Beth Mooney - Chairman and Chief Executive Officer Don Kimble - Chief Financial Officer Bill Hartmann - Chief Risk Officer.

John Pancari - Evercore Scott Siefers - Sandler O’Neill Erika Najarian - Bank of America/Merrill Lynch Bob Ramsey - FBR Ken Zerbe - Morgan Stanley Matt O’Connor - Deutsche Bank Ken Usdin - Jeffries Matt Burnell - Wells Fargo Securities Gerard Cassidy - RBC Steven Alexopoulos - JPMorgan Mike Mayo - CLSA Kevin Barker - Piper Jaffray Saul Martinez - UBS Geoffrey Elliott - Autonomous Research Terry McEvoy - Stephens Peter Winter - Wedbush Securities Lana Chan - BMO.

Good morning, ladies and gentlemen and welcome to the KeyCorp’s Fourth Quarter 2016 Earnings Conference Call. This call is being recorded. At this time, I would 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 2016 earnings conference call. Joining me for today’s presentation is Don Kimble, our Chief Financial Officer. And available for our Q&A portion of the call is Bill Hartmann, our Chief Risk Officer.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call. I am now turning to Slide 3. Key’s strong results for the fourth quarter complete what has been a very successful and transformational year for our company.

We reported our third consecutive year of positive operating leverage and our pre-provision net revenue was up 23% from 2015, excluding merger-related charges. In the fourth quarter, we reduced our cash efficiency ratio to 63% and our return on tangible common equity was 12.5%, excluding merger charges.

We completed our First Niagara acquisition in August, the largest in our company’s history. And in October, we successfully integrated branches, systems and clients. This included moving data and account information for over 1 million new clients, converting over 300 branches and consolidating over 100 First Niagara and Key branches in the quarter.

Overall, the conversion was very well executed and we were open for business on Tuesday morning, following the Columbus Day weekend. Our 3 million total clients had access to our combined set of products and capabilities.

Our results this quarter, reflects solid performance across our company with meaningful contributions from both the Community Bank and the Corporate Bank. We continue to grow and expand client relationships, which generated solid loan growth and positive trends in our fee-based businesses.

Investment banking and debt placement fees reached a record level for the quarter and the year despite the challenging environment we saw early in 2016. Cards and payments, along with corporate services, also had record years. These have all been areas of targeted investments over the past several years.

We also maintained our moderate risk profile and continued to operate below our targeted range for net charge-off. Capital management remains a clear priority for us. We increased our common stock dividend in May by 13%. And subject to Board approval, we expect an additional increase of 12% in the second quarter of this year.

We also resumed our share repurchases in the third quarter after completing our acquisition. And although we did not repurchase shares earlier in the year, we still paid out almost 60% of our net income in 2016. The final item on this slide is our First Niagara acquisition, which I have already mentioned in my remarks.

The acquisition continues to exceed our expectations as we are already realizing some of our targeted cost savings and begin to see traction on revenue opportunities across our organization. As we have seen early signs of momentum, we see First Niagara clients are choosing Key because of our broader capability.

Some examples include, we have closed $100 million in First Niagara related commercial mortgage banking transactions, and our commercial payments pipeline is already over 3x higher than First Niagara’s historic level. We have seen early wins in purchase card, foreign exchange and accounts payable automation.

And we are also seeing retail deposit growth across all First Niagara markets. This early progress strengthens our confidence and our ability to reach or exceed our financial targets. And in total, our targets include achieving $400 million in cost savings.

And as I have said before, we expect to achieve an even higher level of savings generating $300 million in revenue synergies, reducing our cash efficiency by 300 basis points, and improving our return on tangible common equity by 200 basis points.

And as a look back over the past several years, I am very proud of our team and of our accomplishments and pleased with how Key has performed through a period of slower economic growth and lower interest rates. And despite these headwinds, we grew our business, generated positive operating leverage, improved efficiency and invested for the future.

Now as I look ahead, I believe that Key was uniquely positioned to take advantage of an improving economy and a more constructive business environment. Our business model and the investments we have made in people and capabilities give us confidence and position us well.

We have clear and compelling priorities, which will continue to drive growth in our four businesses and attain the value from our First Niagara acquisition. I have never been more optimistic about our future and confident in our ability to create long-term value for our clients, communities, employees and most importantly, our shareholders.

Now, I will turn the call over to Don for a more detailed look at the quarter and to discuss our outlook for 2017.

Don?.

Thanks, Beth. I am on Slide 5. Fourth quarter net income from continuing operations was $0.31 per common share after excluding $0.11 of merger-related charges. This compares to $0.27 per share in the year ago period and $0.30 in the third quarter, which excluded $0.14 of merger-related charges.

We generated positive operating leverage for the quarter excluding merger-related charges with a return on tangible common equity of 12.5%. As a reminder, the fourth quarter reflects the first quarter – first full quarter impact to First Niagara acquisition. Third quarter results included two months of impact.

And as we mentioned in the third quarter call, our results were shown on a combined basis without attribution to either legacy Key or First Niagara. We will cover many of these items on this slide in the rest of my presentation. So now I am turning to Slide 6.

Total average loan balances of $85 billion were up $25 billion or 43% compared to the year ago quarter and up $8 billion or 10% from the third quarter. Average loan growth primarily reflects the full quarter impact of the acquisition as well as core business performance.

Sequential quarter growth and average balances was impacted by the divestiture of $439 million in September, and the sale in the fourth quarter of approximately $330 million in acquired loans that did not align with our relationship strategy.

CF&A loans, which were up 28% from the year ago quarter and 6% from the prior quarter continued to be a primary driver of our growth. On a period end basis, total loans were up 1%. During the fourth quarter, the fair value mark on our acquired loan portfolio was adjusted from $686 million to $548 million.

Continuing on to Slide 7, average deposits, excluding deposits in foreign office totaled $105 billion for the fourth quarter 2016, an increase of $33 billion compared to the year ago period and $10 billion compared to the third quarter.

Compared to the prior year, fourth quarter average deposit growth was driven by First Niagara as well as continued momentum in our retail banking franchise, which now accounts for nearly half of our total balances. As core deposits from our commercial mortgage servicing business also contributed to the growth from the prior year.

On a linked-quarter basis, deposit growth reflects 1 additional month impact from First Niagara as well as retail deposit momentum and the inflows from the commercial clients. Turning to Slide 8, taxable equivalent net interest income was $948 million for the fourth quarter of 2016 and net interest margin was 3.12%.

These results compare to taxable equivalent net interest income of $610 million and a net interest margin of 2.87% for the fourth quarter of 2015, and $788 million and a net interest margin of 2.85% in the third quarter of 2016.

Included in the fourth quarter figure is $92 million from purchase accounting accretion, $34 million of which is related to the refinement of our third quarter purchase accounting.

Excluding purchase accounting accretion and net interest income increased $246 million from the prior year and $87 million from the prior quarter, with increases driven primarily by a full quarter impact of First Niagara acquisition and core business growth.

The fourth quarter net interest margin of 3.12% was 27 basis points higher than the prior quarter. The increase was largely due to the purchase accounting accretion which contributed 23 basis points, including 11 basis points related to the refinement of the third quarter results.

Lower levels of excess liquidity also benefited our margin compared to the third quarter as funds were redeployed into our investment portfolio. Slide 9 shows a summary of non-interest income, which once again includes a full quarter impact of First Niagara in the fourth quarter results.

Non-interest income in the fourth quarter was $618 million, up $133 million from the prior year and up $69 million from the prior quarter. The fourth quarter benefited from $9 million associated with merger related adjustments compared to merger related charges of $12 million in the prior quarter which were primarily in other income.

Excluding the impact of merger related charges, non-interest income was up $124 million from the prior year and up $48 million from the prior quarter. Growth was driven by continued momentum in a number of our core fee-based businesses, reflecting investments we have made over the past few years as well as the acquisition.

As Beth mentioned, investment banking and debt placement fees had a record quarter. We saw strength across our platform, including mortgage banking, M&A and loan syndications. Turning to Slide 10, reported non-interest expense up for the fourth quarter was $1.2 billion, which includes $207 million of merger related charges.

A detailed breakout of our merger related charges is included in the appendix of our materials. The quarter also includes a pension settlement charge of $18 million and an increase in intangible amortization, including $5 million related to the refinement of the third quarter purchase accounting.

Compared to the fourth quarter of last year and after adjusting for the merger related charges, non-interest expense was up $283 million, both primary reflects the acquisition of First Niagara as well as higher incentive and stock-based compensation.

Additionally, the pension settlement charge was $14 million higher compared to last year, and the intangible amortization increased by $18 million. Linked quarter expenses also adjusted for the merger related charges were up $120 million.

If you can see on the lower right hand side of this slide, an additional month of the impact of First Niagara was the largest part of the increase, along with an $18 million pension settlement charge.

Incentive and stock-based compensation also increased, primarily related to stock-based compensation plans, reflecting the impact of our higher share price. And intangible asset amortization increased $14 million.

Turning to Slide 11, net charge-offs were $72 million or 34 basis points of average total loans in the fourth quarter, which continues to be below our targeted range. During the quarter, net charge-offs increased $8 million to regulatory guidance on consumer loan bankruptcies and confirming First Niagara indirect auto charge-off policies to Key.

Additionally, we had a few commercial charge-offs that impacted the overall trends. Fourth quarter provision for credit losses was $66 million, an increase of $21 million over the year ago period and $7 million from the linked quarter. Non-performing loans decreased $98 million from the prior quarter.

At December 31, 2016, our total reserves for loan losses represented 1% of period end loans and 137% coverage of our non-performing loans. Keep in mind the acquisition of First Niagara portfolios are recorded at fair value. And turning on to Slide 12, our common equity Tier 1 ratio at the end of the fourth quarter was 9.59%.

Also in accordance with our 2016 Capital Plan, we repurchased $68 million of common shares during the fourth quarter. Slide 13 provides you with our outlook and expectations for 2017. This includes the impact of First Niagara and it’s based on the reported results. The merger related charges however, are excluded.

Importantly, we remain committed to generating positive operating leverage. We expect average loans and deposit growth to increase in the mid single-digit percentage range for the full year with 2016 adjusted to account for the full year of First Niagara.

Net interest income is expected to be in the range of $3.6 billion to $3.7 billion with our outlook assuming one additional rate increase in the middle of the year. Benefit from purchase accounting accretion is also included in our outlook.

We expect the quarterly impact from purchase accounting accretion to trend down over time from the fourth quarter level, adjusted for the third quarter refinement. We anticipate that non-interest income will be in the range of $2.3 billion to $2.4 billion, as we continue to drive growth from our core businesses and the acquisition.

Non-interest expense is expected to be in the range of $3.65 billion to $3.75 million and once again, does not reflect merger related charges. As Beth said, we remain committed to meeting or exceeding the financial targets we have laid out for the acquisition.

We continued to expect to achieve our $400 million cost rate – cost savings run rate target by mid-2017, which would then be reflected in our full year 2018 run rate.

In 2017, net charge-offs should continue to be below our targeted range of 40 basis points to 60 basis points and provision should be slightly – should slightly exceed our level of net charge-offs to provide for loan growth. Coming off our momentum in 2016, our 2017 outlook would be another year for strong performance.

Keep in mind that our first quarter results will reflect a lower day count and we expect to see normal seasonality in areas such as loan fees and colleague. Other fee categories such as investment banking and debt placement fees are also show some variability over the year.

We have included our long-term financial targets on the bottom of the slide, including continuing to generate positive operating leverage, reducing our cash efficiency ratio to less than 60% and this would be over 500 basis points of improvement from the time that we announced the acquisition, maintaining our moderate risk profile and producing a return on tangible common equity of 13% to 15%, which would be an improvement of 400 basis points.

These results reflect our expectation for continued momentum in our core business and the meaningful lift we expect from our First Niagara acquisition. We expect to achieve these targets in 2018.

I will close with a comment consistent with Beth’s remarks that really was a good year for Key and we feel we are very well positioned as we head into what is shaping up to be a more positive operating environment. I will now turn the call back over to the operator for instructions in the Q&A portion of our call.

Operator?.

Thank you. [Operator Instructions] And first on the line we have John Pancari with Evercore. Please go ahead..

Good morning..

Good morning..

I want to start with the margin, I just wanted to see if we can get your thoughts around where the margin could trend going into the first quarter and then maybe through ‘17, if you can give us what you assume right now in terms of the Fed hikes you might have already mentioned that earlier, sorry if I missed it.

And then also when it comes to deposit beta as well, what you have seen so far in terms of the December 2016 hike and how that may trend through the year? Thanks..

As far as margin, we reported 3.12% for the fourth quarter. If you back out the impact of the third quarter refinement, that would be right at 3%. What we said in our guidance is that the purchase accounting accretion would trend down on a quarterly basis going forward.

We would expect the outlook for 2017 to be about 20% below what that fourth quarter level is adjusted for the third quarter refinement. And with that, we will be showing a margin for next year in the mid-2.95 range or 2.90 range, so would be in that middle range, reflecting again, the lower accretion coming from purchase accounting.

As far as the rate increases, we have assumed one additional rate increase in the middle of 2017 and that’s the only additional rate increase we are seen or projected in our forecasts. And then the last question you had was deposit betas, our assumption longer term is that it would be about a 55% beta.

As far as the December rate increase, we haven’t seen a lot of movement on the consumer side, but we have started to see some movement on commercial deposits and so we are well less than half of that, the beta that we had assumed the 55%..

Okay. Thanks.

And then separately, I just wanted to get some thoughts on the corporate tax reform impact, we have had some management teams commenting on it, I just wanted to get an idea if you do see – if we do see some corporate tax cuts getting passed through here, how much of it do you expect ultimately can get, kind of creep to the bottom line and do you expect any of that benefit to ultimately get computed away in the industry and at KeyCorp? Thanks..

Well, as far as the tax reform, we do believe that would be positive for the industry and the economy overall as far as our outlook. We would say that Key is positioned so that we would not be disadvantaged or advantaged compared to peers.

I think that we need to wait and see how the impact comes through before we start to assess how much of that gets retained versus shared. But right now, we do believe it’s going to be positive for the industry..

Alright. Thank you..

Our next question is from Scott Siefers with Sandler O’Neill. Please go ahead..

Good morning guys..

Good morning Scott..

Good morning..

Don, could you spend just a second talking about what do you think the main drivers of fee income growth will be in ‘17? And I guess specifically, what I am hoping you can speak to is some of the dynamics around the investment banking and debt placement line item, I mean, it’s just been really, really strong.

I am just trying to figure out if we are sort of at a new structural level that’s higher than we might have thought or how you are thinking about that line as well?.

Well, Scott, I tried to convince our capital markets team that it was a new level and it should be the baseline going forward, but I would say that we really need to look at this on a trailing 12-month basis. But if you look at the full year, we are $482 million in the investment banking debt placement fees.

We do expect to see growth from that level in 2017. We have continued to be investing in our people and also investing in products and capabilities. And so we think that should translate to growth in that category on a year-over-year basis. And so we are optimistic about that.

We are also continuing to be optimistic about our cards and payments revenues, both for the core business, but also because of the impact of First Niagara that we do believe that there will be synergies there on the revenue side that we will start to see, realize in 2017.

And then beyond that, we think that due to the other core fee categories will continue to show progress up. So we think on a core basis, we are going to continue to drive increases in fee income..

Okay, that’s perfect. Thank you very much. And then I have just one separate sort of tick-tack question. The preferred dividends, I think where it came in a little higher than I might have thought.

Is that just sort of a timing difference between the recent issue and I think retiring the one that’s the recent one was meant to replace?.

You are right that the third quarter didn’t have the full impact from the First Niagara preferred stock dividend. And so we did have a full quarter this quarter, but we have already called the preferred from First Niagara, so that should be off the books here in the first quarter..

Okay.

So, we just sort of dropped that down towards that more typical – for something more like a $13 million, $15 million per quarter range?.

I want to make sure we are including three issues of preferred, one, the original Key, one that we had in the third quarter and then one in the fourth quarter and to incorporate those. So, it would be that adjusted run-rate..

Okay, great. Alright, thanks very much..

Next, we will go to Erika Najarian with Bank of America/Merrill Lynch. Please go ahead..

Yes, good morning. My first question, Beth and Don, is on the capital return outlook.

Now that you have First Niagara integrated, I am wondering how you are thinking about capital return plans for the 2017 CCAR? And Beth, if the SIFI threshold does get raised to $250 billion, how does that change, if at all, how you think about capital return and also, how you think about the trajectory of your regulatory-related costs from here?.

Good. Erika, this is Don. I will go ahead and take the first crack at that. We are still finalizing what our 2017 expectation would be for capital actions. I would say that this year we have been constrained, because of the impact of the one-time merger-related charges, which impacts our overall capital level.

We feel very good about where our capital level is. We do not expect to be seeing increases or significant reductions in that in the near-term. And so the capital returns will be more reflective of what kind of outlook for growth we are seeing and what kind of capital will be required to maintain these levels of capital.

Beth, you want to talk about the outlook?.

Yes, Erika. As it relates to if the SIFI designation did move to $250 billion, I think the one thing that we have talked about and would consider would be the mix of our return of capital, which would be – higher level than 30% for the dividend payout, be appropriate, a both for Key, and we believe for our regional banking company such as Key.

So I think we would lean into more capital returns in the form of dividend. And then secondarily, I would tell you that as it relates to regulatory costs, I would say that at least I would say a trajectory where the level of increases that we have all seen over recent years and our investments in regulatory costs, capital compliance could be slowing.

But I think our trajectory at this point against what is yet not clear about any changes would suggest that what level of declines we would expect would be premature, but I do think it could be beneficial as we have all felt pressured or have had those costs rising in recent years.

And in any event, we have reached what I think was a relative state of maturity for our staffing and our capabilities in regulatory personnel..

Thank you for that.

And just as a follow-up question, Don, just to clarify the guidance on average loan growth, the base upon which we are looking at mid single-digit loan growth, we are adjusting as if First Niagara was in KeyCorp for full year 2016? I just want to make sure I am understanding the base correctly?.

That’s correct. Now keep in mind, too, that the First Niagara would be net of the impact of the branch divestitures which was over the $400 million number and also some of the strategic exits we had on the $330 million. And so that would be the adjusted baseline from which we would start..

Got it. Thank you..

Thank you..

Our next question is from Bob Ramsey with FBR. Please go ahead..

Hey, good morning. I am wondering if you could talk a little bit more about the rate sensitivity around further increases.

I know you have provided guidance based on one rate increase, but how would that shifts if there is a second or if there were to be none?.

Yes. In our guidance, we basically talked about – for the impact to deposit betas on future rate increases, it’s about a 2 percentage point change in overall net interest income sensitivity. And so future rate increases, you can apply that same type of assumption set to it.

I would say that the further we get into it though the more likely we are going to see the beta start to materialize and start to show deposit prices move in line with the impact of rate increases..

Okay, fair enough.

And then maybe can you talk a little bit about – is there any benefit to the expenses from the pension settlement charge you all took this quarter?.

A slight run-rate benefit, but I would say that the bigger news here is that with the acquisition of First Niagara, we will be merging those two plans in 2017 and the combination of the two plans would suggest that we probably won’t have those pension settlement charges going forward and so that will be a big benefit for us.

But the other thing that helps us there is that the threshold that you look at as far as whether or not to recognize a pension settlement charge is how does the lump-sum distributions compared to the overall interest impact. And since interest rates are moving up, the hurdle has gotten higher as well.

And so we think this should not be impacting our earnings, hopefully, for the next several years..

Great. And then I guess final question, you highlighted some of the incentive and stock-based comp expense increase this quarter.

How much of that was tied to the capital markets business versus other parts of your business?.

Well, the majority of it really wasn’t our stock-based compensation expense and that was almost $15 million of the increase. And a good portion of that really related to the fact that our stock price went up by $6 a share from the third quarter to the fourth quarter.

So, I would love to see our stock price go up another $6 a share, but I don’t think we would see that continue with that kind of pace..

Think optimistically. That’s all I have. Thank you..

Thank you..

Next question is from Ken Zerbe with Morgan Stanley. Please go ahead..

Great, thank you. I guess first question, just in terms of taxes, your tax rate is pretty low already sort of in that mid-20% range.

If we do get, let’s call it, the House bill, right, tax rate goes down to 20%, how do you guys think that would impact you relative to peers?.

Again, I don’t think that we would be either advantaged or disadvantaged compared to peers. But if you look at what drives our tax rate lower, I would say that it’s some of the normal things. Others would be experiencing, one is corporate-owned life insurance. We don’t know how that will be treated in the House bill and how that would play through.

The other is some of the tax credits we would have from some of the leasing and other loan activities we have. And with those loans and leases, the way that it shows up through our P&L is we have very little PPNR coming through for those loans and leases. And we have a benefit coming through the tax line.

And so as long as we will continue to have loan growth at the projected levels, we would think that we would have a greater net interest income and pre-tax pre-provision earnings coming from that loan growth as opposed to today, it shows up in the bottom line below in the tax rate.

So again, I don’t think that we would be either advantaged or disadvantaged, but we will have to wait and see when the final terms come out..

Okay.

And then just really quick on the expenses, obviously this $3.65 billion – $3.75 billion versus this quarter, $1 billion plus, how should we think about sort of the right number going in the first quarter, because I assume there are some FICO expenses, etcetera in the first quarter, but as you get the expense savings over the first half, I mean should we see sort of a steady downward trend in absolute dollar expenses have been steady or how it would be great? Thanks..

As far as our expenses for the current quarter included a number of things, including the higher revenues for the capital markets and included the pension, settlement charge and included the correction on the intangible amortization from the third quarter. And a number of things that would have created some noise in the numbers.

If you adjust for those, you will see expenses come down meaningfully in the first quarter from the fourth quarter level. And as we said, that we would expect to achieve our $400 million in cost saves by mid-2017. And we are going to see a chunk of that come through in the first quarter.

And we really shutdown a good portion of the systems and back office operations already related to the First Niagara acquisition and so we should start to see some meaningful progress against that target in Q1..

Got it.

So if a lot comes through in the first quarter then the dollar expenses over the course of the year, it sounds like it might be pretty stable-ish, is that fair?.

I would say we will see some continued trend down in the second quarter. And then we would start to see less of the incremental benefits and the cost saves in the second half of the year..

Alright. Thank you..

Next question is from Matt O’Connor with Deutsche Bank. Please go ahead..

Good morning..

Good morning..

Good morning..

I was wondering if you can talk a little bit about the outlook for the charge-offs, you indicated last in the kind of long-term average of 40 basis points to 60 basis points for 2017, obviously there was kind of some noise this quarter and more recently, you have been in kind of the low to mid-20s, so maybe tighten up or expand on kind of the low-40 basis points to 60 basis points and we then call it the seasoning aspect as the First Niagara loans stay in the balance sheet?.

I would start off by saying that our current credit outlook is fairly stable and we are not seeing a lot of change from the current levels and so that would imply charge-offs continuing around the same zone as what we have experienced over the last year.

As we saw in the current quarter, we had a couple of commercial charge-offs that will be more one-off type of situations. We might see it has some – a little bit of variability from time-to-time, but generally, fairly consistent with the current picture.

Bill, would you add anything to that?.

The only thing Matt that I would add to that is we have spent a significant amount of time confirming what the portfolio looks like. So as Don says, what we think the portfolio losses will look like going forward will be along that more normal path..

Okay. Thank you very much..

Thanks..

Next question is from Ken Usdin with Jeffries. Please go ahead..

Thanks a lot.

Hey, Don, I wonder if we could just kind of go back on the NII outlook a little bit more, first of all, can you just clarify the outlook 3.6 to 3.7 NII, that’s on a GAAP basis, excluding FTE adjustment?.

That is correct, yes..

And the FTE adjustment of $10 million for this quarter, is that a good run rate?.

That is a good run rate, yes..

Okay.

And so if I exclude the 11 basis points of the true-up on accretion, then the GAAP NIM 3.01 and the core NIM is 2.89 in the fourth quarter, then you threw out two numbers before, I just want to ask you again to go back over how do you expect the path of both the GAAP NIM and the core NIM to trend and were you talking about a full year NIM outlook or where do you expect to end the fourth quarter and can you just reiterate that number you were talking about as far as the NIM for the year?.

Sure, as far as the NIM for the year, rather the assumption is baked into that as it the purchase accounting accretion that we have in the fourth quarter, which is the $92 million, the total accretion minus the $34 million related to the prior quarter refinement, would be about $58 million a quarter.

We would say that, that would trend down so that the full year 2017, would be about 20% less than that current run rate. And with that assumption, that the full year net interest margin would be in the mid-2.90s. And so that 3% adjusted fourth quarter number would be in the mid-2.90s for the full year..

Okay.

So 58 times 4, 232, take 20% off of that and that’s the full year accretion that you would expect?.

That’s correct..

Trending down throughout the year?.

That’s correct..

And then just last question on this spend so and does that continue to trend down as you go into ‘18 and would you expect then the NIM to continue to drip on an X rates basis just because of that dynamic or are there other things that could support it further again, with an X rates perspective or however you can help us understand it?.

We would expect to see that and purchase accounting accretion continue to trend down over the next several years, I assume an average life of around 4 years for that.

And then the other thing is that NIM will continue to have some pressure because of that purchase accounting reduction, but we are going to start just getting closer to the overall impact adjusted or not adjusted for rates, so that 2.89 number that you had talked about before.

The other thing that can impact that is as we look at rate increases, we should see some benefit for NIM from that as well. And so that’s not any meaningful increase in 2017 since we are only assuming one mid-year rate increase..

Right, okay.

And then just one final one, sorry for the rapid chat there, but just on – when do you think we would get a true-up on your internal target that you keep suggesting is, on the expense side, is going to be distinctly above the $400 million and we assume also is that extra in the guidance or that will be better than the guidance?.

The guidance reflects achieving $400 million in the middle of 2017 and as we achieve that and starts reporting numbers higher than that, we will keep informed. But we would not be adjusting that target until after we have achieved it..

Okay. Thanks a lot. I am sorry for those extra questions..

Thank you..

Next, we will go to Matt Burnell from Wells Fargo Securities. Please go ahead.

Thanks for taking my question. Don, may be a couple of questions for you.

The short-term investment balance you mentioned was a – the decline in the short-term investment balance appeared to help the NIM this quarter, just curious if going forward that’s going to continue to go down and provide some support to margin or is that going to remain stable with the fourth quarter level and the – and also in terms of the available for sale securities, those were average about $20 billion this quarter, what’s the trajectory of that balance over the course of ‘17?.

As far as the short-term earning assets, reducing it from the prior quarter for two things; One is that we did see some of those temporary commercial deposits actually leave, and so that really occurred during the fourth quarter and so that had an impact on utilizing some of that excess liquidity.

The second thing is we actually increased our investment portfolio and put some of those short-term dollars to work in the bond market and so that’s why did we saw an increase in the bond portfolio. Our guidance going forward is that loan growth is approximate deposit growth and so we wouldn’t see a huge change in that investment portfolio overall.

But what we should see is that our expected cash flow is coming off the investment portfolio, about $6 billion for next year. And so the current purchase rates are much higher than what the existing portfolio yield is and so that should have some added benefit to it..

Okay. Thank you. That’s helpful. And then just in terms of your overall outlook, there has been a number of questions on that.

But we heard earlier, from a competing bank about, what sounds like a pretty optimistic view of GDP growth from the current level to higher level over 2017, just curious as to what GDP growth environment is embedded in your assumptions, is it basically steady-state or does it incorporate any improvement in the overall GDP growth?.

Our outlook is more steady state and we are seeing some early signs as far as increased activity, calling efforts and things like that. And hopefully, we will see some additional tailwind come through from that economy, but that’s not baked in the current guidance..

And Matt, this is Beth. And so as we think about it, there could be areas that would be opportunities for increases or upside to our current outlook if any of this anticipated growth is realized.

And we continue to believe between the investment bankers and capabilities and our business model, Key would be well positioned if there were opportunities in that regard..

It makes sense. Thank you..

Thank you..

Next we will go to Gerard Cassidy with RBC. Please go ahead..

Good morning Beth, good morning Don..

Good morning..

Good morning..

Don you talked a lot about the expense savings coming from the First Niagara deal, can you share with us some color on the revenue synergies, one line items, I guess cards and payments, I think you alluded to that line item seeing some benefit from the First Niagara deal, but what are the line items should we keep an eye on to see these revenue benefits when they show up later this year and into ‘18?.

I think you hit on one of the primary ones, which is the cards and payments and that reflects some of the impact of our treasuries, management services that we would expect to see as far as additional synergies there.

The other is that mortgage for us has been very well and I know the mortgage rates going up is negative on the overall industry, but we have such a small share as far as our customer base on the mortgage product. And as we are launching that, we should start to see some real traction there as well.

Beyond that, the capital markets, we talked earlier and Beth mentioned that we already had some successes in the first 60 days as far as closing, financing for some of the commercial real estate customers of First Niagara. And so we are starting to see some pickup on that side.

And the last piece would just be an ongoing balance sheet growth, whether its deposits from the commercial treasury management services or even certain loan categories, where we could see growth pickup a little bit will be added to the picture as well..

Great.

And I guess, I don’t know Beth if you want to answer this, but now that you are obviously going into 6, 7 months of ownership here of the First Niagara deal and the integration, what were some of these positive surprises and maybe some of the challenges that you have experienced so far with this transaction?.

Two positives, I would tell you, I am incredibly pleased that the retention we have seen of the talent at First Niagara, of the client base at First Niagara.

We were very sensitive to our treatment of customers through the integration and making sure that we have identified who were the high-value customers and making sure that we gave out everybody a good treatment, but the extra treatment that was necessary.

Because at the end of the day, those clients that we have acquired and their relationship managers are critical to the success of how we see the opportunity for growth out of First Niagara. And we see building a pipeline and the retention of clients and employees is a very positive sign.

Also very proud of the way our teams planned and executed this integration.

I would tell you that we at some level said it was going to be one for the record books and as we look at where we stand today and end the year, we go into 2017 in a business as usual mode and for the time horizon as well as the proximity to the conversion date of Columbus Day weekend, I think that’s a very, very strong statement to be able to say.

And then I think on the flipside, it’s always a journey to make sure that you really bring these two companies together and build the culture and have a new Key, because I think that will be fundamental to our ability to deliver. I am extremely pleased with the cost savings and our trajectory and progress there.

And as an all things, we squared our shoulders the weekend, the Friday before Columbus Day and said little things – things will go wrong that you don’t expect and how you can be nimble and recover is critical to that and it’s always something as they say..

Thank you..

Our next question is from Steven Alexopoulos with JPMorgan. Please go ahead..

Hi, good morning everybody..

Good morning..

Good morning..

I want to start maybe Don, what percentage of the cost saves were included in the 4Q ‘16 run-rate?.

We had said third quarter we had achieved about $100 million of run-rate cost saves. I would say that the – we had some modest improvements in that in the fourth quarter, but still in that $100 million plus range.

And so again, we would expect to see the majority of those really start to pickup in the first half of next year and be at a run-rate by mid next year with $400 million..

So close, still pretty close to the $100 million..

Yes, that’s correct..

Okay.

And I want to follow-up on Scott’s earlier question, what is the expectation for IB in debt placement fees that you are including in the 2017 guidance?.

We are assuming growth from the $482 million for the full year this year and we haven’t specifically said what level, but it would be growth from that point..

And then maybe, thanks, just one final one, I know the average balances were pretty messy in the quarter given the deal. If I look at C&I loan growth and I use the period end data, is the growth seem to trail off a bit, I don’t know if you read that much into a quarter.

But maybe can you give some color on maybe what you saw in the quarter and expectations for C&I loan growth in 2017? Thanks..

I would say one of the factors that impacted the period end balances on a quarter-over-quarter basis is the exit of the $330 million of non-relationship commercial credits that were within the First Niagara portfolio.

And so adjusted for that we do believe that the growth is real, our pipelines remain strong for commercial growth and still believe it will be a driver of balance sheet growth for us next year – for this year, excuse me..

Great. Thanks for all the color..

[Operator Instructions] We will go to Mike Mayo with CLSA. Please go ahead..

Hi, good morning..

Hi, Mike..

So Slide 15, you have taken $474 million in merger charges, how much more merger charges are there to go?.

When we announced the transaction, we talked about a target of $550 million in the aggregate and that was based in the $400 million cost save number.

As we achieve numbers that would be in excess of the $400 million, that could go up slightly from that $550 million target but we are substantially through most of the cost saves and that one-time charge, excuse me..

Okay.

And so is there a reserve like a merger charge reserve that you draw against? And if so, how much of that reserve is less or is this all, you use it as you charge it?.

We hit the one-time merger charges as we realized those expenses. And so this quarter for example, we had about a $29 million hit related to the branch consolidations. We had about $40 million worth of cancellation costs for contracts. And so those are more incurred as they are realized as opposed to set aside against the reserving..

And then last just a point of clarification, so your NII guidance for 2017 is 4% less than fourth quarter annualized NII, but I think if I heard you correctly, take out the $34 million, look back purchase accounting accretion attributed to the third quarter and then your guidance would be for flat NII with the fourth quarter.

Am I looking at that correctly?.

Generally in line with that and I would say that the organic growth that we would be seeing in NII would be offset by the reduction in the purchase accounting accretion during the year..

Okay, great. Thank you..

Thank you. And we will go to Kevin Barker with Piper Jaffray. Please go ahead..

Previously, you discussed that First Niagara had some limited amount of density in some of the markets that you acquired when the deal was announced. And given that it seems like you have made quite a bit of progress on your goals around the acquisition.

At what point you start looking at acquisitions once again and what are some of your goalposts before you actually start going back?.

Good question. I would say that of the new markets we are picking up, whether it’s Connecticut, Pittsburgh, Philadelphia, we are seeing market positions there that are usually in the top 5, but at a lower density in some of those markets been than there we would target.

I would say that just like we have talked about before, our focus is really growing the franchise organically. We think that with our products and capabilities we can move market share. We are excited about the possibility of doing that and really not looking for acquisition strategies to fill in the gap..

Is there any point in time where you would feel that First Niagara is fully integrated and then you can start to look at that given you do have some excess capital post acquisition?.

Yes. Again, when First Niagara came along, we really felt that this was a unique opportunity for Key. And so we hadn’t been actively out there looking for acquisitions.

We want to make sure that our first priority continues to be realizing the financial benefits that we have outlined, making sure that our existing shareholders benefit from our ability to achieve those and then drive the organic growth going forward.

Beth, anything you would add to that?.

Yes, Don. I would say, Kevin, I think it’s very clear that our first and clear and compelling priorities are to complete First Niagara, realize the value that we have committed to the street and for our shareholders.

And as we went into this transaction a year ago, we have said for a very long time that we had – we lacked for nothing that we needed to be successful. And we continue to believe that we have a very strong business model that could generate organic growth and returns in long-term performance for our shareholders.

So I think we are very clear about what we need to accomplish and on our priorities around long-term performance, capital and growth for our shareholders is our first priority..

Our next question is from Saul Martinez with UBS. Please go ahead..

Hi. Thanks for taking my question.

I want to follow-up on corporate tax reform and you obviously get quite a bit of benefit from tax credits, tax advantage, investment – you have addressed this in some of your other questions, but as the tax reform progresses, if it goes through Congress, what are some of the key issues, some of the key debates we should be looking at that could ultimately determine what the ultimate impact is and how much of it filters into your effective tax rate, whether it’s BOLI/COLI, whether it’s low income housing, if you just kind of delineate what some of the major issues themes would be.

And then secondly a clarification, I just want to make sure I got the number right, but you indicated that this quarter $100 million of the cost saves were embedded in the cost line similar to what you had last quarter, I just want to make sure that I heard that correctly?.

Let me answer your last question first, yes. But we did see some modest improvement in the cost savings realized, but still in that $100 million-plus type of range. And so I think that still is a good starting point for realization for this quarter. As far as tax reform, I think that this is again an industry wide issue.

And I think things that would impact banks and other financial institutions would include the treatment of life insurance, would include tax credits associated with low income housing, energy related credits for lending activities.

And then it will also include any type of treatment as far as bank specific items, including deductibility of interest expense. And so, I would be looking for those types of issues as the bills go through and see how that might impact the industry overall.

And again, I truly believe that we will be in a position that will benefit along with the industry and really not being an outside position, either positively or negatively as a result of any reforms based on what we know at this point in time..

Okay, got it, that’s helpful. Thank you..

And we have a question from Geoffrey Elliott with Autonomous Research. Please go ahead..

Hello, good morning. Thank you for taking the question.

I wondered if you could talk a bit about the opportunities that the First Niagara acquisition is giving you to expand into new businesses and particularly on indirect also you didn’t have that, you have added a portfolio through that acquisition, which is relatively small in the context of Key overall, but was bigger for them, how do you think about growing that going forward, how does it fit into the strategy?.

Yes. Geoffrey, this is Beth Mooney. And I would tell you that part of what we saw is a value of bringing our two companies together was there were some complementary products and capabilities that were going to newer to the benefit of Key.

There were three principal businesses that they brought to Key that I believe, we will be able to benefit and first, as you indicated is indirect auto. They had about a $3 billion indirect auto portfolio. Key was not in that business line, but we have been a lender to dealerships through floor planning.

So the ability to extend indirect auto to what is our book of business of dealers will be beneficial and an area for us to be able to extend that, both to cut the existing customers to deepen relationships and provide some growth for the bank. Second, it was an accelerator to our ability to re-enter the first mortgage business.

As we announced in the second quarter of 2015, it was our intention to rebuild and to start back up the residential mortgage business. First Niagara, from originations through servicing had a full fledged mortgage capability that was an accelerator to us.

So again, the levels of, Don alluded to it, while mortgage may be down due to rate, it is upside for a combined Key-First Niagara from where we would have been prior to that because those capabilities in that mortgage origination to servicing platform is fully up and running as of the fourth quarter.

There was also a small insurance business that came with this and then as we look at our ability to extend specifically our cards payments, corporate treasury and capital markets capabilities into the First Niagara client base, we see many corresponding revenue opportunities as we extend ourselves into that First Niagara client base.

From a revenue point of view, that is part of our confidence around that $300 million in synergies, but there really is a complementary opportunity for growth there..

Thank you..

Our next question is from Terry McEvoy with Stephens. Please go ahead..

Hi. Thanks. Good morning.

Before FNFG, Key had an active strategy around the branch network as a way to really manage expenses, how are you thinking about the branch network, now that FNFG is behind you and are there opportunities that we will hear about later this year in terms of reducing the branch count and having some of the associated financial benefits?.

Terry, that’s a good point. We talked before First Niagara of having a strategy of reducing our branch count by 2% to 3% a year.

I would say that we still believe that there is opportunity to continue to right size our retail distribution and that might be a little bit slower in the next year because of the consolidations we did last year, but still in that 2% to 3% range overall..

Thanks Don..

And next we will go to Peter Winter with Wedbush Securities. Please go ahead..

Good morning..

Good morning..

Key has a fairly sizable swamp portfolio, I am just wondering if there is any thoughts to let some of the swaps roll off to make the balance sheet more asset sensitive with thought that rates are going to start rising?.

Good. We look at that at an ongoing basis. And you are right that we do have a decent sized swap portfolio that, it’s used to target our overall asset sensitivity position. We have about $4 billion worth of swaps to mature throughout 2017 and that gives us the opportunity to either replace those or let those expire.

The other thing to keep in mind though, as we look at the maturity date of those swaps, if we would put a new swap on the books, it would really be reflecting the forward curve at that point in time. And so as rates are expected to increase, we will be receiving that benefit in the form of a swap throughout the term of that swap’s life.

And so that’s one of the things we have to evaluate as we better off letting those swaps expire, or are we better off continuing to maintain the current position, but realize the benefit of those future increases and the new swaps we will be booking in the balance sheet..

And how much is going to expire in ‘18?.

I don’t have that number off the top of my head. But it’s probably in a similar range, because we have an average life of a little over 2 years..

Thanks very much..

Our final question is from Lana Chan with BMO. Please go ahead..

Hi. Thanks. My question has been answered. Thank you..

Thank you..

And Ms. Mooney, I will turn it back to you for any closing comments..

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

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect..