can kind of give us some color as to how the credit in that book performed this quarter versus last quarter?

I would say that credit continues to be very strong there and no deterioration in that portfolio. Keep in mind that we focused on issuing super prime paper, so it's a 760 FICO score on average. So we're very pleased with the performance, and we believe that we continue to be positioned well for that business.

And then Don, I just wanted to kind of understand the moving parts on your earlier discussion on the NIM. You'd mentioned something about the investment securities rolling off and did you say you expect to see 50 to 60 basis points increase in yield, so that should offset some of the runoff in the loan accretion as well as the increased deposit cost. So I just want to kind of understand the moving parts?

Sure. As far as the investment portfolio, we have about a $1.4 billion cash flow as a quarter coming off that portfolio. For the fourth quarter, we would expect to see about a 50 basis point pickup on that $1.4 billion compared to the run-off of that portion of the portfolio, and so that will be an add-in that, so we get back to the gains as far as a relatively stable core NIM for the quarter.

Great. Thank you. That's helpful.

Thank you.

Thanks. There's two things that really were kind of off track in a sense kind of kept me from doing a little bit better this quarter. And one of those was like you said the PAA as you had all these paydowns in September; those paydowns should have really led to higher purchase accounting accretion. So what was the disconnect? I mean, I think you mentioned earlier kind of off the huff that you were surprised that it didn't work. When you looked at it, what was the reason that it didn't work this quarter?

I would say that the paydowns that we saw throughout the quarter that put pressure on our loan portfolio didn't necessarily correspond to the same type of benefit we would've seen for some categories that had a higher purchase accounting discount recorded at the time of the acquisition. Those higher credit discount portfolios didn't deteriorate as much this quarter as what they had in previous quarters. It was really more of a mix of those paydowns as opposed to the absolute level of paydowns that caused that balance to come down at a slower pace.

That makes sense. Maybe the better borrowers were able to do that versus credit impaired borrowers. The other thing I was looking at is while your investment banking and debt placement moved up sequentially and was at a higher level, it still was down from last year, and I was just curious if you thought that possibly any of the disruptions that we saw across the country with hurricanes and everything else that was going on does that somehow possibly delay some of the transactions just because of the business destructions that were going on out there at the back end of the quarter?

Marty, it's Chris. We don't specifically think that the hurricanes and some of the other disruptions had a material impact. A lot of these transactions have a pretty long lead time and exactly when they happen is a whole lot of influence of things, but I don't think the weather per se had an impact on the timing of these deals. Having said that, we do feel good about where the pipeline is.

And Marty, I would add that if you look at 2016 the first half of the year, the markets were depressed and not functioning well, so our levels of investment banking and debt placement fees were not consistent with the level of performance we would have expected. In the third quarter last year was the quarter where you really saw the markets open up and a lot of the pipeline flow through, so the third quarter last year was actually a record year and reflects those pent-up demands coming out of the slow first half.

Thanks.

Good morning. Thanks for taking my questions. On the loan demand side, just want to talk about the front end a little bit. I know you've been talking about in terms of loan growth the impact of the paydowns and everything, but in terms of the front end, you sounded a little bit more constructive in your commentary around the pipeline. So why don't you give us a little more color around where you're seeing the strengthening of pipeline and also a little bit around line utilization? Thanks.

John, it's Chris Gorman. A couple things, as we look forward into the fourth quarter, the pipelines are strong, and there's a few things really working in our advantage there. First is that we have a leasing business that typically is a fourth quarter business. Second thing is just our business flows continue to be good. Even areas like real estate where we didn't grow loans, we're clearly growing the business. We have really good flow for us, and as it relates specifically to the utilization, pretty flat. If you go back a year, you go back a quarter, right around that is the utilization has been flat. That is potential upside if people feel the impetus to sort of go along on inventory, which heretofore we haven't seen.

Okay. And then in terms of the borrower sentiment, are you still seeing the number of borrowers apprehensive to drawdown on line due to the uncertainty in Washington?

No, I think sentiment has remained sort of as it's been. I would describe it as cautiously optimistic. We're out talking to our clients all the time. One of the interesting things that we've seen in places as diverse as Elkhart, Indiana and Boise, Idaho is all of a sudden it seems like unskilled labor is a little bit tight. It seems like the cost of building materials are starting to increase. I would hold those out as sort of a little bit of a green shoots as you think about people getting back to being a little bit more aggressive. But what we're seeing in general is sort of a continuation of what we've seen, which is that our clients are doing well, but they're cautiously optimistic.

And John, I would add that there is dialog that relates around physical policy, particularly related to tax reform. I do think that there is some tendency at this point here to wait to see what that in uncertainty translates into and what the more constructive tax environment brings. I do think there is some level of demand that might come from that.

Okay, thanks, Beth. And then on the comp expense, the 3% or 2.5% pickup that on linked quarter basis, how much of that was related to the performance in the investment bank and then one of the drivers impacted that? Thanks.

Sure, as far as the investment bank, we tend to see about a 30% correlation between the revenues changes and the comp expense that relates to investment banking debt placement fees. So that's been fairly consistent over the last couple of years. One of the drivers this quarter as far as total personnel cost, we saw seasonal increases in our healthcare and medical costs and that also drives an increase on a linked quarter basis around $5 million or so.

Okay and then one more from me. The Cain $20 million in revenue and expenses, do you expect in the fourth quarter? How does that trend further out? Will the expense level pare back a bit or how we think about the profitability of the acquirement?

We do see a strong contribution coming from Cain. I would say the expenses do come down a little bit and we see a lot of revenue synergies opportunities for us, as well as there are a great fit with our world banking franchise. And you add that, Chris?

No, I would just say that as an enterprise, we have about $10 billion of exposure in places like hospitals, seniors housing, and skilled nursing. Cain is an organization that we have been keenly interested in for some time. So we're adding about 100 people, 25 senior bankers that have very, very good relationships that tie in really well with the business we've built. The first test we always have when we're looking at any acquisition like this is can we integrate it into our core business, and if you think about the offerings that we have in terms of debt payments, equity, we think Cain will be a great fit.

Great, thank you.

Thank you.

Hi, there are a lot of in-and-out here. Where is your guidance by line and a little bit worse where is it better? That you look ahead, I think you said you expect that our efficiency next year, but there are some other in-and-out I might have missed?

Yes, as far as our guidance for outlook, the one piece that we did change was the loans. We do see those at a lower level for the fourth quarter than we previously expected, and it came in a little light on the third quarter compared to our expectations, and so that's the primary driver. As a result of that, we're seeing a little less net interest income, but we've still kept that in the overall guidance range that we established at the beginning of the year. We've also seen purchasing accounting accretion come in a little lower than what we had previously expected, and so we think that is an area of challenge from that perspective. The opportunities we continue to see strong fee income growth and we think we're well positioned for the capital markets space to be strong again in the fourth quarter, and we think fee income is growing at a pace that's in line to better than where we had been positioned before. As far as the expense guidance, the only adjustment we've made there really is to reflect Cain Brothers, which wasn't previously in our guidance, and even with that, we're still in the range that we could previously provide. I think it's just the three pieces that really have moved a little bit.

Got it and maybe this is too simplistic, but I think of KeyCorp with the capital markets being able to capture more disintermediation from traditional bank lending. In other words, the paydown on the loans, borrowers accessing the capital markets more - you've seen more of those revenues there?

Mike, it's Chris. We agree that we think the model that we've built is first and foremost well-suited to our clients to be able to access whatever the most advantageous capital was. To the extent that there are pockets of pretty - the markets are wide open in their pockets of opportunity out there, we think we're well positioned to serve our clients and continue to grow our business. It might in any given quarter not be on the loans on our balance sheet line. But we can continue to grow our business.

All right, thank you.

Thank you.

Hey, good morning everybody.

Good morning.

Good morning.

I wanted to follow-up on John's earlier question. I'm trying to better understand why you're not seeing the slowdown in C&I that many of your peers are seeing. Is it just finding your markets more resilient? Are you doing a better job of taking market share? Is there a particular market driving growth? Thanks.

I think as we step back and look at it, as you know we've always been strong in C&I. So we have a real business built around continuing to go out and as we look at it, it's really share capture because it's not as though we're holding any more of the credits that we're underwriting. So we really attribute that 2% linked quarter on annualized growth to really fortunate enough to be out there and be able to win in the marketplace. One thing I'd like to add to that as well is that historically we rely more on the Corporate Bank as far as generating the C&I growth. Over the last year and a half to two years, we've seen the Community Bank portion of the commercial lending activity also be additive, and that's been a real help for us. So we have the entire organization helping to drive that as opposed to just one portion of it.

And is the growth broad-based or is there one market they would point to really be the story here?

It's really broad-based. As Don mentioned in our Community Bank going to places, last week I was in Salt Lake; I was in Boise, we're getting really good growth across the board, and a lot of that is C&I. That's the business of course that just last quarter had double-digit growth. So it's really broad-based.

And Steve, I would just add to that also part of it if you think about it that we talked about last quarter and it continues into this quarter. Is that the First Niagara bankers in the new and overlap markets are starting to also contribute. The first couple quarters were perhaps more focused on transitioning their relationship books, and they are now also starting to see growth, which is gratifying.

Helpful. Maybe just one final one Don, sorry if I missed this, the new purchase accounting guidance going down 10% quarter-over-quarter in 2018. I think you originally said you expected 2019 to decline around 20%. How should we think about that? Should we decline 20% of that new level for 2018?

First of all, it goes a lot longer than mind - but I would say just continue to assume that 10% decline per quarter to continue for the foreseeable future be a good estimate at this point in time.

Perfect, thanks for all the color.

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. Have a great day.