KeyCorp (KEY) 2018 Q1 法說會逐字稿

Good morning, and welcome to KeyCorp's First Quarter 2018 Earnings Conference Call.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Chairman and CEO, Beth Mooney.

Please go ahead.

Thank you, operator.

Good morning, and welcome to KeyCorp's First Quarter 2018 Earnings Conference Call.

In the room with me are Don Kimble, our Chief Financial Officer; and Chris Gorman, our President of Banking.

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. The first quarter was a good start to the year for Key, with continued momentum in our core businesses, as we grew and expanded relationships with our targeted clients.

For the more positive economic backdrop and improving client sentiment, we are seeing strong activity and healthy dialogue in our markets from clients large and small.

We continue to take share and our pipelines remain strong.

Our results this quarter reflect the strength of our business model and competitive positioning.

Earnings per common share was up 19% from the prior year, and we generated a return on tangible common equity of 15% for the quarter.

Reported revenue was up over 3% from the first quarter of last year, and adjusted for purchase accounting accretion, revenue growth was 4.6%, driven by a higher net interest margin, solid loan growth and strong performance from our fee-based businesses.

The growth in average loans this quarter was broad-based and was primarily in commercial and industrial loans, which were up over 3% linked quarter.

The growth reflects our success in growing and expanding middle-market and corporate relationships as well as the momentum we had coming out of the fourth quarter, with strong pipelines and activities that carried into the first quarter for closing.

Our fee-based businesses, once again, reflected our ability to offer a full range of solutions to our clients, including off-balance sheet financing alternatives that help drive our investment banking and debt placement fees to a record first quarter level.

Capital markets' execution enables Key to meet our clients' needs, drive fee income, manage portfolio risk and generate attractive returns on capital.

While the mix of on and off balance sheet activity can vary in any given period, this quarter, we saw strength in both, and our results continue to be a clear reflection of the success of our model.

Expenses were elevated in the quarter as a result of higher benefits and severance as well as the acceleration of certain technology costs and investments.

Don will walk through the expense line items in his comments.

But importantly, we remain committed to achieving our 2018 expense guidance and believe that the first quarter level will be the high point for the year.

Given our outlook for revenue growth and lower expenses, we expect to move towards the high-end of our long-term efficiency ratio target of 54% to 56% by the end of this year.

As we have discussed previously, we continue to execute on efficiency opportunities across our company, including realizing the remaining benefit from the First Niagara expense saves that will be fully captured in our second quarter results.

We've also started implementation on a number of expense initiatives, including several that are a carryover from last year when resources were devoted to the integration of the acquisition.

We have a high degree of confidence in achieving these incremental savings as we move through the year, which will come from such things as additional branch consolidations, savings from third-party vendor contracts, realizing efficiencies in the middle and back office areas and the realignment of several business units.

The final 2 sections on this slide, highlight our strong position in terms of both risk management and capital.

Credit quality remains a strength, with net charge-offs to loans of 25 basis points.

We remain committed to maintaining our moderate risk profile.

And our approach to capital has also remained consistent, maintaining our strong capital position while returning a large portion of our earnings to shareholders through dividends and share repurchases.

Earlier this month, we submitted our capital plans through the CCAR process, and our plan was consistent with our stated capital priorities.

Overall, it was a solid start to the year.

I was pleased with the growth we are seeing across our franchise.

Expenses reflected some seasonal factors and other timing differences are expected to come down over the course of the year, and we remain on a path to make meaningful progress, approaching the upper end of our efficiency ratio target this year.

Now I'll turn the call over to Don for more detail on the quarter.

Don?

Thanks, Beth.

I'm on Slide 5. We reported first quarter net income from continuing operations of $0.38 per common share.

Our results compared to $0.32 per share in the year ago period and $0.36 in the fourth quarter, with prior periods adjusted to exclude notable items.

Our return on tangible -- average tangible common equity grew to 14.9% in the first quarter.

Our cash efficiency ratio was impacted by elevated expenses in the first quarter.

Importantly, as Beth mentioned, and as I will comment on in more detail later, we have plans in place to reduce our expenses, and we expect to approach the high-end of our efficiency ratio target of 54% to 56% by the end of this year.

In the first quarter, we benefited from a GAAP effective tax rate of 13%, reflecting recent tax law change and credits from investments and tax-advantaged assets.

I'll cover many other remaining items on this slide in my rest of my presentation, so I'm now turning to Slide 6. Total average loans of $87 billion were up $921 million from the fourth quarter.

First quarter growth was driven by commercial and industrial loans, which were up over 3% linked quarter unannualized.

The growth was from core relationship business in both our Community Bank and our Corporate Bank.

And we saw a good business activity in our new and overlap markets.

Importantly, we maintained our underwriting standards and remained selective and focused on our targeted client segments.

The growth this quarter also reflected the continuation of the momentum we had at year-end.

Carryover from deals that were pushed into the first quarter and strong pipelines.

Loan paydowns, while still elevated, slowed significantly this quarter, and we would expect this trend to continue, as we move through the year.

On the consumer side, we saw a growth from the expansion of our auto lending business into existing geographies and dealer relationships.

We are also positioned, coming into the second quarter, with ending loan balances of $88 billion, up $1 billion from the average balances this quarter.

Continuing on to Slide 7. Average deposits totaled $103 billion for the first quarter of 2018, down $1.2 billion or 1% unannualized compared to the fourth quarter.

The cost of our total deposits was up 5 basis points from the fourth quarter, reflecting recent rate increases as well as continued migration of our portfolio into higher-yielding products.

Compared to the prior year, we saw retail and commercial growth in certificates of deposits, as we continue to see a mix shift into higher cost deposits.

We also saw a 10% increase in consumer noninterest-bearing deposits.

Now on money market accounts.

The decline in the prior year, largely due to a mix shift as well as the managed exit of certain higher-cost corporate and public sector deposits.

On a linked-quarter basis, the change in our other balances was primarily driven by the decline in noninterest-bearing deposits.

These deposits were elevated in the fourth quarter due to seasonal and short-term escrows.

These declines were partially offset by growth in our consumer noninterest-bearing deposits.

We continue to have a strong, stable core deposit base, with consumer deposits accounting for 61% of our total deposit mix.

Turning to Slide 8. Taxable equivalent net interest income was $952 million for the first quarter of 2018 and the net interest margin was 3.15%.

These results compare to taxable equivalent net interest income of $929 million and a net interest margin of 3.13% for the first quarter of 2017 and $952 million and a 3.09% margin in the fourth quarter.

Purchase accounting accretion contributed $33 million or 11 basis points to our first quarter results.

This compares with $38 million or 12 basis points in the fourth quarter and $53 million or 18 basis points in the first quarter of 2017.

From the first quarter level, we continued to expect purchase accounting accretion to decline by approximately 10% per quarter in 2018.

Excluding purchase accounting accretion, net interest income was up $43 million from the first quarter of 2017.

The increase was largely driven by higher rates and low-managed deposit betas.

Excluding purchase accounting accretion, total revenues would have increased by $67 million or 4.6% from the first quarter of 2017.

Net interest income increased $5 million from the prior quarter, excluding purchase accounting accretion as a benefit of higher interest rates and lower short-term earning assets with the lower levels of liquidity which partially offset by the day count and the impact of taxable equivalent adjustments.

We expect our core net interest margin, excluding purchase accounting accretion, to move modestly higher in the remainder of this year, which assumes continued growth in our balance sheet and a rate increase midyear and another towards the end of the year.

Reflecting March rate increase as well as the expectations for the remainder of the year, we are increasing our net interest income outlook for the year by $50 million to now be in the range of $3.95 billion to $4.05 billion.

Moving to Slide 9. Key's noninterest income was $601 million for the first quarter of 2018 compared to $577 million for the year ago quarter, as we continue to benefit from investments in several of our fee-based businesses.

Growth in the prior year was largely driven by a record first quarter for investment banking debt placement fees, which were $143 million, up $16 million from a year ago period, as we benefited from the acquisition of Cain Brothers as well as strength across our capital markets platform.

We also saw momentum in many of our other fee-based areas, including commercial leasing and corporate services.

Compared to the fourth quarter of 2017, noninterest income decreased by $55 million.

The decrease was largely driven by seasonal impacts in several fee-based businesses, including investment banking debt placement, cards and payments and corporate-owned life insurance.

Turning to Slide 10.

Key's noninterest expense was $1.006 billion for the first quarter of 2018, which compares to $1.013 billion in the fourth quarter, with the prior quarter adjusted for a number of notable items including merger-related charges and the impact of tax reform and related actions.

The current quarter reflected a number of seasonal and timing items, which impacted the comparison with the fourth quarter.

Excluding notable items from the prior period, personnel costs were up $28 million from the fourth quarter.

The drivers of this increase were $31 million in higher employee benefit costs, primarily due to the seasonal increases, employer taxes and healthcare-related expenses and approximately $11 million from the accretion -- the acceleration of technology development costs into the first quarter.

We also incurred $5 million in severance costs this quarter and offsetting these increases in personnel line was a decline of $24 million in incentive compensation.

The increase in personnel costs were more than offset by a net $35 million reduction in nonpersonnel expenses.

Despite the impact of a $4 million increase resulting from purchase accounting true-up and $3 million of higher operational losses.

We expect that our elevated expense levels this quarter will represent the high point for the year, and we will achieve our targeted expense range of $3.85 billion to $3.95 billion for the 2018.

Contributing to our lower expense run rate will be the remaining First Niagara cost saves of $50 million, which should be fully reflected in our second quarter results.

Additionally, as part of our ongoing continuous improvement culture, we are implementing plans across the company that will contribute to our results this year.

As Beth mentioned, these cost reductions include additional branch consolidations, expecting to close 40 branches this year.

Additional savings from third-party vendor contracts, realizing efficiencies from middle and back office functions, realignment of several business units and adjustments of staffing model throughout the organization.

With these efforts, we expect to be approaching the high-end of our long-term efficiency ratio target of 54% to 56% by the end of this year.

Again, we're maintaining our full year guidance for noninterest expense of $3.85 billion to $3.95 billion.

Moving on to Slide 11.

Our credit quality remains strong.

Net charge-offs were $54 million or 25 basis points of average total loans in the first quarter, which continues to be below our targeted range.

The provision for credit losses was $61 million for the quarter.

Nonperforming loans were up $38 million or 8% from the prior quarter but represented 61 basis points of period-end loans.

At March 31, 2018, our total reserve for loan losses represented 1% of period-end loans and 163% coverage of nonperforming loans.

And turning to Slide 12.

Capital remains a strength for our company, with a Common Equity Tier 1 ratio at the end of the fourth quarter of 10%.

We continued to repurchase common shares during the quarter, which totaled $199 million.

We submitted our capital plans earlier this month with a requested capital action, which are consistent with our earlier messages of continuing to increase a common dividend to a level approaching our long-term targeted payout range of 40% to 50%.

Our requested share repurchases will also move our capital closer to our long-term Common Equity Tier 1 target of 9% to 9.5%.

Slide 13 is our outlook for 2018.

With the exceptions of the higher net interest income and adjusting our tax rate guidance, our outlook remains the same with what we shared with you in January.

We continue to expect average loan balances to increase to $88.5 billion to $89.5 billion range with deposits growing less than loans.

As I mentioned earlier, net interest income is expected to be in the range of $3.95 billion to $4.05 billion, with our outlook assuming one more increase in the middle of the year and another later in the year.

In our appendix, we also updated our net interest -- our interest rate sensitivity slide, which provides different rate and balance sheet assumptions.

We anticipate the noninterest income will be in the range of $2.5 billion to $2.6 billion, as we continue to drive growth from our core businesses and deliver First Niagara revenue synergies.

We continue to expect noninterest expense to be in the range of $3.85 billion to $3.95 billion, with the first quarter marking the high point in expenses for the year.

Net charge-offs are expected to remain below our targeted range of 40 to 60 basis points, and our loan loss provision should slightly exceed our level of net charge-offs to provide for loan growth.

And given our lower starting point this quarter, we've adjusted our full year guidance for our GAAP tax rate down to 17% to 18%.

Beth said, this was a good start to the year for us with continued growth across our franchise.

There was some noise and the seasonality in our expense line but we remain confident on our outlook and expect to make meaningful progress this year toward achieving our long-term goals.

I'll now turn the call back over to the operator for instructions in the Q&A portion of the call.

Operator?

(Operator Instructions) First from the line of Ken Zerbe with Morgan Stanley.

Just a quick question on the efficiency ratio target.

Are you guys referring to reported efficiency ratio, the 54% to 56%, or are you excluding the intangible amortization from that?

Ours is a cash efficiency ratio and that's what we've always used as our target, which would exclude the intangible.

That's correct.

Got it, okay.

And then, just in terms of the technology spend, I guess, how are you thinking about additional technology spend from here?

Because I guess, my question is, what is the risk that in the future quarters, we see additional, let's call it, accelerated technology spend that may or is -- I assume it's all built into your expense guidance but I guess I'm kind of curious about the upside risk there.

It is built into our guidance and we would expect the first quarter like expense overall would be the high point as far as our technology spend, and we would continue to manage that appropriately going forward.

Got it, perfect.

Okay, and then just one last question.

On Slide 7, you mentioned the migration into higher-yielding products in terms of the deposit side.

Can you just elaborate on that, like how pervasive is that and what do you expect over the course of the year?

I think you can see that in the time deposit line item.

We're seeing much more growth there than we are in other deposit products.

And that's essentially where the consumer and some commercial customers are going to get the increased rate that we're not seeing a lot of the core money market pricing and others change yet.

And so we're seeing that drift back into time deposits and we expect that to continue throughout the next year.

Next we'll go to Scott Siefers with Sandler O'Neill.

Don, thank you for the comments about sort of the high-water mark and expenses going down from here.

I'm wondering if you're willing -- if you could be maybe a little more specific on your thoughts on the trajectory for the remainder of the year.

I guess that, what I'm asking is, would you expect just an immediate step down in cost in the 2Q and then some growth from there, or is this going to be more ratable change over the course of the year?

And then, I guess, the follow-on question to that is, almost like I guess the way expenses are going to traject this year is almost reverse of the way they typically do, right?

The first year is -- or first quarter is typically the low-water mark for the year and by a wide margin, the fourth quarter tends to be the highest.

I think mostly because of investment banking.

So do you -- have you baked into the guide -- that seasonal increase from compensation costs in the fourth quarter?

And so you still think you can lower expenses even in spite of what typically is a weaker end of the year in costs?

That's a great question.

And I would say that as we look at our outlook for expenses from the first quarter level, that would imply that the second through fourth quarter, should on an average be down about $40 million.

And so, if we look at what we incurred here in the first quarter, we had higher benefit costs of about $30 million, and we also had some onetime items that I mentioned, as far as the accounting -- purchase accounting true-up, which cost us about $4 million and also elevated operating losses, which cost us about $3 million.

And so, those 3 combined are in that $38 million range.

We would expect the benefit cost come down meaningfully here in the second quarter.

We won't recapture 100% of that $30 million windfall, but we do expect to see a meaningful adjustment down for that.

We'd also expect those other items of purchase accounting true-up and the operating losses not to continue to recur at that pace.

But we do expect to see some other things that would occur in the second quarter, which includes some of the merit increases that would come through and those would be offset by some of the savings that we'd be expecting to achieve.

And to your earlier question, we are also taking into consideration the increased compensation related to higher investment banking fees throughout the rest of this year as well.

And so, that is embedded in our guidance for this year.

And as a result, we would expect to see a different trajectory as far as expenses this year compared to what we would've seen in previous years.

And more of that's related to the timing of some of these expense programs that we've talked about and making sure that we achieve those savings as part of our continuous improvement to offset those increases.

Okay.

All right, so perfect.

So almost basically, regardless of what happens on the revenue side, you're going to be -- your plan is to enter 2019 off of a lower 4Q expense base than we've got now, almost regardless of what happens, right?

That would be our expectation based on the timing of these expense initiatives we talked about.

Next we'll go to Ken Usdin with Jefferies.

Just as a -- and follow-up to Scott's questions.

Like, the question is, expenses are going to go down for the rest of the year but then it seems like we'll have a new seasonality, so we should just -- should we expect first quarters to generally be the high-water mark for the absolute expense quarters as we go into '19 as well, or are we just kind of now on a different trend down, down, down, all the way?

We would expect to see some seasonality in the first quarter of every year, mainly because of the benefit expenses.

I would say that this first quarter, we had about $20 million of items that were elevated compared to what our expectations would've been coming into the quarter.

Benefit costs themselves were probably about $5 million higher.

We had severance costs of $5 million and then we also have the other 2 items I mentioned, which was the true-up of purchase accounting and also the higher operational losses, which we wouldn't expect to continue going forward.

Right, okay.

And then just on the -- really helpful to give us that approaching the high-end of 40 -- 54% to 56% That's a far, far away from 62.9% that you just printed, given all the things you just talked about.

I just want to -- can you help us understand what approaching really means?

Is it directionally or is it actually expected you can really, really get tight to that 56% side?

We mean that we will be closely approaching that 56% side.

Our next question is from Gerard Cassidy with RBC Capital Markets.

Can you guys give us some additional color?

You had some strong commercial loan growth in the quarter, sequentially annualized it was about 12%, I guess.

Can you share with us where that's coming from maybe geographically?

And Don, I think you mentioned something about some overlapping, I'm assuming, with the First Niagara franchise, some growth came from that area and some further color on this growth.

Great question, Gerard and I'll ask Chris to provide some more color here as well.

But you're right, that the growth was driven by a number of things.

One is that we did have some pipelines and volumes that really got pushed out of the fourth quarter into the first quarter and so we saw growth there.

We also benefited this quarter significantly from paydowns being lower.

And that was about $1.3 billion lower payoffs this quarter than what we had in the fourth quarter.

And so, that was a huge benefit to us as well.

And the growth was across the board.

And then, Chris will highlight some of the markets and especially, some of those new markets for us that contributed to it.

Sure.

So if you just step back for a second.

Our business is one where we're constantly out talking to our clients and things develop over time.

So if you kind of step back, we have more bankers, we have better dialogue, we have more clients, we continue to expand the clients that we have.

So in any given quarter, you'll see movements like this.

We had really strong performance across the board.

We had strong performance in the Rocky Mountains, strong performance in the Pacific Northwest, we had strong performance in our Hudson Valley area.

And we also had strong performance in some of these overlap markets that Don mentioned and those would be markets like Buffalo and some of our new markets like Pittsburg and Philadelphia.

Also in our industry-based businesses, we had pretty much across-the-board growth.

So it was just a -- it was a really good quarter for both on and off balance sheet growth.

Very good.

And then shifting to the other side of the balance sheet, on the deposit side.

Can -- I may have not heard this, so I apologize, can you give us an idea of what the deposit betas are doing today?

And what is your expectation and when you will get to your terminal deposit beta.

Is it later this year?

In 2019?

And about what level would that be when you look at it?

As far as the deposit beta this quarter, you can look at our deposit rate went up by about 5 basis points this quarter compared to the 25 basis point increase in Feds -- Fed funds.

So calculating just that with some -- basically it's about 25% on a cumulative basis, we're at 22%.

We would expect that 25% to continue to increase throughout the rest of this year and probably get into the 2019 time period, where future increases would be more to our normalized beta, which we have historically talked about a mid-50s kind of beta.

And so we would see a gradual increase from here to that point.

And those are the assumptions that are baked into our net interest income guidance for the outlook for this year.

Our next question is from Erika Najarian with Bank of America Merrill Lynch.

Just wanted to follow-up on Scott and Ken's line of questioning.

So I thought it was very clear the way you outlined some of the seasonality, Don, on the first quarter expense line.

But within the revenue parameters that you laid out in Slide 13, the quarterly run rate for expenses should average between $965 million to $981 million, sort of using the midpoint to high point of your expense range.

That's correct.

And then so I would just say that it's roughly, on average, about a $40 million climb from what the first quarter level was.

And again, a good portion of that really comes from the removal of some of these onetime or seasonal items.

And so essentially, the increases in incentive compensation related to strong performance in capital markets and some of the other investments we'd be making would be offset by the impact of the cost savings we talked about, timing of those.

Got it.

And as a follow-up on the net interest income guide.

You guys clearly outperformed on client activity trends among regional banks this quarter.

I'm wondering what average loan growth and balance sheet size you've contemplated underneath that $3.95 billion to $4.05 billion guidance?

What we've included in there is the guidance we have for total loans.

And so, the midpoint of that, I believe, was $89 billion and the midpoint of the other deposits was in the $104 billion range.

So those would both be about a $2 billion increase from where we were on an average basis for the first quarter and based on how we're positioned to-date, with our ending balances for loans being up $1 billion from the average for the first quarter, I think, we're off to good start here in the second quarter.

Got it.

And one last one for Beth.

Beth, with the stress capital buffer proposals that had come out 2 weeks ago, or I guess, last week.

Clearly favorable for lower-risk models like KeyCorp's and favorable towards higher dividend payers.

I'm wondering if that could potentially change how you're thinking about capital return if the proposal is passed as written?

Good question, Erika.

And no, it does not.

But it certainly does augment in support what -- how we have talked about our capital priorities.

Next we'll go to Peter Winter with Wedbush Securities.

If I look at pretax pre-provision net revenue for the first quarter, it was down 4% year-over-year.

I'm just wondering, did you possibly front-load some of the expenses for the revenue enhancements last year?

And so, there should be better operating leverage going forward?

I would say that the pre-provision net revenue impact really was related to more the timing and some of the elevated level of expenses this quarter that we expect to see come down throughout the rest of the year.

And as far as the investments we're making and the revenue synergies that more of those, as we talked about before, are proportionate to the revenues.

And so, we still believe we're on a path to achieve a run rate for those revenue synergies of $150 million a year by the end of this year and achieve the $300 million target by the end of next year.

And then, just one quick one on credit.

It's not major, but I'm just wondering, there was an increase in C&I nonperforming.

I'm just wondering if you could give a little color.

It tends to be more deal-specific, so there really isn't any trend or specifics as far as industry seeing any stress or pressure, it really is just one item at a time.

So no big or unusual transactions and no industry concentrations there.

And next we'll go to John Pancari with Evercore.

Thanks for all the color on the expense trend.

I don't mean to kick the dead horse here but I'm going to kick it twice.

The -- on the expense number, just can you talk about your -- if revenue does come in weaker this year for any given reason, could you just talk about your ability and your willingness to be more flexible on the expenses, your ability to pullback in order to get to the efficiency target?

You're right on that point but keep in mind that a good portion of the revenue growth is coming from more of our fee-based businesses.

And some of those are tied to the capital markets and there is a direct correlation between the expenses associated with supporting that and their actual revenues.

So if revenues don't come through, we would see a corresponding reduction to the expenses.

As we've always talked as well that we're very focused on continuous improvement.

And we've talked about the time as we'll make investments because we're seeing the payback and have additional revenue growth opportunities from making those investments.

At times, revenues won't be there and so we'll pull back on the expenses and you're seeing a little bit of that here with this quarter and what we're talking about because the expense initiatives that we're taking on for rest of this year are probably elevated and toward the upper end of what our normal guidance range would be to make sure that we can manage to and live up to our commitments we made as far as our expense outlook.

Got it.

All right.

And then separately, again on expenses, the -- you haven't announced any plans to reinvest your tax savings yet.

A lot of your peers have.

And so, I guess, could you just talk about the -- I know you're not signaling anything just yet and you indicated that the IT investments are ongoing but not going to drive a big jump in cost.

What is the likelihood that 2019, that you relook at the tax savings and decide to reinvest the portion of that into IT or any other area?

I would say when the tax law changed, we did make an investment in our people and we increased our minimum wage to $15 an hour, and so that was meaningful to a lot of our employees and feel that was an appropriate step to take.

And we also had a onetime contribution to the retirement funds for those individuals as well.

And so that was -- both we thought very constructive.

We're very focused on continuing to drive the core and we want to focus on driving positive operating leverage for the current year and we'll expect to do the same thing in '19 and beyond.

And for us to do that, our investments will have to be made through benefits we have from cost savings and from future revenue growth.

And so it won't be a direct result or connected to the tax reform that's occurred.

Our next question is from Saul Martinez with UBS.

First, just a clarification on your NII guide and this year's slide deck, you made it clear that it's on a tax equivalent basis in previous versions, I think it wasn't exclusively specified.

Just want to make sure that this number is on a like-for-like basis.

I know it's not a big number, it's about $30 million.

So I just wanted to make sure that we're comparing the respective guide on a similar basis.

No, you're right.

And the reason we added that this quarter is, last quarter's call had a question as whether or not that was taxable equivalent or not and it was.

And so it's -- on a consistent basis, we just wanted to make sure that, that was clear for the investors to know that.

Got it, perfect.

And to beat a dead horse, I guess a little further.

On -- couple of quick questions of cost.

The $50 million of cost savings that you've realized, how much of that was in the run rate in the first quarter and how much do you expect to -- incremental expense save do you expect to filter into the second quarter and beyond?

Yes, we've said that the full amount is in the second quarter outlook, so we will have it achieved.

And I would say that we were over half the way there in the first quarter.

And then you would see that in some of the nonpersonnel-related expenses, which are down $35 million on a linked-quarter basis.

Okay.

And I guess, final question on the cost and maybe, I don't know, if it's -- I know you talked about the seasonality in some detail.

But it's still not clear to me why this first quarter the seasonality in the expense line was so much greater than it has been in previous years.

Obviously the -- and couple of years ago you didn't have First Niagara, but it seems very, very pronounced.

So can you just walk us -- walk me through why this year was -- what is seemingly so different in terms of seasonality?

You're right, first quarter of last year would've had some noise around First Niagara and so, it might not have been first transparent as it is this year.

If you look at just, for example, the benefit cost, we're up $10 million on an adjusted basis this quarter compared to a year ago quarter.

$5 million of which was timing-related and so it was more pronounced this quarter than what we would've expected.

And then beyond that, as far as the expenses, as I'd highlighted earlier, we really had about $20 million worth of expenses that just broke against this quarter, and we wouldn't expect that to continue or recur.

But anything that turned against us this quarter from an expense perspective, and so that really made the overall seasonality and timing-related issues even more pronounced this quarter than what it has been historically.

And going forward, we shouldn't, on average, expect this kind of seasonality in 1Q?

We would expect ongoing seasonality as far as the benefit cost and some other day count-related issues going forward, that's correct.

Our next question is from Matt O'Connor with Deutsche Bank.

So a lot of details on expenses for the full year and what you expect, kind of, exiting the year.

But just as you could narrow down, what do you expect the range of expenses to be in 2Q specifically?

Just to reduce the risk of any miscommunication on that might be helpful.

Matt, we typically don't give guidance specifically on a quarterly basis, but I will say that the majority of that $30 million benefit increase, we should see it come down.

And so I would expect to see in the neighborhood of about $25 million decline for that line item.

Two of the other line items that I talked that we wouldn't expect to continue at that level would be the purchase accounting true-up, which cost us about $4 million in the elevated operational losses, which were about $3 million.

And so those combined would imply about a $30 million reduction on a core basis to expenses and I think that's a good walking around assumption for this point in time.

Okay, that's helpful.

And then just separately, the trust fees if we look at year-over-year, we're down a little bit.

I'm just wondering what's driving that.

Obviously, market levels have been choppy of late but cumulatively, over the last year, up nicely.

And that's only one component of it.

But just remind us what the puts and takes are there and why that's down a little bit year-over-year?

Sure, Matt, it's Chris.

Actually, our private banking business which is the bulk of that, is actually on a really good trajectory, you probably saw, we had $39 billion of AUM, and we continue to gain a lot of traction there.

That was somewhat offset by challenging comp periods from both our equity and our fixed income trading businesses.

And how much are the trading revenues versus the private bank roughly?

Is that disclosed?

We've never disclosed that but it's relatively small vis-a-vis the private banking business.

Okay, and why were those areas weak?

I think if we look at the broader investment banking universe, taking equity overall was flat to up, depending on what the mix is between the two.

In that business both our fixed income and our equity business, we really are just facilitating liquidity for our clients.

The equity platforms in general, I think, are under a lot of pressure in terms of margins, and we just didn't have the quarter in fixed income that we've had previously.

Our next question is from Steven Alexopoulos with JPMorgan.

I wanted to start first follow-up on the commentary around accelerating the tech projects.

I saw the headlines of Key upgrading its lending platform.

One, do you have plans to upgrade the entire core?

It is that what's driving this accelerated tech project?

That's my first question.

Good question that and two of the initiatives that we've really kicked off in this year, has been more the consumer lending platforms, both for residential real estate-related and also for nonresidential real estate.

So there are two initiatives.

And those really are the area of increase for this year.

I would say that in future years, we'll continue to have a component of our technology development to continue to reinvest in the core.

And so we will see opportunities there to make those investments and those will be, again, more consistent with the overall plan and efforts.

This year, we also have some digital investments going on but we think that'll be an ongoing part of our business model as well because we believe that those are critical for us to continue to stay current and make sure that we're making the appropriate investments in the digital aspects for both our consumer and commercial customers.

And what's the anticipated tech spend this year?

The -- when we look at technology spend that we would tend to have captured in a couple of different buckets.

One is for personnel and contractors, which all roll through the personnel line item where we saw that at elevated level.

And that would be in the $120 million to $125 million range for this year.

I'd say our total technology spend is close to $200 million, which would include some software and hardware investments as well.

And that's fairly consistent with what we've had on a run rate.

But keep in mind, in some prior periods, more of the efforts were focused on the integration and conversion for First Niagara.

And so we're seeing those efforts more aligned now to the platform, the digital and just ongoing core investments in the business.

Maybe for Beth.

With the potential upgrade in cost which are significant to upgrade the quarter over time.

Do you think you have enough scale at this size to make the needed investments in tech or do you think you need to get larger here?

If we look at it, we think we have the adequate resources to support both our business strategies and the investments that we need to enable those.

And that would include people product capabilities, as we've talked about in the past.

So being smart and allocating and prioritizing our investments is always part of the art of how you do this but certainly a discipline that we believe we have and I do believe we are well positioned to compete.

If I could squeeze one more in.

On the expense initiatives, Don, you talked about realigning the business units, stuffing adjustments.

Can you give a little more color on what you're doing there?

Realignment of the business.

As we've gone through the integration with First Niagara, we identified some areas where we can make things more efficient, more effective.

And so we have combined some areas and that's a lot of the gains from efficiencies from a business alignment.

And then, as far as the staffing models that -- we just have a number of areas where we're performing outside what our normal models would be, and we're achieving those target levels through normal attrition and other efforts.

And so it's just making sure that we continue to adhere to those models and continue to deliver the kind of synergies we would expect to see from the combination.

And next we'll go to Mike Mayo with Wells Fargo.

So still on the efficiency topic.

And so retail efficiency is 69% and that's flat with a year ago despite the First Niagara merger savings and everything else that you're doing.

If you could just give some color, why that hasn't improved despite the merger savings and maybe it's some sort of allocation to the business line or maybe you're not happy with the progress or maybe you're spending the benefits of the savings or some other reason.

If you could give some color, that would be great.

Sure, Mike.

And as far the efficiency ratio for the overall Community Banks that we are seeing the improvements that we want to see that we are seeing the savings come through for the merger.

The Community Bank was the disproportionate party that was impacted by some of these seasonal and/or unusual costs this quarter.

And that drove their efficiency ratio up.

We would expect to continue to see some strong, positive operating leverage and Community Bank going forward and expect to see some of these seasonal items go away and show some meaningful progress going forward from that.

A follow-up.

It sounds like you're not -- you're probably not super excited about having a 69% efficiency ratio in that business line.

It sounds like you expect that to improve.

But if you're spending $200 million a year on your technology budget, it's going back to the scale question.

At a time when the technology budget of, say, JPMorgan of $11 billion, and you're spending $200 million a year on technology, is the investing phase potentially going to last longer than you expect?

And if you could just clear -- is that right, the $200 million a year on technology?

You are right.

As far as the overall spend, I would say that we can remain very competitive with that.

The other thing that we have going for us is our ability to partner with other FinTechs and other providers.

And so while we might not be developing our own capabilities like some of the larger banks might, we believe we can get some of the same benefits.

And we've talked about that in the payment space, where we have a number of strategic partnerships where we can win the market very competitive and very technically advanced types of products and capabilities to our customers, without having to develop that ourself.

And so the $200 million is consistent with how we've looked at as far as the spend and believe it's perfectly positions us going forward.

Our next question is from Kevin Reevey with D.A. Davidson.

So first question is either for Chris or for Don.

Are you seeing any increase in your line utilization at the end of the quarter versus the prior quarter?

Actually our utilization across both our community and Corporate Banks has been relatively flat.

And then moving towards your auto book.

I know it's a small percentage of your overall loan portfolio.

How was the auto book behaving?

Auto book's done very well.

Again, we focus on a FICO score of about 760, the delinquencies have been holding up very well, and we're fine with the performance of that business.

And as we highlighted, that's been an area of benefit to us as far as taking that product across the legacy Key footprint, the dealers that we already have relationships with.

And so we're seeing some synergies from that as well.

And then my last question is on the revenue enhancements from the First Niagara.

It's kind of a follow-up to Gerard's question.

Can you kind of talk about any of the revenue enhancements that you're seeing from there?

Yes, that -- again, on that front, we do expect that those are moving in line with our outlook that we expect to be at $150 million run rate by the end of this year and $300 million by the end of next year.

Where we're seeing benefits already are in the Commercial Payments space, where we continue to see a nice adoption rate going from the former First Niagara customers and to some of the products and capabilities we have there.

We're seeing some strong growth as far as the capital markets-related activities especially on the commercial real estate customers for First Niagara.

And we've placed about $400 million of debt on that front, so that's been a real win for us.

We've talked about indirect auto earlier with you, Kevin, as well and so we're seeing growth there.

One thing that hasn't shown as much on the bottom line, so to speak, that we're seeing good activity is the residential mortgage and if we look at the application volumes here for the first quarter, they're up 41% from a year ago.

And so we haven't seen the volume come through as far as closed deals and -- but we are optimistic that we're going to start to see some pick up here in the second quarter and beyond.

And, Kevin, I would add that on the mortgage side part of what we talked about last year was ramping up our staffing as well as investments and making sure our platforms from underwriting through servicing were ready to accommodate what we saw was probably the largest driver of our revenue synergy.

And so I would say we entered 2018 staffed and ready.

But that is something that we'll definitely build throughout the year and as reported on our income statement in a way where we will be able to track it.

And next we'll go to Geoffrey Elliott with Autonomous Research.

Maybe back to that little pick up in C&I nonperformers.

I mean, I hear you say that it's nothing industry-specific.

But is there anything in terms of the characteristics of those companies or deals, anything like leverage or interest cover that kind of stands out as a common factor across loans that have gone into nonperforming?

There really aren't any common threads there at all.

But we're seeing our small leverage portfolio relatively stable and it continues to perform well.

It is more of a deal-by-deal basis that we're seeing some increases there and it's very slight.

And it's up from the fourth quarter but down from first quarter of last year and as a percentage of total loans, it's 61 basis points, which is still pretty low compared to the industry overall.

And more broadly, we started to see some more press on rising leverage in the corporate sector.

We've heard 1 or 2 other banks comment on that as a sign that we might be getting later in the cycle.

Do you agree that, that's a concern or how do you think about that?

So there's really -- this is Chris.

So there's really kind of 2 things.

One is our book.

Our leverage book has been flat for some period of time.

So that's a book that is, a: a small percentage of our total loan portfolio; and secondly, it has a lot of velocity.

With respect to leverage in general and what we're seeing in the marketplace, there is, in fact, rising levels of leverage in some transactions in some parts of our business and obviously, that's something we watch very closely.

And next we go to Marlin Mosby with Vining Sparks.

Focusing a little bit more on the revenue side.

You had a pipeline for the investment banking debt placement, just curious about the step down that we had in this particular quarter.

Do you think that's a temporary pullback or do you think that this is more normal levels and there's a little bit of pull-through or acceleration as rates were going up, that people are trying to do deals faster than the rates were climbing?

So just thought about that revenue stream as you move through rest of the year.

Yes, Marty.

This is Chris.

No, what I think you're really seeing is a pretty typical seasonality that we experienced in that line.

We always look at that line on a trailing 12 basis.

And so if you look at, for example, in absolute terms, this is a record first quarter for us.

If we look at our backlogs now vis-a-vis a year ago, our backlogs are actually better than they were a year ago.

So we feel pretty good about where the business is.

Now there was one thing, we noted there were fewer paydowns in the first quarter and when you have fewer paydowns, typically that can adversely impact the fee line in investment banking and debt placement fees as well.

But we feel really good about where the business is, and particularly where it is vis-a-vis this time last year.

And then, Don, I had 2 questions for you in the sense of, one, if you look at the roll up of security yields as well as just your interest rate swaps as they now repriced, you'll get actually the pull-up in those yields.

So could your net interest margin actually continue to increase, let's say, the Feds stop raising rates just because where medium and longer rates are, is there a benefit?

And then also the tax rate popped down this quarter, was that related to the stock price fully kind of benefit and is that -- was that kind of an unusual item?

So just those 2 items I want you to ask -- look at.

Great.

As far as the overall margin that we do believe that there'll be a lift there as far as the cash flows of our investment portfolio.

I think we highlighted that the new purchases were coming on at about a point higher than what the roll-off of the portfolio and we're seeing about $1.2 billion plus of cash flows each quarter now on the investment portfolio.

Same thing on the swap books, that we had about $1.4 billion of maturities of the swap book.

And the roll-off rate versus the new rate for those replacement swaps is about 160 basis points wider.

And so we're seeing lift there as well.

And so we think those would both be additive.

And so when we think that there could be some lift there, we would refer to the core margin as being relatively stable, even if rates don't go up, with maybe some slight bias or some lift there, because offsetting that would be the continued drift to the portfolio on the deposit side -- more on the time deposits and also seeing some of the impact as far as the continued reduction and purchase accounting accretion, which would decrease our margin by about 1 basis point a quarter.

And then as far as the taxes, you're right, but there are really 2 components that drove that, each in the $10 million range as far as the benefit this quarter.

One was for the employee stock purchases and vesting that occurred and that really is more heightened as far as the first quarter based on when some of the stock plans do vest.

And the other was higher tax credits.

And now the way that we would look at that is, it did have a benefit to us this quarter but that really essentially offsets some of the timing issues we saw on the expense side.

And so we feel pretty good about the quarter being at $0.38 and feel that both of those essentially offset each other and provide for a baseline for us going forward.

And we'll go to Kevin Barker with Piper Jaffray.

One of your competitors is mentioning that there's increased competition in the market due to the effects of tax reform.

Have you contemplated increased competition on loan yields in your NII guidance and are you seeing some of that increased competition in your markets today?

I'll take the first crack at this and hand it over to Chris to get more color on the competition but I would say that pricing on the commercial front has been extremely competitive here over the last year plus.

And we're not seeing any change or acceleration of that competition or any more pressure on the pricing after the tax reform than what we did before.

And so I don't want us to characterize this as there isn't some impact there.

But I would say that it's the continuation of what we've been seeing.

Our outlook for the net interest income guidance for us does assume that we continue to see a very competitive marketplace as far as pricing for new loan volumes and repricing.

Is there anything you'll add?

Don, one thing that I would add to that is in the real estate area, I think that the level of intensity has even increased to a greater degree than on the C&I front.

And you see that really reflected in our business because we have -- our approach to serving our clients has remained unchanged but you can see that we're getting significant growth in terms of commercial mortgage, were up 21% on a quarter-over-quarter basis.

And so what we're doing is we're figuring out really the right place to take our clients and to fund their needs.

Are you seeing any particular markets or asset classes within commercial real estate where you're seeing greater competition versus others?

I would say real estate broadly, and then specifically, we see it in multifamily probably as much as anything.

Also industrial is an area where there's been significant price appreciation.

Over the last year, there's been about an 11% appreciation in the industrial space and then last quarter, it was kind of mid-single digit.

So that's an area that's hot as well.

And with no further questions, I'll turn it back to you, Ms. Mooney, for any closing comments.

Thank you, operator.

And again, we thank you all 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 for the day.

Thank you.

Ladies and gentlemen, thank you for your participation.

You may now disconnect.