KeyCorp (KEY) 2015 Q4 法說會逐字稿

Good morning and welcome to KeyCorp's fourth-quarter 2015 earnings conference call.

This call is being recorded.

At this time I'd like to turn the conference over to Beth Mooney, Chairman and CEO.

Please go ahead, ma'am.

Thank you, operator.

Good morning and welcome to KeyCorp's fourth-quarter 2015 earnings conference call.

Joining me for today's presentation is Don Kimble, our Chief Financial Officer.

And available for the Q&A portion of the call is Chris Gorman, President of our Corporate Bank; EJ Burke and Dennis Devine, Co-Presidents of our Community Bank; 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'm now turning to slide 3. Our fourth quarter closes out what has been a very significant year for our Company.

We improved our operating performance, continued our credit discipline, maintained our strong capital position, and made investments that will drive future growth and profitability.

For the year, Key generated positive operating leverage that we believe was among the strongest in our peer group.

Our revenues were up 3% and our pre-provision net revenue was up 5%, both compared to the prior year.

These results reflect our success in continuing to grow and expand client relationships in both the Community Bank and the Corporate Bank.

And these new clients contributed to our 5% growth in average loans and 12% growth in CF&A balances.

We also increased our core fee-based income, including investment banking and debt placement fees, which were up 12%, another record year for us.

Corporate services and cards and payments were both up over 10%.

And I think it's worth noting that these are areas where we have made recent investments that are generating growth and positive returns.

Expense management also remained an area of focus.

During the year, we continued to execute on opportunities to right- size our business, reduce occupancy costs, and improve operational efficiencies.

Expense trends reflect our investments to drive future growth and profitability, as well as merger-related charges and those related to our continuous improvement and efficiency efforts.

Investments during the year included remixing our headcount to increase client-facing roles in both the Corporate Bank and the Community Bank.

We also enhanced our payments capabilities which have driven strong growth in purchase and prepaid cards as well as a 13% increase year-over-year in credit card sales.

And we continued to invest in our digital and mobile offerings, as well as ongoing enhancements to our compliance and regulatory processes.

These were good investments that helped drive our revenue growth in 2015 and they will make an even larger contribution in the future as they fully mature.

While these investments, including the addition of 60 senior bankers in our Corporate and Community Bank, as well as Pacific Crest Securities, position us for growth, they offset some of the efficiency improvements made in other areas of our Company last year.

Importantly, we remain committed to further improvement in the targets that we have established.

Credit quality remained a good story in 2015, with nonperforming loans down for the year and net charge-offs of 24 basis points, which is below our targeted range.

We remain committed to strong risk management practices and staying true to our relationship focus.

The final item on the slide is capital.

Our common equity tier 1 ratio remained strong at 11%, which we believe positions us well for the 2016 CCAR process and we expect both share repurchases and a dividend increase to be part of the capital plan we will submit.

I'm now moving to slide 4 which provides some highlights of our announced acquisition of First Niagara.

We continue to make good progress as we move toward our anticipated closing in the third quarter of this year.

Under the leadership of Chris Gorman, we have established integration teams with some of the top talent from both Key and First Niagara and these teams have been focused on developing detailed assessments and moving forward with our integration plans.

As we move through these early stages, I'm even more confident in this being the right opportunity for Key and our ability to realize the cost savings.

The combined Company will generate attractive financial returns and create value for our shareholders and accelerates our progress towards becoming a high-performing regional bank.

And although not included in our financial projections, we will realize additional value from revenue synergies that will also add to the financial performance.

We look forward to sharing more developments with you in the coming quarters as we move towards closing.

Before I turn the call over to Don, I would like to close my remarks by saying that it was a good year for Key.

We executed against our strategic and financial goals and took steps to accelerate our progress going forward.

I'm proud of our team and of our performance and I'm excited about the opportunities that we have ahead.

Now I'll turn the call over to Don to discuss the details of our fourth-quarter results.

Don?

Thanks, and I'm on slide 6. As Beth said, we had a good year, finishing with fourth-quarter net income from continuing operations of $0.27 per common share.

This compared to $0.28 in the year-ago period and $0.26 in the third quarter.

In the fourth quarter, Key incurred $10 million of charges related to pension settlement and the acquisition of First Niagara.

The combined impact was $0.01 per common share.

Excluding these items, net income from continuing operations was $0.28 per common share, the same as a year-ago quarter.

However, as worth noting in comparison with the year-ago period, the current quarter includes $23 million in higher provision expense and $18 million in lower principal investing gains, giving us a strong finish to the year.

Also, not on the slide is our revenue growth.

For the quarter, revenue was up 2% from the prior year and up 3% from the prior quarter.

For the full year, Key had revenue growth of over 3%, reflecting the success we've had in growing our businesses.

This revenue growth has allowed us to grow our pre-provision net revenues 5% year-over-year.

I will cover the other items in the rest of my presentation, so I'm now turning over to slide 7. Average loan balances were up $3 billion or 5% compared to a year-ago quarter and up $295 million in the third quarter.

Our year-over-year growth was once again driven primarily by commercial, financial and agricultural loans and was broad-based across Key's business lending segments.

Average CF&A loans were up $3.7 billion or 14% compared to the prior year and were up $510 million or 2% [on annualized] from the third quarter.

During the current quarter we continued to generate strong customer growth that was muted by paydowns of lines to existing customers.

Continuing on to slide 8. On the liability side of the balance sheet, average deposits, excluding deposits in foreign office, totaled $71.5 billion for the fourth quarter of 2015, an increase of $2.3 billion compared to the year-ago quarter.

The year-over-year increase is reflective of growth in our commercial mortgage servicing business and inflows from commercial and consumer clients.

Compared to the third quarter of 2015, average deposits, excluding deposits in foreign office, increased by $1.5 billion.

The growth was driven by both seasonal and short-term deposit inflows from commercial clients, along with growth in NOW and money market deposit accounts and certificates of deposit.

Turning to slide 9. Taxable equivalent net interest income was $610 million for the fourth quarter of 2015, and the net interest margin was 2.87%.

These results compared to taxable equivalent net interest income of $588 million and a net interest margin of 2.94%, for the fourth quarter 2014.

The increase in net interest income reflects higher earning asset balances, partially offset by lower earning asset yields, which also drove a decline in the net interest margin.

Compared to the third quarter of 2015, taxable equivalent net interest income increased by $12 million and the net interest margin was unchanged.

The increase in net interest income and the stable net interest margin were attributable to higher earning asset yields and loan fees.

And while net interest margin was stable, it was negatively impacted by higher levels of excess liquidity driven by short-term commercial deposit growth.

Slide 10 shows a summary of non-interest income, which accounted for 44% of our total revenues.

Non-interest income in the fourth quarter was $485 million, down $5 million or 1% from the prior year and up $15 million or 3% from the prior quarter.

The slight decrease from the prior year was attributed to lower net gains from principal investing of $18 million and $7 million of lower trust and investment services income reflecting market variability.

These decreases were partially offset by a $12 million increase in other income gains in our real estate capital line of business, along with growth in some of Key's other core fee-based businesses, including $4 million of higher cards and payments income, and a $4 million increase in mortgage servicing fees.

Compared to last quarter, non-interest income improved by $15 million, most notably due to higher investment banking and debt placement fees, marking a strong finish to a record year.

Additionally, other income was higher, once again related to gains in real estate capital.

And corporate-owned life insurance increased reflecting normal seasonality.

These items were offset by lower net gains from principal investing.

Turning to slide 11.

As you can see on this slide, expense levels were elevated and reflected a number of moving pieces.

I'll start with the current quarter.

Non-interest expense was $736 million, which included $20 million of charges consisting of $10 million of efficiency charges, primarily related to branch closures and severance, $6 million of merger-related costs, and $4 million of pension settlement expense.

Next, compared to the fourth quarter of last year, our non-interest expense was up 5%.

The increase was primarily attributed to $20 million of higher personnel costs, reflecting an $11 million increase in benefit costs, the investments in client-facing personnel costs across the Company, and higher severance expense.

We also had $6 million of merger-related costs.

And finally, linked quarter expenses were up 2%, related to $12 million of higher incentive compensation related to strong capital markets performance and end of the year accruals, $6 million of merger-related costs incurred in the fourth quarter, and $6 million of higher efficiency-related charges.

These were partially offset by the lower pension settlement charge.

Once again, the current quarter included elevated levels of expenses reflecting the costs noted above and normal seasonal trends.

We would expect first-quarter expense levels to be significantly lower than the fourth quarter.

Also we would expect the full-year 2016 expenses to be relatively stable with 2015, adjusted for merger-related costs.

Turning to slide 12, net charge-offs were $37 million or 25 basis points of average total loans in the fourth quarter, which continues to be below our targeted range.

In the fourth quarter, provision for credit losses of $45 million, slightly above the level of charge-offs, reflecting current trends in our portfolio.

Nonperforming loans and nonperforming assets were both down relative to prior quarter and year-ago period.

At December 31, 2015, our reserve for total loan losses represented 1.33% of period end loans and 206% coverage of our nonperforming loans.

It is also worth noting that our energy exposure is small, representing 2% of our total portfolio and has performed in line with our expectations.

We've built reserves throughout the year which currently represent 6% of outstanding loans.

Turning to slide 13, our common equity tier 1 ratio was strong at December 31 of 2015 at 10.95%.

There were no share repurchases in the fourth quarter; for the full year we repurchased $460 million of common shares.

We expect share repurchases and an increased dividend to be included in our upcoming 2016 CCAR submission.

Now moving on to slide 14.

For our 2016 outlook, we're providing guidance on a standalone Key operations.

In 2016, we expect to continue to drive positive operating leverage.

Average loans should grow in the mid single-digit range as we benefit from the strength in our commercial businesses.

We anticipate that net interest income growth in the low single-digit percentage range compared to 2015, without any benefit from higher interest rates.

With the benefit of future rate increases, we would anticipate net interest income to be up in the mid single-digit range.

It is also important to note that we have assumed that deposit rates will increase with future rate increases.

Non-interest income is expected to be up at mid single-digit percentage range for the year.

This assumes continued strong improvement in investment banking and debt placement fees, as well as continued growth in cards and payments income.

We're also assuming very modest levels of principal investing gains for 2016.

Full-year reported expenses should be relatively stable 2015.

We would expect to see normal seasonal trends in expenses with first-quarter expenses down significantly from the fourth-quarter level.

Credit quality should remain a good story with net charge-offs below our targeted range of 40 to 60 basis points.

We also expect provision levels to maintain a stable level of allowance to total loans.

Finally, we expect our dividend to increase in the second quarter to $0.085 per share and the 2016 CCAR plan to include both common share repurchases and an increased dividend.

Our guidance excludes the impact of merger-related charges, as well as the acquisition of First Niagara.

If the acquisition closes in the third quarter as planned, we would expect EPS impact to be a slight dilution of 1% to 2% in 2016 and accretive in 2017.

With that, I'll close and turn the call back over to the operator for instructions for the Q&A portion of our call.

Operator?

(Operator Instructions)

Ken Usdin, Jefferies.

This is Josh in for Ken.

Can you just talk about what rate assumptions you're including with that NII guidance with rates?

Sure.

Our assumption would be to have two additional rate increases for 2016, both of which in the second half of the year, and then the last of which toward the end of the year.

Okay.

And then secondly, can you talk to the IB pipeline, and what you're seeing here in the outlook?

Sure, Josh.

It's Chris.

As we look at our pipelines across the Corporate Bank, our pipelines are very much in line with where they were a year ago.

And as Don mentioned, we had a record year last year, so we actually feel very good about our pipelines.

Great.

Thanks a lot, guys.

Erika Najarian, Bank of America Merrill Lynch.

Beth, just wanted to ask a question on something you mentioned during your prepared remarks.

You mentioned that you're even more confident about the First Niagara deal after -- in terms of extracting cost savings.

Could you give us a little bit of color in terms of the conversations or the progress that you have made after announcing the deal, in terms of thinking about the future impact?

And also, what the progress is in terms of getting First Niagara ready to be embedded into your CCAR process?

Yes, Erika.

I'd be glad to discuss that, and I'll let Don address the CCAR portion because he is closer to that work than I am.

And you're correct that I'm even more confident, and we feel even stronger about the path and quality of what will be the value of this combined -- of these combined Company.

On the cost savings, as you know, we had targeted $400 million or approximately 40% of their costs.

And while it is early days, the integration teams have been identified and are working two by two, to map out those plans.

And as we really understand the underlying cost structure, particularly in technology, operations, vendor expense, there's significant savings in all of those areas that probably contribute to over 40% of that $400 million.

So, out of the gates, as we look for the path, while nothing is ever easy, we also see very real savings that are easy to garner and will also be realized fairly early within the time after our acquisition.

We're also looking at complementary business capabilities and revenue synergies that we continue to gain confidence about the value that will be created there.

So, in all, I do think you hear a continued tone of confidence, as well as a path forward that we feel strongly about.

As far as the CCAR process, we will be including First Niagara with an assumed acquisition date in the third quarter, as we've talked about before, for the CCAR submission.

We'll be relying primarily on Key models and in the path, and using the First Niagara information where we can to run through our existing models as well.

And so, we will show within the plan separated amounts for both First Niagara and Key on a stand-alone basis, but that the total CCAR plan will include the assumption that First Niagara is acquired in the third quarter.

Got it; really appreciate the color -- the look-forward color on the 2016 CCAR submission.

And as we think about the amount of common share repurchases, should we assume that, given that First Niagara is part of your two-year plan, that the 2016 buy-back ask would be lighter than the up to $725 million that you were approved for, for 2015?

I think it's too early to assume the absolute dollar amounts.

We do believe and do expect to see a significant portion of share buybacks, as well as an increase in our dividend for the 2016 CCAR.

But we'll have to work through that over the next several months and finalize those remaining details.

Okay.

Thank you.

Scott Siefers, Sandler O'Neill.

Wanted to ask a question on overall loan growth: Based on the guide for 2016, it looks like there are no hiccups or anything, but I was a little caught off guard by the slowdown in a few categories and then the overall rate of loan growth in the fourth quarter.

So, either Don or Beth, was hoping you could update us on your thoughts on overall loan demand trends you're seeing, et cetera?

Sure.

As far as the overall loan growth, if you look at the average balances, I would say on a year-over-year basis we're up 5%, where we're saying for next year mid-single digits -- pipelines remain strong.

We had a very strong third quarter.

And so, if you're just looking at period-end balances, there clearly was some slowdown in period-end balances because of some temporary flows in and out during that subsequent period.

But I would say that we are continuing to see very strong growth in our commercial business.

You will probably see some slower growth from Key in our commercial real estate area.

And that's intentional, as far as some of the credit disciplines we're maintaining, and backing off of some of the higher-growth areas from a multi-family perspective, and also adjusting our outlook as far as student housing and a few areas like that.

So, you're going to see a lot less construction loan activity from Key than you might be seeing from some of our peers.

Scott, I would just follow on with the notion that Don did say we had an extremely strong third quarter, and there are some variability quarter to quarter, but I think it was a good quarter and obviously a good year.

And when you look to our guidance for 2016 with mid-single digits and continued strength in our commercial businesses, I look at that across the spectrum and continue to say this is an area of strength and where we have been investing in our senior bankers in order to drive growth through client acquisition.

Perfect.

That's good color.

Thank you.

John Pancari, Evercore.

Couple questions here: Back to First Niagara, anything about the updated macro environment or are there [amid] energy concerns here or just overall US economic developments -- anything influencing your marks that you took that would make you have to revisit that?

The marks that will be taken will be done as of the close date.

So, I would say that as what we're experiencing, I don't think that there's any outsized risk from the marks on the First Niagara portfolio from a loan book or others that would suggest any overall concerns there.

But again, we'll finalize those toward the acquisition date, and make sure that we have the appropriate valuations at that time.

Okay.

And then separately, wanted to get your -- and sorry if I missed this, but I wanted to get your updated thoughts on the manufacturing sector as it pertains to impacting loan growth as well as credit.

I know we've seen some -- the industrial space -- seen some pressure here, and some banks have flagged some incremental concern there, but wanted to get your updated thoughts.

Thanks.

John, it's Chris.

Clearly, as we're out talking to customers every day, a 2% growth in the economy, coupled with the strong dollar -- it's not without challenges.

Having said that, our clients are sitting on more cash than ever.

We're having more strategic discussions than we ever had with our clients.

And in a 2% loan growth, you have to either -- they have the same challenges we do.

You have to either figure out how you can take share or how you can grow externally.

And so, in a way, that's a bit of a catalyst for our Business.

So, it certainly isn't rosy.

The growth is, as I said, probably 2%, but the companies are in good shape.

They have a lot of cash, and they're looking to do things strategically.

Broadly -- when you have sales of 17.5 million cars and trucks at retail, that has a positive impact on a lot of business banking clients, middle-market clients and other clients, because a lot of the folks obviously are part of the supply chain.

Okay.

And then lastly, just going back to the strong 3Q you said that you saw in loan growth -- so, is it fair to think -- fair to focus more on the end-of-period balances here as we model out, in terms of the real trends you're seeing in loan growth?

I don't know that I would ever want to stay off -- stay on the period-end balances, but it happens to work out this quarter that if you look at our average balances in the fourth quarter, they're lower than the period end.

And so, if we continue that kind of momentum going forward, it would imply a mid-single-digit kind of year-over-year growth.

So, I would say that's reflective this quarter, but not necessarily every quarter.

Got it.

All right.

Thanks, Don.

David Eads, UBS.

Curious to get any color you guys might have on what you're seeing in the energy vertical in your capital markets business, in terms of where people are going for capital, where the discussions are, whether you guys are involved in restructuring discussions or asset sale discussions -- just what the state of play from where you stand is there?

This is Chris.

I think the answer is all of the above.

I think depending on where in the capital stack companies are, clearly, the amount of high-yield debt that was raised when the cycle first started to turn over -- that has dissipated.

The amount of private equity that has come in -- I think that has started to dissipate.

And I do think people are looking at asset sales, whole company sales, and other forms of restructuring.

So, I think, with oil trading $26 or $27 a barrel, I think people are looking at all options, and we are part of those discussions.

Has there been a change to the percentage of capital raised pertaining to the balance sheet?

I think it dipped a little bit in 3Q.

I'm just curious where that shook out here in 4Q?

The actual capital raised in the oil and gas sector was actually down in the fourth quarter.

If you give a number more broadly for this -- sorry, I -- little bit unclear, for the broader business?

I'm sorry.

Broadly, for the year in our capital market -- in our entire Corporate Bank platform, we raised $57 billion across all the verticals, and about $9.3 billion or, say, 16% actually went onto our balance sheet.

Okay.

Thanks for the color.

Bob Ramsey, FBR.

Credit trends look good, and all the numbers of yours I see out there -- I'm just curious as you guys think about credit, if you're incrementally more or less cautious than maybe a quarter or a year ago?

Bob, this is Bill Hartmann.

I think, as we look at credit in our portfolio, we have a very, very granular portfolio, which is one of the ways that we like to balance things out.

I would pick up on Chris's comments about the general overall trend in a low-growth economy.

We're being diligent to look for any signs of weakness.

And what we're seeing is really reflective in Chris's comments, which is -- there are certain sectors where we're seeing weakness, you know?

But overall, the trends that we're showing in our numbers say that the overall portfolio quality remains high.

Okay.

And sectors where you are seeing weakness -- I know you mentioned manufacturing a little bit, but beyond that, and maybe energy, where else would you be seeing some weakness?

We're not seeing any weakness, per se, but we have been cautious for a while now in talking about multi-family, and being cautious about where we invest and how we do that.

And then student housing was another area.

Okay.

Great.

Thank you.

Gerard Cassidy, RBC.

Don, you mentioned that, on the other commercial lending areas, those balances obviously are down, and you guys are sticking to your credit disciplines.

There's been some talk about the multi-family and student loan housing markets that you're seeing some weakness.

Can you share with us some of the underwriting criterias that you're seeing out there that makes you hesitant to get involved, or is it just overbuilding that has you concerned in these markets?

Gerard, it's Chris.

We look at a lot of metrics.

You can start with some of the cap rates.

And they range from, in large gateway cities, 5% in some instances, even 4%, and those are sort of priced to perfection.

We spend a lot of time looking at what the rent-to-wage ratio is, i.e, the affordability of these class A multi-family apartment buildings.

Those are some of the metrics we look at.

And then we also spend a lot of time looking at what people are doing out in the market.

How far out are they going?

Are they doing non-recourse loans?

What percent of our book, for example, is non-stabilized?

We're now down to 13% of our total commitments in real estate are non-stabilized.

So, those are some of the metrics we're looking at.

Chris, when you mentioned the cap rates of 4% to 5% priced to perfection, what are you guys more comfortable with, even with that specific metric of a cap rate?

You'd have to look at market by market, and really what the opportunity is.

But I can tell you when you get to a 4% cap rate, that has built in it -- into those assumptions -- that it will lease up, that it will lease up quickly, and you'll be able to get rent increases going forward.

And we just think those are a lot of variables.

Finally, on this commercial real estate, have you guys seen any evidence -- the regulators came out late last year with concerns about the commercial real estate market underwriting?

Is there any evidence yet that that's sinking in to banks to be a little more conservative?

We aren't seeing that in the marketplace.

Of course, we're familiar with the prudent lending memo that came out, I think, in the fourth quarter.

EJ is sitting next to me.

The last time the regulators sent out such a memo in real estate it was when?

2005.

2005.

So, I think -- we actually think the regulators are right.

We think the market is a little hot in certain areas, and that's why, by strategy, we've been really toggling more to agent from principal.

Great.

My final question is: In the Community Bank, you guys show the assets and the management dropped, I think, 13% maybe year over year.

Can you give us some color on what's going on in that part of the Business?

This is EJ Burke.

Included in the $39 billion from 2014 is a sub line of business that we call institutional asset services.

And in that business, there's a securities lending function, which has been -- is not something we've been growing.

We had a couple clients exit; so, about $4 billion of that drop were two clients that left that were doing -- we were doing securities lending for.

You'll note that the drop in our -- the difference in our trust and investment services' revenue wasn't nearly that big.

Thank you.

(Operator Instructions)

Terry McEvoy, Stephens.

Don, you talked about higher deposit rates in your NIM outlook.

Could you provide your deposit [beta] assumption?

Do they differ at all by region?

And do you know how that would compare to past cycles?

What our base assumption is, is about a 55% deposit beta, and there isn't a whole lot of fluctuation by region.

That's more of a general assumption.

It does get more granular at the product level, and so we do use that.

Essentially what we've included in our guidance is that our assumptions here include the outlook that our deposit rates would increase that same deposit beta level for future rate increases.

So, there is some potential opportunity there, if that would lag initially.

Just a follow-up for Beth: Every time I read my hometown newspaper in western New York, it seems like a politician or a business leader is saying something against the First Niagara deal.

I guess my question is: Was this expected?

Is it a little bit more than you expected?

Could there be any additional costs or concessions that you have to make to get the deal done, in terms of expenses and/or divestitures of branches and deposits?

Yes, Terry, it is clearly an area where it is a large acquisition in an environment where there have not been many significant acquisitions in the last several years.

So, it has garnered a fair amount of attention.

But we have been very diligent and consistent in our outreach to community leaders and public officials.

And I believe we're having very, very constructive dialogues.

In part, Key is a very good partner for this franchise.

And as we look at the story we have to tell, and our longstanding track record in community investment, community development, eight straight CRA outstanding ratings, which no other top banking company has ever received, I think we've gone a long way to setting a very constructive tone for the kind of neighbor, the kind of bank, and the kind of partner we will be.

So, we've made a lot of commitments, not only about achieving our financial targets, but also about doing the right things for clients, employees, communities and shareholders.

And I believe that we are obviously in the process with the Department of Justice, who will make the determinations on the divestiture numbers, and working through our plans and our progress.

And I think we will be a good and significant partner, and good for those communities and those customers.

Thank you for taking my questions.

Matt O'Connor, Deutsche Bank.

As we think about the expense progression throughout the year, should we expect any meaningful lumpiness?

So, stable for the full year, but first half on a year-over-year basis versus second half on a year-over-year basis should be relatively stable, I guess, both periods?

Just from a seasonal trend, our first quarter tends to be our lowest point as far as expense levels.

And so, we would expect a meaningful, or if we said significant, reduction from our fourth-quarter level, then you would typically expect the fourth quarter to be one of the higher quarters as far as the expenses.

So, I think you would see a similar trend overall as far as the expense levels.

Keep in mind that first quarter of last year our investment banking debt placement fees were low.

And so, our incentive compensation would have been low last year compared to probably what you would expect in the first quarter of next year, because we would expect to have a nice increase in investment banking debt placement fees for the first quarter compared to a year ago.

Okay.

That partially answered the question.

What I'm trying to get at is, as we think about keeping expenses flat, do we see some increase on a year-over-year basis in the first half of the year?

And then some new efficiencies kick in, in the back half of the year; you just said 1Q might be up on a year-over-year basis because of the incentives, but just conceptually, first half, second half?

I would say that our expense initiatives are continuous throughout the year, so I don't think there's going to be any lumpiness there.

I think, as you just repeated, we would expect first-quarter expenses in 2016 to be higher than 2015, reflecting the overall performance outlook and expectations -- higher revenue during that quarter from those business lines.

Okay.

All right.

Thank you.

David Darst, Guggenheim Securities.

Could you speak to the continuous improvement program, and maybe where do you think you are in percentage of completion, and what those expenses could be for the year?

For our continuous improvement, I hope we're never done.

This is something that we believe is part of our culture, and we'll continue to focus on that.

We've just implemented a number of areas which created some of the charges we had in the fourth quarter, as it relates to our private banking area and restructuring.

So, that's just one example of where we do deeper dives in the specific areas, looking from everything from the customer interface all the way through to the back office, and making sure that we're designing that in a way that can be more effective for that customer interaction, but also more efficient for us from a cost perspective.

So, we would expect to see ongoing opportunities at a similar size to what we've been experiencing this year.

Okay.

And on the private investment gains, what's your outlook for those this year, and then what's the balance of that portfolio?

The principal investing gains, as we showed, was $0 for the current quarter.

Our outlook is to show very modest levels of gains for next year.

So, it would be a smaller level than clearly what we had throughout this year.

And the current balance is around $300 million of investments, and so we would see reductions from that balance, just because we are about $450 million starting the year.

So, we're down to about two-thirds of the level that we were a year ago.

Got it.

Okay.

Thank you.

Marty Mosby, Vining Sparks.

Chris, I wanted to ask you -- you did a really good job with debt placement investment banking this quarter, given all the disruptions in the marketplace.

Didn't really expect you to be able to blow through that like it had no impact.

Are there any things that you see on the horizon or anything that's been happening that would put any pressure on the sense of being able to pull those deals through?

Sure, Marty.

Obviously, we, like everybody else, are subjected to the markets.

And to the extent that the markets were to continue as they have been in the last two or three weeks, our ability to pull through our pipeline -- the yield through our pipeline would be less.

We are really proud of the way we navigated what was a very choppy fourth quarter in the debt markets.

So, we're really pleased that we've been able to distribute all the paper that we had.

But to your point, if we were to face very, very choppy markets going forward, that would have an impact in the first place as you would see the impact would be in the M&A area and also you'd see obviously a related impact in the financing areas.

While the investment banking that deployment was good, trust in your investment was down in what typically would be an upturn in the back end of the year.

Don, I was just curious, was that all market value related, and would we see further impacts as you move into the first quarter, given the first couple weeks and compression we've seen in the market valuations?

The impact there really was in two areas.

One was that some of that is commission revenue, and that revenue was down this quarter, reflecting some of the market-related activities.

And then the other piece was that we did see some pressure on asset value, which created some pressure on the revenues there.

First quarter is not off to a great start as far as asset values.

And so, I think that's an area that would continue to have some pressure throughout 2016.

But our guidance, mid-single-digit kind of growth, reflected seeing some pressure in that area.

Thanks.

Geoffrey Elliott, Autonomous.

It feels like some companies are starting to get a bit more nervous on the credit outlook.

So, what are the early indicators that you typically look at to get a sense of whether credit might be turning, if you called it out, and how are they performing?

Geoffrey, this is Bill Hartmann.

So, in our portfolio monitoring activities, we have a number of different metrics that we look at that we refer to as early warning indicators.

Some of them are macro, and we take a look at how those macro indicators might impact our portfolios by industry and by region.

And then we also look at the performance of the companies themselves, and in the conversations that our bankers are having about the way that the companies prepare themselves for changes in the economic environment.

As Chris mentioned, one of the things that we're noticing, and have noticed for a while, is that many of these companies are being very conservative by carrying larger amounts of cash, which show up in the deposits that we have.

And they're also -- the growth in loans has not necessarily been with the customers that we have, because they're not going out and investing in an environment that's only growing at 2% to 3%.

Just so I understand, you're saying that you think the higher cash balances give you more protection -- higher cash balances at corporate give you more protection than you would have had in prior corporate cycles?

That's the message you're trying to get across?

I think what we're saying is that the customers themselves still remember the last cycle.

And liquidity became extremely important in the way in which they managed themselves through a cycle.

And so, by carrying larger cash balances, it gives them more of an ability to manage their companies successfully through the cycle, which benefits us in their ability to survive.

Great.

Thank you.

Peter Winter, Sterne Agee.

Don, one housekeeping item: The FDIC deposit insurance surcharge -- just wondering -- I know it's proposed, but what the impact could be for you guys?

There would be a slight impact, but it wouldn't be significant to the overall expense base.

Okay.

Is that included in the 4Q?

It would be included in our guidance, yes.

Got it.

And a question for EJ on the Community Bank with -- I was just wondering if you could talk about the loan trends and what you're seeing in small business loan demand?

For small business?

I would turn that to my partner, Dennis Devine.

He heads small business.

I can talk to commercial banking, which is our lower end and middle market.

Okay.

I'll take both.

Both?

First of all, in the commercial banking segment, we had a very good quarter from a loan production standpoint, and then for the year, we've had good loan growth.

We did see some clients pay us down in the quarter.

They didn't pay us off; they just paid us down.

And digging beneath those numbers and talking to clients, we found that, as Bill alluded to earlier, they're carrying higher cash balances, paying us down, so we feel pretty good going into the year around our pipelines.

And finally, the last thing I'd say is that we've talked for the past couple quarters about the fact that we've hired a number of bankers across the Franchise.

Those bankers are ramping up, and we're starting to see good production in new client acquisition from those bankers.

Dennis?

Small business would be comparable.

The sentiment would be about the same.

Our production has been up a little bit, as much focused around our execution as anything else.

The ability to deliver to small business clients is important -- and so, both the capabilities of our branches, our business banking RMs, and some centralized capabilities we've brought to market.

So, you see some year-over-year production increases against a relatively stable outlook, as both EJ and Chris have spoken to.

All right.

Thanks very much.

(Operator Instructions)

Matt Burnell, Wells Fargo Securities.

Just an administrative question on the oil and gas portfolio: You've mentioned what your outstanding exposures are.

I'm curious what your commitments in that sector might be, and whether or not they've changed much over the last quarter or last 12 months?

This is Bill Hartmann.

So, our total commitments to the sector are approximately $3 billion.

They have been coming down slightly over the last 12 months or so.

I think that's your question?

Yes.

Thanks very much.

Beth, I noted your commentary about the initial days of the planning for the First Niagara acquisition.

I guess I'm just curious, maybe it's a matter of a little bit of color, but are you suggesting that there could be, if not cost savings above the $400 million that you've targeted, perhaps a faster ramp-up of the cost savings?

And are you suggesting that your level of confidence in terms of the potential revenue synergies is better than you guided when you announced the deal?

Yes, Matt.

I'll go ahead and talk about that.

I do believe that our confidence in the cost savings, both the path for some of the timing, as I talked about some of the third-party vendor contracts, their technology and operations largely being in an outsourced world gives us a fair amount of certainty around the cost, as well as ability to realize savings in early days of the integration.

And as we look at our detailed planning, which again is still early days, but our planning would suggest we believe that there are more opportunities over and above the $400 million.

So, just in general, as we firm up path and plans, I think we're feeling stronger and better.

And as we look at the revenue synergies, we quoted in our call that we had in late October -- around $300 million in revenue synergies was the number that we had put out there.

Obviously, with some offsetting costs on net numbers -- something less than that, around $200 million.

And I think what we're really seeing is more confidence around the places and the way that we would realize those revenue synergies.

We see the complementary nature of our business models.

They are accelerating our [compliance] within the mortgage space.

And as we look generally around the cultures and the product capabilities, and their client base, we are getting more confident about the path on the revenue synergies.

Okay.

Thanks for taking my questions.

Kevin Barker, Piper Jaffray.

Just to follow up on the energy question, what is the percentage of criticized assets that you have in your energy portfolio at this time?

We have about 31% of our energy assets are criticized.

Thanks And then to follow up on some of your comments regarding commercial real estate and some of the regulatory concerns, could you help us -- just give us a little more color around what sectors and what regions of the country you're seeing particular softness or just froth in general regarding commercial real estate?

Sure.

This is Chris.

Specifically, Kevin, we're really focused on multi-family -- class A multi-family.

And some of the areas that we've identified are places like Houston, Raleigh, DC, Boston, Denver, Seattle, just to name a few.

Are you seeing anything in regards to the hotel sector or even retail?

We don't participate in the hotel sector.

So, that's not something we focus on.

And then what about in regards to retail?

Retail is not a big part of our Business either.

So, we're not really -- what we're really most dialed in on in terms of areas of concern is really the froth in the multi-family area.

Okay.

All right.

Thank you for taking my questions.

With that, we have no further questions in queue.

All right.

Thank you, operator.

And, again, to all, 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.

That concludes our remarks.

Thank you, and have a good day.