Good morning. And welcome to KeyCorp’s First Quarter 2018 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Chairman and CEO, Beth Mooney. Please go ahead.

Thank you, Operator. Good morning, and welcome to KeyCorp's First Quarter 2018 Earnings Conference Call. In the room with me are Don Kimble, our Chief Financial Officer and Chris Gorman, our President of Banking. Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of the call. I am now turning to Slide 3. The first quarter was a good start to the year for KEY with continued momentum in our core businesses as we grew and expanded relationships with our targeted clients. With a more positive economic backdrop and improving client sentiment, we are seeing strong activity and healthy dialog in our markets from clients large and small. We continue to take share and our pipelines remain strong. Our results this quarter reflect the strength of our business model and competitive positioning. Earnings per common share was up 19% from the prior year and we generated a return on tangible common equity of 15% for the quarter. Reported revenue was up over 3% from the first quarter of last year and adjusted for purchase accounting accretion, revenue growth was 4.6%, driven by a higher net interest margin, solid loan growth and strong performance from our fee based businesses. The growth in average loans this quarter was broad based and was primarily in commercial and industrial loans, which were up over 3% linked quarter. The growth reflects our success in growing and expanding middle market and corporate relationships, as well as the momentum we had coming out of the fourth quarter, the strong pipeline and activity to carry it into the first quarter for closing. Our fee based businesses once again reflected our ability to offer a full range of solutions to our clients, including…

Thanks, Beth. I’m on Slide 5. We reported first quarter net income from continuing operations of $0.38 per common share. Our results compared to $0.32 per share in the year ago period and $0.36 in the fourth quarter with prior periods adjusted to exclude notable items. Our return on average tangible common equity grew to 14.9% in the first quarter. Our cash efficiency ratio was impacted by elevated expenses in the first quarter. Importantly, as Beth mentioned and as I will comment on in more detail later, we have plans in place to reduce our expenses and we expect to approach the high end of our efficiency ratio target of 54% to 56% by the end of this year. In the first quarter, we benefited from a GAAP effective tax rate of 13%, reflecting recent tax law change and credits from investments and tax-advantaged assets. I will cover many of the remaining items on this slide in the rest of my presentation, but I’m now turning to Slide 6. Total average loans of $87 billion were up $921 million from the fourth quarter. First quarter growth was driven by commercial industrial loans, which were up over 3% linked quarter on annualized. The growth was from core relationship business in both our Community Bank and our corporate bank, and we saw a good business activity in our new and overlap markets. Importantly, we maintained our underwriting standards and remain selective and focused on our targeted clients segment. The growth this quarter also reflected the continuation of the momentum we had at year end, carryover from deals that were pushed into the first quarter and strong pipelines. Loan pay downs were still elevated slowed significantly this quarter and we would expect this trend to continue as we move through the year. On…

Thank you [Operator Instructions]. First one is from the line of Ken Zerbe with Morgan Stanley. Please go ahead.

Just have a quick question on the efficiency ratio target. Are you guys referring to reported efficiency ratio, the 54% to 56% or are you excluding the intangible amortization?

Other than cash efficiency ratio and that’s why we use as our target, which would exclude the intangible, that’s correct.

And then just in terms of technology spend. I guess, how are you thinking about additional technology expense from here. Because I guess my question is, what is the risk that in future quarters we see additional, let’s call it, accelerated technology spend that may -- or I assume it’s all built into your expense guidance. But I guess I’m curious about the up side risk there.

No, it is built into our guidance and we would expect the first quarter like expenses overall, will be the high point as far as our technology spend and we will continue to manage that appropriately going forward.

And then just one last question. On Slide 7, you mentioned the migration into higher yielding products in terms of the deposit side. Can you just elaborate on how pervasive is that and what do you expect over the course of the year? Thanks.

I think you can see that in that in the time deposit line item, we’re seeing much more growth there than we are in other deposit products. And that’s essentially where the consumer and some commercial customers are going to get the increased rate, but we’re not seeing a lot of the core money market pricing and others change yet. And so we’re seeing that drift back into time deposits and we expect that to continue throughout the next year.

And next we’ll go to Scott Siefers with Sandler O’Neill. Please go ahead.

Thank you for the comments about the high watermark and expenses going down from here. I’m wondering if you’re willing -- if you maybe a little more specific on your thoughts on the trajectory for the remainder of the year. I guess what I’m asking is, would you expect an immediate step down in cost in the 2Q and then some growth from there or is this more ratable change over the course of the year. And then I guess the follow on question to that is almost like clockwork, I guess the way your expenses are going to project this year is almost reverse the way they typically do in the first quarter is typically the low watermark for the year and by wide margin, the fourth quarter tends to be the highest, I think mostly because of investment banking. So have you baked into the guide, that seasonal increase in compensation costs in the fourth quarter and so you still think you can lower expenses even in spite of what typically is a weaker end of the year and cost.

And I would say that as we look at our outlook for expenses from the first quarter level that would imply that the second through fourth quarter should on average be down about $40 million. And so if we look at what we incurred in here in the first quarter, we had the higher benefit cost of about $30 million and also we had some one-time items that what I would mention as far as the accounting. Purchase accounting true-up which costs us about $4 million and also elevated operating losses which cost us about $3 million. And so those three combined are in that $38 million range. We would expect the benefit cost come down meaningfully here in the second quarter. We won’t recapture a 100% of that $30 million windfall but we do expect to see a meaningful adjustment down for that. We’d also expect those other items of purchase accounting true-up and the operating losses not to continue for that base. But we do expect to see some other things that would occur in the second quarter, which includes some of the merit increases come through and those will be offset by some of the savings that we’ll be expecting to achieve. And to your earlier question, we are also taking in consideration the increased compensation related to higher investment banking fees throughout the rest of this year as well. And so that is embedded in our guidance for this year and as a result, we would expect to see a different trajectory as far as expenses this year compared what we would have seen in previous years and more of that’s related to the timing of some these expense programs that we’ve talked about and making sure that we achieve those savings as part of our continues improvement to offset those increases.

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

It’d be our expectation based on the timing of these expense initiatives we talked about.

Next we’ll go to Ken Usdin with Jefferies. Please go ahead.

Just an follow up to Scott’s questions, thanks for all the color Don. The question is like expense are going to go down for the rest of the year but then it seems like we’ll have a new seasonality so we should just expect -- should we expect first quarters to generally be the high watermark for the absolute expense quarters as we go into ’19 as well or are we just now on a different trend down, down, down the hallway?

We would expect to see some seasonality in the first quarter of every year, mainly because of the benefit expenses. I would say that this first quarter, we had about $20 million of items that were elevated compared what our expectations would have been coming into the quarter. Benefit cost themselves were about $5 million higher, we had severance costs of $5 million and then we also have the other two items I mentioned, which was the true up of purchase accounting and also the higher operational losses, which we wouldn’t expect to continue going forward.

And then just on -- really helpful to give us that approaching the high end of 40 -- 54 to 56 that’s a far-far away from 62.9 that you just printed given all the things you just talked about. I just want to -- can you help us understand what approaching really means, is it really directionally or is actually expected you can really, really get tight to that 56 side.

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

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

Can you give us some additional color, you had some strong commercial loan growth in the quarter, sequentially annualized it was about 12%, I guess. Can you share with us where that's coming from may be geographically? And Don I think you mentioned something about some overlapping, I am assuming with the First Niagara franchise some growth came from that area and the some further color on this growth.

I’ll ask Chris to provide some more color here as well. But you’re right. The growth was driven by a number of things, one is that we did have some pipelines and volumes that really got pushed out of the fourth quarter into the first quarter, and so we saw growth there. We also benefited this quarters significantly from pay downs being lower and that was about $1.3 billion lower pay-offs this quarter than what we had in the fourth quarter. And so that was a huge benefit to us as well. And the growth was across the board, and I think Chris will highlight some of the market, especially some of those new markets for us that contributed to it.

So if you just step back for a second, our business is one where we’re constantly out talking to our clients and things develop over time. So if you step back, we have more bankers, we have better dialogue, we have more clients, we continue to expand the clients that we have. So in any given quarter, you'll see movements like this. We had really strong performance across the board. We had strong performance in the Rocky Mountains, strong performance in the Pacific Northwest, we had strong performance in our Hudson Valley area. And we also had strong performance in some of these overlap markets that Don mentioned and those would be markets like Buffalo and some of our new markets like Pittsburg and Philadelphia. Also in our industry based businesses, we had pretty much across the board growth, so it was just a really good quarter for both on and off balance sheet growth.

And then shifting to the other side of the balance sheet on the deposit side, I may have not heard this so I apologize. Can you give us an idea of what the deposit betas are doing today? And what is your expectation and when you will get to your terminal deposit beta, is it later this year 2019 and about what level would that be when you look at it?

As far as the deposit beta this quarter, you can look at our deposit rate went up by about 5 basis points this quarter compared to the 25 basis points increase in fed fund. So calculating just that way simplistically, it’s about 25%, on a cumulative basis we’re at 22%. We would expect that 25% to continue to increase throughout the rest of this year and probably getting into the 2019 time period for future increases would be more to our normalized beta, which we've historically talked about mid-50s beta. And so we would see a gradual increase from here to that point. And those are the assumptions are baked into our net interest income guidance for the outlook for this year.

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

Just wanted to follow-up on Scott and Ken's line of questioning. So I thought it was very clear the way you outline some of the seasonality, Don, on the first quarter expense line. But within the revenue parameters that you laid out in Slide 13, the quarterly run rate for expenses should average between $965 million to $981 million using the mid-point to high point of your expense range.

That's correct and so I would just say that it's roughly on average about $40 million decline from what the first quarter level was. And again a good portion of that really comes from the removal of some of these one time or seasonal items. And so essentially the increases and incentive compensation related to stronger performance and capital markets and some of the other investments we’d be making will be offset by the impact of the cost savings we talked about and timing of those.

And as a follow-up on the net interest income guide, you guys clearly outperformed on client activity trends among regional banks this quarter. I am wondering what average loan growth and balance sheet side you've contemplated underneath that $3.95 billion to $4.05 billion guidance.

What we've included in here is the guidance we have for total loans. And so the midpoint of that I believe was $89 billion and the midpoint of the deposits was in the $1.04 billion range, so those would both be about $2 billion increase from where we were on average basis for the first quarter. And based on how we’re positioned to-date with our ending balances for loans being up $1 billion dollars from the average for the first quarter, I think we're off to a good start here in the second quarter.

And one last one for Beth. Beth, with the stress capital buffer proposals that had come out two weeks ago or I guess last week clearly favorable for lower risk models like KeyCorp and favorable towards higher dividend payers. I am wondering if that could potentially change how you’re thinking about capital return if the proposal is passed as written?

Good question Erika, and no it does not. But it certainly does augment and support how we have talked about our capital priorities.

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

If have to look at pretax pre-provision net revenue for the first quarter, it was down 4% year-over-year. And I’m just wondering did you possibly frontload some of the expenses for the revenue enhancements last year, and so there should be better operating leverage going forward?

I would say that the pre-provision net revenue impact really was related to more of the timing and some of the elevated level of expenses this quarter that we expect to see come down throughout the rest of the year. And as far as the investments we’re making and the revenue synergies that more of those as we’ve talked about before are proportionate to the revenue. And so we still believe we’re on a path to achieve a run rate for those revenue synergies of $150 million a year by the end of this year and achieve $300 million target by the end of next year.

And then just one quick one on credit, it’s not major. But I’m just wondering there was an increase in C&I non-performing. Just wondering if you could give a little color?

It tend to be more deal specifics, so there really isn’t any trend or any specifics as far as industry seen any stress or pressure, it really is just one item at a time. So no big or unusual transactions and no industry concentrations there.

And next we’ll go to John Pancari with Evercore. Please go ahead.

Thanks for the color on the expense trends. I don’t mean to kick the dead horse here, but I am going to kick it twice. On the expense number, just can you talk about your -- if revenues does come in weaker this year for any given reason, could you just talk about your ability and your willingness to be more flexible on the expenses, and your ability to pull back in order to get to the efficiency target?

You’re right on that point but keep in mind that a good portion of the revenue growth is coming from more of our fee-based businesses, and some of those are tied to the capital markets and there is a direct correlation between the expenses associated with supporting that and their actual revenues. And so revenue if revenue don't come through, we would see a corresponding reduction to the expenses. And we’ve always talked as well as that we’re very focused on continuous improvement. And we’ve talked about times will make investments, because we’re seeing the payback and have additional revenue growth opportunities for making those investments. At times revenues won't be there, and so we’ll pull back on the expenses. And you’ve seen a little bit of that here with this quarter and what we’re talking about, because the expense initiatives that were taken on for the rest of this year are probably elevated and toward the upper end of what our normal guidance range would be to make sure that we can manage to and live up to our commitments we made as far as our expense outlook.

And then separately again on expenses, you haven't announced any plans to reinvest your tax saving yet, a lot of your peers have. And so I guess, could you just about -- I know you’re not signaling anything just yet and you indicated that the IT investments are ongoing, but not going to drive a big jump in cost. What is the likelihood that 2019 that you relocate the tax savings and decide to reinvest a portion of that into IT or any other area?

I would say when the tax law changed, we did make an investment in our people and we increased our minimum-wage to $15 an hour, and so that was meaningful to a lot of our employees and I feel that was appropriate step to take. And we also had a one-time contribution to the retirement funds for those individuals as well. And so that was both we thought very constructive. We’re very focused on continuing to drive the core and we want to focus on driving positive operating leverage for the current year and we’ll expect to do the same thing in ’19 and beyond in. And for us to do that, our investments will have to be made through benefits we have from cost savings and from future revenue growth. And so it won't be a direct result or connected to the tax reform that’s occurred.

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

First is just a clarification on your NII guidance. This year’s slide deck you made it clear that it's on a tax equivalent basis, in previous versions I think it wasn’t explicitly specified. I just want to make sure that this numbers is on a like for like basis. I know it’s not a big number but it’s about $30 million, so I just wanted to make sure that we’re comparing the respective guides on a similar basis.

No, you're right. And the recently we added that this quarter is last quarter's call I had a question as whether or not that was taxable equivalent or not, and it was. And so on a consistent basis, we just want to make sure that I was clear for the investors to know that.

And to beat a dead horse, I guess a little further couple of quick questions on cost. The $15 million of cost savings that you’ve realized, how much of that was in the run rate in the first quarter and how much do you expect to incremental expense save you expect to filter into the second quarter and beyond?

We have said that the full amount is in the second quarter outlook, so we will have it achieved. And I would say that we were over half the way there in the first quarter, and then you would see that in some of the non-personnel related expenses, which are down $35 million on a linked quarter basis.

And I guess final question on the cost and maybe I don’t know if it’s -- I know you talked about the seasonality in some detail. But it’s still not clear to me why this first quarter the seasonality in the expense line was so much greater than it has been in previous years. Obviously, couple of years ago you didn't have First Niagara, but it seems very, very pronounced. So can you just walk me through why this year it was -- is seemingly so different in terms of seasonality?

Your right, first quarter of last year would have had some noise around First Niagara, so it might not have been quite as transparent as it is this year. If you look at just, for example the benefit costs, we’re up $10 million on an adjusted basis this quarter compared to a year ago quarter. $5 million of which was timing related and so that was more pronounced of this quarter than what we would have expected. And then beyond that as far as expenses as I highlighted earlier, we really had about $20 million worth of expenses, but just broke against this quarter and we wouldn’t expect that to continue or recur. But anything that to turned against us this quarter from an expense perspective and so that really made the overall seasonality and timing related issues even more pronounced this quarter than what it has been historically.

And going forward we shouldn’t on average expect this kind of seasonality in 1Q.

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

Our next question is from Matt O’Connor with Deutsche Bank. Please go ahead. Matt O’Connor: So a lot of details on expenses for the full-year and what you expect existing the year. But just if you can narrow down what do you expect the range of expenses to be in 2Q specifically just to reduce the risk of any miscommunication on that might be helpful.

Matt, we typically don’t given guidance specifically on a quarterly basis. But I will say that the majority of that $30 million benefit increase we should see it come down. And so I would expect to see in the neighborhood of about $25 million decline for that line item. Two of the other line items that I talked about that we wouldn’t expect to continue at that level, it would be purchase true-up, which cost us about $4 million in the elevated operation losses which were about $3 million. And so those combined would imply about a $30 million reduction on a core basis to expenses, and I think that's a good walking around assumption for this point in time. Matt O’Connor: And then just separately, the trust fees, if we look year-over-year we’re down a little bit. I'm just wondering what's driving that. Obviously, market level has been choppy of way, but cumulatively over the last year, up nicely and that's why one component of it. But just remind us what the puts and takes are there and why that's down little bit year-over-year?

Actually, our private banking business, which is the bulk of that, is actually on a really good trajectory. You probably saw we had $39 billion of AUM and we continue to gain a lot of traction there. That was somewhat offset by challenging comp periods for both our equity and our fixed income trading businesses. Matt O’Connor: And how much are the trading revenues versus the private bank roughly about disclosed?

We've never disclose that, but it's relatively small vis-à-vis the private banking business. Matt O’Connor: And why were those areas weak? I think, if we look at the broader and some banking universe thinking equity overall was flat to up depending on the mixes between the two?

In that business, both our fixed income and our equity business, we really are just facilitating liquidity for our clients. The equity platforms in general I think are under a lot of pressure in terms of margins. And we just didn’t have the quarter and fixed income that we've had previously.

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

I wanted to start, first follow-up on a commentary around accelerating the tech project. I saw the headlines that KEY upgrading its lending platform, one the airplanes upgrade the entire core. And is that what's driving this accelerated tech project that's my first question?

Good question, and two of the initiatives that we've really kicked off and this year it has been more of the consumer lending platforms, both for residential real-estate related and also for non-residential real-estate, so there are two initiatives. Those really are the area of increase for this year. I would say that in future years, we’ll continue to have a component of our technology development to continue to reinvest in the core. And so we will see opportunities there to make those investments, and those will be again more consistent with the overall plan and efforts. This year, we also have some digital investments going on that we think that will be an ongoing part of our business model as well, because we believe those are critical for us continue to stay current and make sure that we're making the appropriate investments in the digital aspects for both our consumer and commercial customers.

And what’s the anticipated tech spend this year?

When we look at technology spend that we would tend to have captured in a couple different buckets. One is for personnel and contractors, which all will go through the personnel line item where we saw that elevated level. And that would be in the $120 million to $125 million range for this year. I would say our total technology spend is closer to $200 million, which would include some software and hardware investment as well. And that's fairly consistent with what we’ve had on a run rate. But keep in mind in some prior periods more of the efforts were focused on the integration and conversion for First Niagara. And so we’re seeing those efforts more aligned now to the platform, the digital and just ongoing core investments in the business.

And maybe for Beth. With the potential upgrade in costs which are significant upgrade the core overtime. Do you think you have enough scale at the size to make the needed investments in tech or do you think you need get larger share?

As we look at it, we think we have the adequate resources to support both our business strategies and the investments that we need to enable those. And that would include people, product and capabilities as we’ve talked about in the past. So being smart in allocating and prioritizing our investments is always part of how you do this, but certainly a discipline that we believe we have and do believe we are well-positioned to compete.

If I could squeeze one more in. On the expense initiatives, you talked about realigning business unit staffing adjustments. Can you give a little more color on what you're doing there? Thank you.

Realignment of those businesses, as we’ve gone through the integration with First Niagara, we identified some areas where we can make things more efficient and more effective. And so we have combined some areas and that’s -- a lot of gain some efficiencies from a business alignment. And then as far as the staffing models, we just have a number of areas where we’re performing outside what our normal models would be and we’re achieving those targeted levels through normal attrition of other efforts. And so it’s just making sure that we continue to adhere to those models and continue to deliver the synergies we would expect to see from the combination.

And next we’ll go to Mike Mayo with Wells Fargo. Please go ahead.

So still on the efficiency topic, so retail efficiency is 69% and that’s flat with the year ago despite the First Niagara merger savings and everything else that you're doing. If you could just give some color why that has improved despite the merger savings? And maybe it’s some allocation to the business line or maybe you're not happy with the progress, or maybe your spending the benefits of the savings or some other reason. If you could give some color on that would be great?

And as far as the efficiency ratio for the overall Community Bank that we are seeing the improvements that we want to see that we are seeing the savings come through for the merger. The Community Bank was a disproportionate party that was impacted by some of these seasonal and/or unusual costs this quarter and that drove their efficiency ratio up. We would expect to continue to see some strong positive operating leverage from the Community Bank going forward and expect to see some of these seasonal items go away and show some meaningful progress going forward from that.

A follow up, it sounds like you’re not -- you’re probably super excited about having a 69% efficiency ratio in that business line. It sounds like you expect that to improve. But if you’re spending $200 million a year on your technology budget, just going back to scale question at a timeline, the technology budget of say JPMorgan of $11 billion and you’re spending $200 million a year on technology. Is the investing phase potentially going to last longer than you expect? And if you could just clear is that right the $200 million a year on technology?

You’re right. As far as the overall spend, I would say that we can remain very competitive with that. The other thing that we have going forward is our ability to partner with fintechs and other providers. And so while we might not be developing our own capabilities like some of the larger banks might, we believe we can get some of the same benefits. And we’ve talked about that in the payment space where we have a number of strategic partnerships where we can bring to market very competitive and very technically advanced types of products and capabilities to our customers without having to develop that ourselves. And so the $200 million is just consistent with how we look at as far as the spend and believe it’s appropriately positioned going forward.

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

So first question is for Chris or for Don. Are you seeing any increase in your line utilization at the end of the quarter versus the prior quarter?

Actually, our utilization across both our community and corporate banks has been relatively flat.

And then moving towards your order book, I know it’s a small percentage of your overall loan portfolio. How is the order book behaving?

The order book has done very well. But again we focus on a FICO score of about 760, the delinquencies has been holding up very well and we’re fine with the performance of the that business. And as we highlighted, that’s been an area of benefit to us as far as taking that product across the legacy key footprint to the dealers that we already have relationships with. And so we’re seeing some synergies from that as well.

And then my last question is on revenue enhancements from the First Niagara, it’s a follow-up to Gerard's question. Can you talk about any revenue enhancements that you're seeing from there?

Again, on that front, we do expect that those are moving in line with outlook that we expect to be at $150 million run rate by the end of this year and $300 million by the end of next year. Where we're seeing benefits already are on the commercial payments space where we continue to see a nice adoption rate going from the former First Niagara customers and some of the products and capabilities we have there. We’ve seen some strong growth as far as the capital markets related activities, especially on the commercial real estate customers or First Niagara. And we placed about $400 million of debt on that front, so that’s been a real win for us. We talked about indirect auto earlier with you Kevin as well, and so we’re seeing growth there. One thing that hasn’t shown as much on the bottom line so to speak that we’re seeing good activity is the residential mortgage. And if we look at the application volumes here for the first quarter, they’re up 41% from a year ago. And so we haven't seen volume come through as far as closed deals and that we are optimistic that we’re starting to see some pick up here in the second quarter and beyond.

And Kevin, I would add that on mortgage side part of what we talked about last year was ramping up our staffing as well as investments and making sure our platforms from a underwriting through servicing we’re ready to accommodate what we saw was probably the largest driver of our revenue synergy. And so I would say we entered 2018 staffed and ready, but that is something that will definitely build throughout the year, and is reported on our income statement in the way where we will be able to track it.

And next we’ll go to Jeffery Elliot with Autonomous Research. Please go ahead.

Maybe back to that little pick-up in C&I non-performers, I mean I hear you say that it's nothing industry specific. But is there anything in terms of the characteristics of those companies or deals anything might leverage or interest cover that stands out as a common factor across loans that have gone into non-performing?

There really aren't any comment threads there at all, but what we're seeing in our small leverage portfolio that are relatively stable and it continues to perform well. It is more of a deal-by-deal basis that we're seeing some increases there, and it's very slight. And it's up from the fourth quarter but down from the first quarter of last year, and as the percentage of total loans at 61 basis points, which is still pretty low compared to the industry overall.

And more broadly, we started to see some more press on rising leverage in the corporate sector. We've heard from one or two other banks comments on that as the sign that we might be getting later in the cycle. Do you agree that that's a concern or how do you think about that?

So there is really two things, one is our book. Our leverage book has been flat for some period of time, so that's a book that is a small percentage of our total loan portfolio, and secondly it has a lot of velocity. With respect to leverage in general and what we're seeing in the marketplace, there is in fact rising levels of leverage in some transactions in some parts of our business and obviously that's something we watch very closely.

And next we go to Marlin Mosby with Vining Spark. Please go ahead.

Focusing a little bit more on the revenue side. You had a pipeline for the investment banking debt placement, just curious about the step down that we have this particular quarter. Do you think that's a temporary pull-back or do you think that this is more normal levels and there is a little bit of pull through or acceleration as rates were going up that people are trying to do deals faster than the rates were climbing. So just thought about that revenue stream as you move through rest of the year?

What I think you’re really seeing is a pretty typical seasonality that we experienced in that line. We always look at that line on a trailing 12 basis. And so if you look at, for example, in absolute terms this is a record first quarter for us. If we look at our backlogs now vis-à-vis a year ago, our backlogs are actually better than they were a year ago. So we feel pretty good about where the business is. There was one thing and we noted there were few of pay downs in the first quarter and when you have fewer pay downs, typically that can adversely impact the fee line and investment banking and that placement fees as well. But we feel really good about where the business is and particularly where it is vis-à-vis this time last year.

And then, Don, I have two questions for you and in terms of one if you look at the roll-up of security yields, as well as just our interest rate swaps as they now re-priced, you’ll get actually the pull up in those yields. So could your net margin actually continue to increase, let's say the fed stop raising rates just because where medium and longer term rates are as there benefit. And then also the tax rate popped down this quarter. Is that related to the stock price and probably benefits and is that -- was that an unusual item? So just two items I want you to look at. Thanks.

As far as the overall margin, we do believe that they’ll be a lift there as far as the cash flows are for our investment portfolio. I think we highlighted that the new purchases were coming on at about a point higher than what the roll-off of the portfolio, and we’re seeing about a $1.2 billion plus of the cash flow each quarter now on the investment portfolio, same thing on the swap books. We had about $1.4 billion of maturities to the swap book and the roll off rate versus the new rate for those replacement swaps is about 160 basis points wider. And so we’re seeing lift there as well. And so we think those would both be additive. And so when we think that there could be some lift there, we would refer to the core margin as being relatively stable even if rates don't go up with maybe some slight bias for something with lift there, because offsetting that would be the continue drift to the portfolio on the deposit side more on the time deposits, and also seeing some of the impact as far as a continued reduction in purchase accounting accretion, which would decrease our margin by about a basis point a quarter. And then as far as the taxes, you're right but they’re really two components that drove that each in the $10 million range as far as the benefit this quarter, one was for the employees stock purchases and vesting that occurred; and that really is more heightened as far as the first quarter based on when some of the stock plans do vest; the other was higher tax credits. And the way that we would look at that is it did have a benefit to us this quarter, but that really essentially offset some of the timing issues we saw on the expense side. And so we feel pretty good about the quarter being at $0.38 and feel that both of those essentially offset each other and provide for a baseline for us going forward.

And we‘ll go to Kevin Parker with Piper Jaffrey. Please go ahead.

One of your competitors is mentioning that there is increased competition in the market due to the effect of tax reform. Have you contemplated increased competition on loan yields in your NII guidance and are you seeing some of that increased competition in your markets today?

I’ll take the first crack at this and hand it over to Chris to get more color on the competition. But I would say that pricing on the commercial front has been extremely competitive here over the last year plus. And we’re not seeing any change or acceleration of that competition, or any more pressure on the pricing after the tax reform than what we did before. And so I don't want to characterize this as there isn't some impact there, but I would say that it’s the continuation of what we’ve been seeing. Our outlook for the net interest income guidance for us does assume that we continue to see a very competitive marketplace as far as pricing for new loan volumes and re-pricing.

Don, one thing that I would add to that is in the real estate area, I think level of intensity has even increased to a greater degree than on the C& I front. And you see that really reflected in our business, because we have -- our approach to serving our clients has remained unchanged. But you can see that were getting significant growth in terms of commercial mortgage were up 21% on quarter-over-quarter basis. And so what we’re doing is we’re figuring out really the right place to take our clients and to fund their needs.

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

I would say real estate broadly and then specifically, we see it in multifamily probably as much as anything. Also industrial is an area where there has been significant price appreciation. Over the last year, there's been about an 11% appreciation in industrial space and then last quarter, there was mid single digit, so that scenario that's hot as well.

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

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

Ladies and gentlemen, thank you for your participation. You may now disconnect.