Good morning, ladies and gentlemen and welcome to KeyCorp's Second Quarter 2017 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 second quarter 2017 earnings conference call. In the room with me is Don Kimble, our Chief Financial Officer, and we announced in June that Chris Gorman and Don were both recently named Vice Chairman of our company; and as such, we have Chris Gorman here joining us today in his new capacity as President of Banking at Key. 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. Now I will move to Slide 3. This morning, we reported second quarter earnings of $393 million or $0.36 per common share. Our quarter included a number of notable items that we have outlined on the slide, which in total contributed a net benefit of $0.02 per share. Overall, it was another strong quarter, which reflects our continued business momentum across the company and the realization of value from our First Niagara acquisition. In the second quarter, excluding notable items, we generated positive operating leverage of 10% compared with the year-ago quarter, driven by revenue growth from our acquisition as well as our core businesses. Revenue benefits from both higher net interest income and continued growth in our fee-based businesses. On a linked quarter, expenses remained relatively stable despite some seasonal increases in certain line items. And importantly, we reached $400 million in annual run rate cost savings from our First Niagara acquisition. We remain confident in achieving $50 million in incremental savings by early 2018, which will allow us to continue to deliver value to our shareholders. Our cash efficiency ratio, excluding notable items, was 59%, and our return on tangible common equity moved to 13%. Credit trends remained strong during the quarter, with…

Thanks, Beth. I'm on Slide 6. We reported second quarter net income from continuing operations of $0.36 per common share. This compares to $0.23 per share in the year-ago period and $0.27 from the first quarter. As Beth mentioned, our results this quarter included a net benefit of $0.02 per common share from notable items made up of a $64 million onetime gain in our merchant services business, a benefit of $43 million from the finalization of purchase accounting, merger-related charges of $44 million and a $20 million charitable contribution. Earnings per common share, excluding these items, grew compared to both the prior quarter and the prior year. As Beth highlighted earlier, excluding notable items, our cash efficiency ratio was 59.4%, and we had a return on tangible common equity of 12.9%. Over time, we have seen continued improvement in these metrics. And with our second quarter results, we are either at or approaching our stated long-term targets. I will cover many of the remaining items on this slide in the rest of my presentation, so I'm now turning to Slide 7. Total average loan balances of $87 billion were up $25 billion or 41% compared to the year-ago quarter and up $369 million or 0.4% unannualized from the first quarter. Compared to the year-ago period, average loan growth primarily reflects the impact of the acquisition as well as ongoing business activity, with commercial and industrial loans continuing to be a driver. Sequential quarter growth in average balances was driven by commercial and industrial loans, which were up 1.7%, and offset lower commercial real estate and consumer balances. Our geographically-based core relationship business performed very well in the second quarter. Overall, our Community Bank middle market lending grew 4% un-annualized linked-quarter, with broad-based growth across Key's franchise, including strong loan…

[Operator Instructions] And first from the line of Steven Alexopoulos with JPMorgan. Please go ahead.

Regarding the loan growth guidance being at the lower end of the 87 billion to 88 billion range for average loans, I think you ended average loans at the midpoint of the year at 86.3 billion, right? That implies only 340 million a quarter for growth for the second half, which is relatively soft. Is the drag from home equity loans driving this outlook for more muted growth? Or is something else going on?

Well, Steve, for us to get to $87 billion, starting with an 86.3 for the first half, that means we'd have to be at $87.7 for the second half of the year. And so it would be a fairly sizable loan growth and a pickup from what we've been experiencing in the first half of the year.

Okay. Got you, Don. Okay. With the deposit costs ticking up quarter-over-quarter, Don, how are you thinking about the core margin here, ex the purchase accounting adjustments?

Yes. We're showing a 2.97% for the current quarter without purchase accounting, that's up 2 basis points from the last quarter. It really reflects about 3 basis points from the March beta impact as far as the rate increase, offset by about a basis point lower from loan fees. And so going forward, we would expect to see some lift again in the third quarter from the June rate increase, that we would continue to expect to see a lower impact from purchase accounting accretion in future quarters.

Do you think deposit costs keep trending higher at the pace we saw this quarter?

I think that there's a couple of things that impacted us this quarter. One was the impact of the rate increase, but also we saw a mix shift in the current quarter. And so our outlook wouldn't imply the same type of mix shift going forward, but we would expect to see some of the same impact I talked about before as far as the June rate increase, and then also the purchase accounting adjustment.

And then just a big-picture question for Beth. With the full First Niagara cost saves now in, the additional $50 million is on track, what do you think about what's next for Key? Do you do another bank deal here? Do you keep doing small deals, such as HelloWallet? What's the playbook?

We've always said that we would invest in people, products and capabilities. And I think this quarter was the reposition of our merchant servicing and the purchase of HelloWallet because that's very consistent with our strategy and our actions over the last couple of years. We've also said that, obviously, we felt First Niagara was a compelling opportunity and a unique fit for Key. And at the time, many banks talk about acquisition for scale, acquisition to reach a certain size. We have never talked about our strategy or our playbook in those terms. We've always said we have a full complement of what we need to serve our customers. But as we looked at First Niagara, we did believe it was a compelling fit. And as we sit here today, I do believe it was a good use of capital and has indeed created real value for our shareholders. So we are not yet done realizing the value. While we have realized the $400 million, we do have additional expense synergies. We're working on the client and revenue synergies. I don't believe we need further acquisition to meet our long-term goals. But I've also learned to never say never. But I believe that our strategies are sound, our focus is clear and that we're creating real value for our shareholders.

Next, we'll go to John Pancari with Evercore. Please go ahead.

I just wanted to get a little bit of additional color on loan growth trends that you're seeing. On the CRE side, I know you indicated some of the impact of the permanent financing markets. Does that imply that the front-end production on real estate generation is slower, at least on the construction side, and if you can talk about that a little bit? And then on the C&I side, I'm not sure if you mentioned line utilization. Sorry if I missed it. And just really interested in what you're seeing there in terms of CapEx pickup at all at your borrowers, and if that's driving a pickup in demand at all.

So a couple of things, as it relates to our CRE business, we still are seeing a lot of flows. If you look at our commercial mortgage banking business, we're up significantly year-over-year, and the pipelines are up. So there's a lot of flow within our real estate business. But as Don mentioned and Beth mentioned, there's a bit of a mix shift, that which goes on the balance sheet and that which we place elsewhere. So good flows in real estate, but the reality is there are market opportunities for our clients as these debt markets are wide open, and we're taking advantage of those for the benefit of our clients. With respect to risk management in real estate, we've talked before about keeping the portion of which is construction to a pretty low percentage, in this instance about 13%, and that's by strategy. And the other thing we've talked about, gee, for a couple of years on this call, is there are certain categories in certain locations, multifamily, gateway, gateway cities, for example, where we've been, from a risk profile, for some time sort of moderating our exposure there. With respect to your question on utilization, our utilization is really up a de minimis amount on a linked-quarter basis, about 0.5%. It doesn't necessarily show up particularly in CapEx as we think about our clients. Our clients remain optimistic. The discussions we're having with our clients remain very, very strategic and focused, but we are not seeing a whole lot of capital expenditures at this point.

Okay, that's helpful. And then my follow-up is -- kind of getting back to Steve's M&A question, Beth, it sounds like you're certainly going to still look for the strategic fits, and you favor these smaller type of nonbank deals potentially. And when it comes to bank deals, it doesn't sound like you completely ruled it out, and especially if you see something compelling. What I'm wondering is, and because this is where investors' concerns are, if you did find something compelling, how do you feel about earn-back? That was the biggest issue with the First Niagara deal that investors had is that it was a long earn-back period for tangible book value. How do you feel about that? Is that something that you will go near again in terms of how long the earn-back was implied on the First Niagara deal? Or is this something that you want to steer clear of, and you're going to look for something with a much shorter earn-back?

So John, I'm going to start conceptually. Strategically, Key is well positioned. We've got a strategy that I think is compelling and a trajectory in our core businesses that is now complemented and augmented by First Niagara. We -- and we are not yet done realizing the value of First Niagara and realizing the value for our shareholders. So I want to be clear that we are not a company who is seeking acquisition as part of our strategy. So if I led you to another place, I did not mean to. And as it relates to value creation, there are a range of things that we looked at, at First Niagara, not the least of which we really did believe Key was uniquely institutioned to unlock the value prospectively. And I think you see it in our returns on tangible common equity, and our efficiency ratio as well as expense saves at some 45% of the acquired cost base. I'm going to let Don augment where we are in the earn-back on tangible books and how he would describe that. But I want to close, John, with I did not mean to lead you to anywhere that was unintended.

And as far as Beth's comments, I would just repeat that we've been very pleased with the financial results we've been able to achieve with First Niagara, that we're showing strong improvement in the categories that we knew that were important for us to achieve. We knew at the time of the announcement that the tangible book value dilution and payback period would be a challenge. I would say that we are seeing a quicker payback than what we originally had expected, and that's coming from the strength of the actual results and the performance we've seen to date. If you look at the tangible book value dilution that we have incurred to date, I would say over the next 3-plus years is when we go back to the point that we were at before the acquisition. And so I think that we're well positioned to have a much quicker payback period than what we initially thought.

And John, one last comment was, and in terms of stock price appreciation, our stock is up 7 -- some 70% versus the index, bank index for that period, the same period of time up 46%. So the forward value and the value realization, we do believe that was a good use of capital for our shareholders.

No, I agree. And the stock certainly reflects it. And I wasn't implying that you're saying you're going to do those deals. It sounds like you're not completely ruling out, so you have to ask the question because that certainly was a concern when the deal was announced. And lastly, Don, on that three-plus year implication that you just said, which method are you still tracking or using when you're calculating that recovery of that tangible book value? Is that the crossover? Or which one?

The three-plus years I talked about was just getting back to tangible book value before the time of the announcement. So what we've talked about before was the [parallel]. And so we are looking at a three-year time period to get back to where we were from a tangible book value per share.

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

Yes. My first question, on a GAAP basis, just so we -- I appreciate, Don, your comment on the core NIM and how it's going to progress from here. I'm wondering if I could just get a confirmation on the starting point for GAAP NIM for 3Q. When we take out the purchase accounting refinement, do we start with, let's say, 3.15%, all else equal, in terms of the purchase accounting guidance that you noted during prepared remarks, and then forecast from there?

I calculated 3.16% because it was 14 basis points on the purchase accounting true-up for finalization.

Got it. And the second question is for Beth. Clearly, with a CET1 of almost 10%, you have a lot of capital for your risk profile and your size, and you'll be continuing to build it over time. And as we look forward to 2018, what would you tell your long-term shareholders a -- what your range is in terms of medium-term payout? And how do you think about dividends versus buybacks in a time period where the CCAR isn't getting more difficult?

Thanks, Erika. Well, as we've talked about it, we have said that one of the things that we think is important, as the CCAR guidelines have been clarified, is the ability to lean into the dividend payout. We believe we hear that from our owners that the level of dividend payout is an important consideration in their investment thesis. So we have talked about a 40% to 50% targeted dividend payout over time. You saw us this year, in the construct of our Capital Plan, for a 2-tiered increase on our dividend payout through the second quarter of 2018. So that is an important part of how we approach CCAR. And then as we balance in any given year what the Capital Plan will look like in terms of return of capital to shareholders, we look at a number of things that, yes, it is indeed true that this is the first year where soft limits around 100% payout were not applicable, and we would always look at what we would do over and above dividends carefully in terms of what we think is the best use of our capital, both in terms of investing in the business as well as returning to shareholders.

But just as a follow-up there, I appreciate the comment on mix. And I'm wondering, given that we saw your peers declare a total payout over 100% -- at 100% or over for this year's CCAR, I'm wondering, as you move past the First Niagara deal, if a payout of 100% or over in total with the dividend at 40% to 50% is something that your shareholders could expect.

Erika, this is Don. And as far as our CET1, that we are at 9.5% after the acquisition, and we feel very comfortable with that level of capital. We do believe that we have to have something north of 9% to continue to meet the stress test associated with CCAR. And so while it could be higher over a short window, we think that to maintain our capital ratios would imply something maybe about an 80% payout ratio. And that's something that we'll have to tweak positively or negatively based on what we see for organic growth and other capital needs.

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

Don, I was hoping you could just expand a bit on your comments on the deposit mix shift in 2Q. I mean, some of the reasoning is pretty obvious with rates moving, but it sounds like there might also be just some other moving parts in the total portfolio. Yes, I think you had mentioned some either intentional or expected runoff. So just hoping you could maybe expand a little on sort of what's going well versus any way you might have been surprised. And then, I guess, more specifically, you indicated the negative mix shift probably would not continue. Just more background on why that would be the case.

Where we've been pleased is essentially with our retail deposit growth and our core commercial deposit growth. Where we've seen some outflows is more in the non-transaction oriented deposits. And so for example, this past quarter, we saw a decline of about $1.2 billion in our collateralized deposits, which really don't provide any liquidity for us, and had an impact on the overall rates that we have for our deposit mix. I'd say in some of the individual categories, you're going to see a little bit more shift in some of the commercial categories, which are driving up some of the overall rates in some of the deposit categories. But generally, we, again, have been pleased with the retail and core commercial transaction accounts.

Okay, perfect. And then just one separate kind of ticky tack one on the higher tax rates expectation. I mean, I definitely get the higher marginal rate on higher earnings. But was there anything else that changed? I guess I'm just wondering, presumably there would've been a ramp expected in the previous guidance as well. So was there anything else that changed sort of quarter to quarter that drove the expectation higher?

Really, if you take a look at our guidance update, it's up pretax about $100 million. And that incremental earnings is taxed at a marginal rate of over 37%. And so that will have the effect of increasing our average tax rate by over 50 basis points. And so that really is the reason for the shift up in the tax rate.

Okay. So then, indeed, then it is just all the higher pretax earnings base?

You got it, yes.

And we'll go to Ken Zerbe with Morgan Stanley.

Don, I just kind of want to put a finer point on the comments around commercial real estate. I know you guys were talking about sort of your risk tolerance around CRE, but are you actually seeing any actual deterioration in commercial real estate? Do you expect to see deterioration in commercial real estate or weaker market terms? Or is it really just sort of Key's own preference for limiting CRE growth?

It is very much the latter. And actually, we've seen credit quality trends improve in commercial real estate. And so that hasn't been an issue. Chris had mentioned earlier that a couple of years ago, we started to exit certain markets. And those markets continue to do very well. And so maybe we put the brakes on a little too fast as far as being conservative there, but we want to make sure that we're cautious and using the capital appropriately as far as putting it to work with our customers.

Got it. Okay, that helps. And then just on the expense side, whether it's for you or Beth. Once you achieve the $450 million of expense savings, right, and let's ignore any potential acquisitions you might or might not do, where do you go from there, right? How much room is there to actually take down sort of Key's core operating expenses versus just getting the efficiency improvement because of higher revenues?

Great. And our model for the last several years has been one of continuous improvement and allowing us to generate cost savings to help fund the investments we want to make back in the business. And we believe that still is available to us prospectively. And a number of the cost-saving efforts that we had teed up before the acquisition of First Niagara were delayed because we wanted to focus most of the resources on the integration of First Niagara. And so we do believe there are some things that we can do to help achieve further cost saves. And that's going to be important for us in the long haul, especially since we're not seeing a GDP growth provide us any tailwinds as far as the growth in our bottom line.

Our next question is from Ken Usdin with Jefferies. Please go ahead.

Don, can I ask you two questions on balance sheet mix? Just on the securities portfolio, it looked like it came down a little bit on average. Can you just talk about just that in relation to what was happening on the liability side? Are you investing further? Or are you just kind of taking a pause? And any changes to the kind of roll-on, roll-off yields?

As far as the overall portfolio, I mentioned before that the collateralized deposits were down [indiscernible]. And that gave us some flexibility as far as managing our overall investment portfolio. It's a free liquidity at that point in time, and so that's something we'll continue to reassess. I would say that, that overall investment portfolio size is more reflective of the balance sheet management and liquidity constraints for the company as opposed to any other purpose. And then as far as the new purchases, they're coming on at about a 40 basis point kind of spread compared to the roll-off position. It's 30 to 40 basis points overall. So.

Okay. So still net positive. Second question, just on the right side. Just in terms of this year, you guys were kind of close to the line on Tier 1 capital. And it came to the stress in the CCAR. And you guys are at 80 basis points of RWAs in terms of the preferred after the redemption of the First Niagara. Perhaps, can you just talk through just your comfort with your buffer? And do you anticipate any further needs in terms of that mix of capital over time in terms of [indiscernible] issuance?

We'll continue to look at it over time because preferred is still an important part of that Tier 1 capital component. I would say as far as our stress-test results, we still believe that there's room for improvement there, that we don't believe that the Fed scenarios give us appropriate credit for some of the cost savings that we've already been able to achieve and discounting out some of the merger-related charges. We also know that there's some data elements that we didn't have in some of our earliest filings that probably resulted in higher loss projections under their models as well. And so we think over time that those both will improve for us as well.

Okay. And did that result or did anything about last year's post-merger tighter stress impact the ask that you went for this year in terms of conservatism just given that uncertainty?

I think that we were pleased, referring to the ask that we made, and don't think that we would've changed that if we would have known what their black box results would've been. So we think it's an appropriate position in the company at this point.

Our next question is from Steve Moss with FBR. Please go ahead.

This is actually Kyle Peterson on for Steve today. Just a couple of questions. So I guess, in core NIM, I kind of appreciate there are some moving pieces there. We had the June rate hike. Security yields are -- or replacement yields are a little better, but then there's also a little bit of moving pieces around deposits. I'm wondering if you guys had any sense of kind of where you see the core NIM going in the coming quarters, given that we did have that hike in June.

Yes, the expectation would be generally relatively stable, which reflects the benefit of the June rate increase, but also the impact of lower purchase accounting and some of the other mix shifts that you talked about. I think, also, it's important to note that our guidance for the full year shows an increase of almost $100 million as far as the net interest income. And that's reflective of the balance sheet growth that we're expecting and also the strength of the margin going forward.

So I guess, if it's with a little bit lower purchase accounting, then you get a little better on the core ex accretion. Is that the right way to think about it?

Correct.

And then just a quick question. I didn't catch it in the release, and my apologies there. What was the preferred dividend expense that you guys had this quarter?

$14 million this quarter, and that's what we see going forward. So I know it was noisy in the first quarter, but it's now down to a stable level going forward.

And next, we'll go to Scott Valentin with Compass Point. Please go ahead.

Just trying to get a sense on the net charge-off guidance for the year. Looking at the table in the presentation, you guys have been below 40 basis points, I think, for the entire period in the presentation. Just wondering if you see things changing in the second half of the year where you expect net charge-offs to increase.

Our charge-off outlook would be fairly consistent with what we experienced in the first half of the year. You can always see a blip here or there. But generally, we would expect it to be fairly consistent; but as we highlighted before our credit quality metrics in the second quarter all improved, with nonperforming being down 12%. Criticized and classified has also improved. So I think we're pretty well positioned going into the second half of the year.

As we look at our portfolio and our mix of businesses, we continue to believe the credit environment is benign. We don't see any emerging issues or concerns in any of our portfolios. And realistically, I think the only kinds of changes to the kind of averages you've seen on net charge-offs would be, as we've talked about, as you bump along the bottom, for lack of a better term, would be some -- if anything, was idiosyncratic, but nothing that suggests a trend or a shift.

And just a topical item of late, but just in terms of retail exposure, both C&I and CRE, I don't know if you have that handy, if you can tell maybe what percent of the loan portfolio is retail CRE and retail C&I?

What we've talked about before was if you look at the direct exposure to retailers, plus the direct exposure to a regional mall combined, it's around $1 billion. And so it's a fairly small portion of the overall portfolio.

Next question is from Peter Winter with Wedbush Securities. Please go ahead.

I was just wondering, can you just give an update in terms of new account growth, deposit growth in Upstate New York?

We have enjoyed deposit growth across the entire, what we call, the new markets. And so we continue to be ahead in terms of what we thought of in terms of what we had modeled in terms of deposit growth. And we also, Peter, continue to be in better shape than we were -- than we had modeled in terms of attrition. And interestingly, on the attrition side, 70% of the attrition, which isn't as great as we would have modeled, are people that were a single-product or a single-service customer. So we feel good about the trajectory.

Just a follow-up. The comments earlier about customers choosing capital markets versus holding the loans on the balance sheet, loans held for sale had a nice increase from first to second quarter. Would that be a good indicator for the second half of the year in terms of capital markets' CMBS-type business and fee income?

Peter, it's a good indicator of the velocity and the activity that we have going on, on our platform. Having said that, we -- there's a lot of churn in that number. So some of those would span quarters, others wouldn't span quarters. So it's not necessarily a number that you can extrapolate perfectly. I will tell you this. We feel good about our business kind of across the board. Our investment banking and debt placement fees will be another record year this year. The actual -- how it lays out from a quarter-to-quarter perspective will be a little smoother this year than last year. Recall last year in the first -- particularly in the second quarter, actually, the markets were challenging. So you had some volatility. But all in all, we feel good about where the business is. But looking at that number specifically, you can't necessarily extrapolate it into the third quarter.

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

Hi, good morning. I apologize if you guys addressed this already, but with overlapping calls, it's kind of difficult to keep -- stay on top of everything. But first, on revenue synergies, can you just comment on how you're feeling about that, whether you're seeing that already, to what extent it's in the numbers, and how you're feeling about the $300 million goal that you've laid out in the past?

Saul, we feel really good about the $300 million goal. You will recall, when you talked about it being in the numbers, all the modeling that we did around the acquisition, specifically the $300 million of revenue, incremental revenue, were not in any of the numbers and the guidance we had given anyone going back to the acquisition. Getting back to the $300 million, we feel good about it. As you think about things like residential mortgage, payments, indirect auto, commercial mortgage banking, private banking, which is interesting because First Niagara really was not in the private banking business. And our private banking business right now has a lot of momentum. And so we think that's another area. Some of these sales, as you know, have a long tail. Some of them are relatively short. We've had some success that's already closed, for example, in commercial mortgage. But getting back to your question, we feel good about the $300 million in revenue synergies.

Understood. And when I said in the numbers, I meant is it showing up already in the first-half results? Have you extracted -- of the $300 million, have you extracted anything thus far?

Yes. Saul, in my comments, and we realize we had some overlapping with another call, we said very early days in terms of what's in current results. But lots of confidence about the pipeline, the fit and the value of the revenue synergies going forward.

Understood. I'll ask a second question. And again, I apologize if you did address it. But the expense number, the expense guide, $3.7 billion to $3.8 billion in what you've -- obviously, it's up a little bit. But what's the level of investment, level of cost that is associated with HelloWallet and the merchant services?

That'd be less than $20 million for the second half of the year between tangible amortization and operating expenses.

And next, we'll go to Marty Mosby with Vining Sparks. Please go ahead.

I wanted to ask a different question kind of as a go-forward. As you've gone through the acquisition, the allowance-to-loan ratio has dropped to about 1%. When you think about CECL, so how will that one be affected by what you have in your purchase kind of portfolio? And then how do you think of that in the sense of building back that loan loss allowance ratio as you kind of go into the new accounting?

One, as far as building back the reserve, normally, we would expect the allowance to increase. But it was flat this quarter, mainly because of the improved credit quality that we experienced throughout the portfolio. We talked about -- before about a 12% reduction in nonperforming, and criticized and classified being better. And so that really resulted in us having a flat allowance. As far as CECL, we're still early stages as far as doing the modeling for that. But generally, we'd expect the allowance to be higher under CECL than you would under previous GAAP. But I think the impact might differ between different loan types and categories. And so it's still too early to see, but we'll start to probably show some increases in the reserves prospectively between now and 2021, when we have to implement CECL.

And then, Beth, you've seen the return on tangible common equity move up towards the lower end of your 13% to 15% kind of guidance, which is in direct result from the acquisition. So I think that's really what the benefit of this acquisition was, is really pushing that to a whole new level. What is the next kind of round of improvements to get you from right at 13% maybe towards the middle to upper end of that range?

Well, Marty, I think it is a function of implementation of the strategy. You're right. We were beneficial to get a step-change in the level of our return on tangible common equity with the merger. And now from here, it is the improved operating performance, continued strong capital management. And we see a path and a plan to move through that 13% to 15% guidance in the next couple of years.

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

This is Rob from Matt's team. With regards to your I-banking and debt placement fees, another strong quarter this quarter. Does the strength so far this year make you any more constructive in your outlook for the back half of the year versus maybe where you were last quarter or at beginning of the year?

Well, again, we always think that this is a business where you ought to look at it on a trailing-12 basis. We feel really good about the business. As I mentioned earlier, this -- 2017 will be another record year. It'll be another year where we grow it. The other thing I mentioned is this year, on a quarter-to-quarter basis through the four quarters, it will be a little smoother than it was last year. The pipelines -- as we look forward, the pipelines are strong. So we feel good about the business. We feel good about the constructive conversations we're having with our clients. And as always, I would be remiss if I didn't say it's all market-dependent, but we feel pretty good about it.

Okay. And then just separately, on the $345 million of First Niagara loan marks, can you remind us how much will ultimately flow through net interest income versus flow through credit? And then on the outlook for purchase accounting accretion, following the $100 million you expect in the back half of this year, how should we think about the step-down in 2018 and 2019?

The accretion all goes through margin. And so what you'll see overtime is building back some of the reserves to offset some of that. But you will see that flow-through through margin prospectively. So like when we talked about the $58 million for the current quarter, you would see that step down to $53 million, and then $48 million would be our outlook for the next couple of quarters. I would also expect you to look at about a 20% kind of reduction per year prospectively from there.

And we have a question from Gerard Cassidy with RBC Capital Markets.

Beth, can you give us a 30,000 foot type of view? We saw earlier in this quarter, in the second quarter, the treasury come out with their so called white paper on their views of how regulation should change for the banking industry. And when you look at what they recommended, what are one or two or the top ones that would benefit Key if the regulators were to change or act on some of their recommendations?

Thanks. I do think the white paper is an important kind of stake in the ground. If you look at nine years post crisis, we certainly have a stronger and more resilient banking sector. We've got high levels of capital and liquidity. So I do think the opportunity to review regulations that align with risk complexity simplification are all important. But I think specifically, as you look at liquidity and capital, there are some opportunities there in terms of what qualifies for LCR requirements. And then I think specifically, some of the capital requirements that would be attributed to mortgage and small business lending would be an opportunity for Key as well as the industry. So we'll see what emerges, but I am encouraged that -- on the list of things that are under review, and I think as I said, at this point, the industry is certainly resilient and well capitalized. And there are some probably opportunities there that would be beneficial.

Great. And then just as a follow up. Chris, you talked about the strength of the investment banking business, and particularly in the real estate area. And I know it's market dependent, as you mentioned, but when you look at your numbers, how much of it was due to market conditions being as healthy as they are for this business versus you taking market share and improving your penetration of customers? And then as part of that, is the First Niagara -- I know you've got some early wins there. Does it represent 0.5% of that business? Or how does it frame out for First Niagara at this point?

So a couple of things. Before I get to First Niagara, clearly, we, Gerard, pay very close attention to where we stand from a market share perspective. And I can tell you, in our capital markets businesses, we are gaining share. And we use an outside service, the same folks that we've used for a long time. And so it is share gain in addition to the markets obviously being open and available. With respect to First Niagara, it's very early days. It would not equate to 0.5%. But what's interesting is we're having a lot of discussions with legacy First Niagara clients. So that's in the future. But in terms of actually having revenue in our investment banking and debt placement fee numbers, not yet a big number. As I mentioned earlier, we did use our commercial mortgage business to place about $200 million with Fannie and Freddie.

And not to ask for names, but when you say share gains, are you taking it from other regional banks or the universal banks or the foreign banks? Have you been able to parse that out?

It's a mix. And particularly, we feel like our model, Gerard, is really capable of really growing relationships with people that need both the balance sheet, need all the treasury services that we provide and need the strategic advice. So we feel like our model, focused on the middle market, is at a competitive advantage to some other models that are more peaky models.

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

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

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