Good morning and welcome to KeyCorp's Fourth 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 fourth quarter 2018 earnings conference call. In the room with me is Don Kimble, our Chief Financial Officer; Chris Gorman, President of Banking, and Mark Midkiff, our Chief Risk Officer. Slide two 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 am moving to slide three. As you have seen with our headlines this morning, Key reported strong results for the fourth quarter. And this finishes what has been a very successful year for our Company as we continued to grow, invest for the future and deliver on our financial commitments. For the fourth quarter, we reported GAAP earnings per share a $0.45. Our EPS results included $0.03 from a pension settlement charge and costs associated with our efficiency initiative, which we refer to as notable items in our materials. Adjusting for the $0.03 of notable items, it brings our core earnings per share to $0.48 for the quarter. To provide a consistent view of our financial trends and prior period comparisons, my remarks this morning will focus on the adjusted core numbers, which exclude notable items in all periods. Our strong fourth quarter built on the momentum we continue to see across our Company. Highlights for the quarter included solid revenue growth, well-managed expenses, strong credit quality with a meaningful decline in nonperforming loans and further improvement in criticized and classified loans. Improved efficiency and return measures, was both up almost 400 basis points from the year-ago quarter, and disciplined capital management, which includes returning a significant amount to our shareholders through dividends and share repurchases. Don will spend more time on the fourth quarter detail, so I will focus most…

Thank you, Beth. And I'm now on slide six. As Beth said, we reported fourth quarter net income from continuing operations of $0.45 per common share. Adjusting for two notable items, a pension settlement charge and cost related to our efficiency initiative, primarily severance, earnings per share was $0.48. Our adjusted results compared to the $0.36 per share in the year ago period and $0.45 in the third quarter. The severance cost this quarter which totaled $24 million was due to early actions taken to achieve or $200 million cost savings target and reach our cash efficiency ratio goal of 54% to 56% by the second half of 2019. I will cover many of the remaining items on this slide in the rest of my presentation. So, I'm now turning to slide seven. Total average loans of $89 billion were up 4% from the fourth quarter of last year, driven by growth in commercial and industrial loans, which were up 9%. Linked quarter growth in average balances was primarily from commercial industrial loans as well as commercial real estate. Importantly, our growth continues to be driven by building and expanding core middle market relationships in our targeted areas. Our business model positions us to offer our clients a wide range of financing alternatives, both on and off balance sheet. In 2018, approximately 16% of the total capital we raised for our clients went on to Key’s balance sheet. Our C&I lending continues to be broad-based, done through our footprint as well as our targeted industry verticals. Commercial real estate where we saw some balance sheet growth this quarter is primarily an originate-to-distribute model that drives fee income and strong returns while providing flexibility in managing portfolio risk. In the fourth quarter, we placed $5 billion of commercial mortgage loans in…

Thanks, Don. And before moving to the Q&A, I'll make a few closing comments. Despite the volatility that was experienced late in the year, I am pleased with our results and the momentum we have and share Don’s confidence in our outlook. Over the past several years, we have made incredible progress across our Company and we have delivered a step change in our financial performance. And we are now approaching peer leading levels of return while remaining disciplined with risk and capital. In the fourth quarter, we increased our return on tangible common equity target to 16% to 19%. And as Don pointed out, we remain on a path to achieve our long-term targets. Our stock valuation however does not reflect our stronger performance, competitive positioning and improved risk profile. We continue to believe that Key offers a compelling investment opportunity, given our track record and focus on sound, profitable growth supported by a dividend yield of over 4%. I remain optimistic about Key's future, and I'm proud of the momentum and accomplishments of our team in 2018. And as we look forward, we are well-positioned to grow revenue, to control and reduce expenses, manage risk, drive further efficiency improvements, and ultimately drive higher returns for our shareholders. I will now turn the call back over to the operator for instructions for the Q&A portion of our call. Operator?

Thank you. [Operator Instructions] And first from the line of Scott Siefers with Sandler O’Neill. Please go ahead.

Good morning, everyone.

Good morning.

Hey. Don, quick question just on the cost outlook, a lot of moving parts this year. You guys typically have I guess more seasonality in the quarterly cost base, just to begin with, given the investment banking component. And we're layering in the acquisition, but then you have the cost savings. So, I was just hoping you could maybe give a little more color on how you would expect the quarterly base to kind of traject the flow throughout the year. In other words, is there a quarter like the 2Q that represents high-water mark and then we start to come down or would the fourth quarter be the low water mark for the year and that we get the run rate cost savings, and how do you see that all panning out?

Great. And like you said, there are number of moving parts. One, we did highlight the first quarter; we do expect to see a pick-up in expenses, reflecting the $30 million of higher benefit cost. Now, that would be offset slightly by the impact that we expect investment banking to have placement fees be lower in the first quarter compared to the fourth quarter, which tends to be high point. But, those two items will impact the first quarter. Or as our continuous improvement, our efficiency improvements we’re making, we should see some small amounts come through in the first quarter, start to build in the second quarter, and really for the second half of next year majority of those $200 million in run rate should be reflected in our expense levels. And so, we would expect to see the improvements come through there. Laurel Road, we talked about having an acquisition in mid-year of ‘19, and that really is what drives that roughly $50 million in expenses. And so, you would see that in the second half of the year. So, that would minimize some the bottom line reduction as far as expenses that we will be achieving on expense savings, but still would -- in my mind show probably the low point in expenses being in third quarter and fourth quarter being up a little bit just to reflect the seasonality we typically see in our capital markets related revenues really typically be stronger. But, again, I think those all combined still get us to that 54% to 56% efficiency ratio range in the second half of the year.

Okay. That's perfect. Thank you for that. And then, just a quick question on the margin outlook. So, you had little liquidity build that you discussed. In the slide presentation, you note that some of the deposit inflows were kind of short-term and/or seasonal. So, one, how does that all play out? I imagine some of that’s securities portfolio that comes down if the deposits are indeed seasonal. But, would that allow the margin, maybe to see a little lift here in the near-term, as an offset?

We would say that our margin outlook for ‘19 would be relatively stable with what we're seeing for ‘18. And I think ‘18, we're at 3.17 for the full year and 3.16 for the fourth quarter. And so, they're both pretty tight already. But, we do think that there could be a little bit of improvement in the overall liquidity positions. But, right now, our guidance would suggest the deposit growth with about equal loan growth. And so, we don't see a significant change in the overall liquidity position. And we're not also including any assumed rate increases for ‘19. And so, we wouldn't see a lot of lift from that either.

Next, we go to Peter Winter with Wedbush. Please go ahead.

Good morning.

Good morning.

I was just wondering, when I look at the loan growth in the fourth quarter, it was more broad-based than what we've seen in the past, which was more reliant on C&I. I’m just wondering if you can give some color behind the change, and do you think that’s sustainable going forward?

I think if you're looking at average balances, Peter, that you would see a growth in commercial real estate. And what you would have seen is some of the building of the portfolio in the third quarter going into the fourth quarter for some of the loan sales we typically have. And we talked about for the quarter we sold about $5 billion worth of commercial real estate balances. And on slide 21 -- or page 21 of the earnings press release, you can see that for the quarter, our total loan sales were $5.5 billion. And that's quite a statement, given the challenge in the markets and what we're able to accomplish for our customers. And so, it was more of a timing issue for that commercial real estate balance. But, we continue to see some growth in consumer categories, mainly the indirect auto. And our expectation is as we integrate with Laurel Road, we'll start to see some other components of loan growth there as well and later ‘19 also.

And just a follow-up. Can you talk about maybe some potential flexibility you might have to fund loan growth? The loan to deposit ratio has been steady. I'm just wondering if you would let that kind of trend upward or maybe use securities and excess liquidity to maybe fund some of the loan growth and putting some less pressure on deposit costs.

Good question. And I would say that we are very-focused on having our balance sheet core funded. And we're doing that through growth in our deposits with our existing customers. And so, we're not out there trying to get wholesale deposits that -- and more of a digital channel base. So, we're growing those with our existing customers and adding to those relationships, deepening those relationships on the deposit side. And we continue to do that. And our outlook, as I mentioned, would suggest that loan growth and deposit growth are about equal for next year, and we like it that way. Now, my preference longer term is to have a little bit higher loan-to-deposit ratio and have less liquidity on the balance sheet to put near term. We're not seeing that in our outlook.

Our next question is from John Pancari with Evercore ISI. Please go ahead.

Good morning.

Good morning.

On the loan growth. Just looking at the commercial trends, end of period versus average, it doesn't appear that you saw a lot of a benefit at all from the capital markets seizing up in December. Some of the other regionals have seen some benefit from that. Did you -- could you just talk about it, if you saw that at all, if that could impact the outlook at all? Thanks.

John, it's Chris. We actually did not get the benefit of that impact. As we look across our book, our clients are doing very well. Some of our clients actually at the end of the year paid down part of their loans. And as Don mentioned, we had a really, really strong quarter as we moved $5.5 billion of financings off our balance sheet. So, we did not see a pickup in loan balances, based on what was going on in the capital markets.

That's helpful. And then, just to confirm one thing on the expense side. I'm pretty much sure I know the answer here. But, the midpoint of your expense guidance of about -- for 2019 of about $3.9 billion, that’s up a bit from the midpoint of what you implied of your range that you gave coming out of your Investor Day, about 3.85. And that change is mainly the Laurel Road -- incorporating the Laurel Road. Is that correct?

100% of the gap, yes. Laurel Road adds about $50 million to our expense base outlook for 2019.

On an annual basis? Okay.

It’s for the -- the full-year impact of ‘19. If you look at Laurel Road for an entire year, it would be north of that $50 million number.

Got it. But, your cash efficiency ratio range remains intact, because you're also dialing in the revenue impact from Laurel Road, correct?

That is correct.

And what is that, how much is the revenue?

Well, what we said is that we expect Laurel Road to be about $0.02 dilutive. And so for that $50 million and revenue -- or excuse me, expenses, it would imply about a $20 million revenue number for the year. And the reason for that gap is we're converting it from a sale model or loan sale model to retain type of model.

Got it. Okay, thank you. Then lastly, on the credit side, you're charge-off guidance still for well below the -- or below the 40 to 60 through cycle basis-point range for charge-offs. Can you give us little more color? I mean, how long you think it'll turn below that when you look at the portfolio? And why not get more specific at this point in the cycle in terms of your charge-off guidance?

I would say that as we look at our portfolio today that it’s still very, very good, very solid. And in this last quarter, we talked about our non-performing loans being down; our criticized and classified loans were down $300 million to $400 million as well. And so, we're seeing continued improvement in the trends there. And so, we don't see anything that would change significantly from where we're at now. I'd say, as far as down the road, multiple years, I don’t know, Mark, do you have any insights or thoughts you'd add to that?

I only would add that we're obviously at a very low level, and continue to be at a low level as we kind of move into ‘19.

And we're just not seeing early indicators that would suggest that’s going to change anytime soon. So, I'd be reluctant to put a timeline out there.

And next, we’ll go to Ken Zerbe with Morgan Stanley. Please go ahead.

I guess kind of a follow-up on Laurel Road acquisition. I just want to make sure I fully understand this. So, they no longer do gain on sale. So, everything that they originate, presumably, I'm going to say 100% student lending, that goes onto your balance sheet and that I guess new balance sheet growth drive this $20 million this year of revenues. And then does it just continue to layer on as you grow that? And then kind of what size or target balances would you expect over the next year or two or three?

Put things in perspective there a little bit that Laurel Road originated about $1.2 billion in total loans this past year. And I would say that the credit quality and the nature of those loans, and more importantly the nature of those relationships we think are consistent with our targeted customer base and we’re very excited about that. And it goes beyond just the student loans as well that they've already implemented a mortgage lending capability and they've looked at other products that could add to that offering as well. And so, it really is more of a relationship strategy for us than just the student loan origination. So, we do believe that we’ll continue to have the opportunity to put those on balance sheet and we'll see that annuity continue to build as that portfolio continues to mature and develop over the next couple of years.

Got you. Okay. And would you anticipate continuing any part of the gain on sale model or is…

I think that's an option for us. And I would say that where we see a good quality relationship, we’ll probably retain it. But one of the things we talk about is their ability to originate mortgage loans. And if it's a conforming mortgage loan that we will probably sell that in the secondary market, like we do with our existing portfolio. So, I think that's more of our approach going forward.

And in terms of the yields that you would get on these new originations, like how do they compare versus your current portfolio yields? Where are they at generally?

I would say, generally, they're a little stronger than some of our consumer loan yields today. And I think it provides a nice upside for us.

And then, just really last question. In terms of the tax rate, it looks like it jumped up about -- sorry, for your guidance, looks like it’s about 2 percentage points higher than where it was this year. Any reason for that?

I would say that the primary driver there is an outlook for a lower tax credits from some of the business models we've deployed in the past. And so, it's just a slower rate of that. And also with the higher level of earnings, the incremental earnings growth is really taxed at the marginal rate, and that helps drive that tax rate up as well.

Our next question is from Matt O’Connor with Deutsche Bank. Please go ahead. Matt O’Connor: I guess, I thought -- I would have thought the expense outlook, at least the high-end might have been a little bit lower, because if we look at it versus this year, it implies relatively flat costs. I know you've got the acquisition that adds 50, but you also have about 70 million of one-timers this year that you called out. So, it just seems like, if you kind of adjust all those things, the high-end of your expense outlook is for relatively flat costs. And I can appreciate that some of the initiatives are stated in or phased in kind of throughout the year. But, just from Investor Day, it seemed like there was real effort to shrink the cost base on a full-year basis.

There clearly is that effort, Matt, looking -- and we'll go back and look at the math on that. But my math would have shown that even on the high end, we've been down about 1%, and at the low-end, we would be down about 3%. So, we think that's right in the ZIP code of what we talked at Investor Day. But, I can confirm that, Matt. Matt O’Connor: And then, just a swing factor of that $100 million, is it just on depending on what revenues are, or do you have a scenario where at the high-end of your revenue range, and the low-end of the expense range, if you can realize all your cost savings?

I would say the primary driver of movement within that range is tied to the revenue growth, and what we're seeing from movement in the markets and also from our core business model. So, what we’ve talked about in the past is that we can adjust that expense based on what we're seeing as far as the economic outlook and what we see as the revenue growth. And part of that expense base does assume a reinvestment back in the business. And that's one of the levers that we can pull is to slow that investment if we don't see the kind of upside from -- vantage from those investments.

Next, we'll go to Steven Alexopoulos with JPMorgan. Please go ahead.

To start on deposits, if we look at the 108 billion to $109 billion guidance for deposits, Don, what's the underlying assumption for non-interest bearing deposits in that guidance?

The assumption there is we would continue to see some slight reductions in those balances throughout the next year. And that's primarily in the commercial side where we continue to see those customers migrating more of their deposit mix over to the interest-bearing as opposed to non-interest bearing. I think this year, we saw 1% to 2% kind of decline. And I would say, it’s something along those lines and probably consistent with our outlook for next year.

And then, when we look at the expense guides, are there any additional efficiency related charges such as severance included in this guidance or is this operating guidance?

This is operating guidance that we wouldn't expect those efficiencies charges to be significant for next year. We would probably see something continue about the same level of the notable items we have this quarter throughout the first half of next year.

And then, finally, so you guys have been cutting expenses obviously for many years. How much longer do you think you can run with expenses in this flat to down pattern? Once we get past the $200 million, is there wood left to chop or do expenses start drifting higher at that point?

You must have been talking to some of our line managers, try to push back on some of the targets. But, I would say that generally many of these savings are really taking a look at how we can make our existing processes and workflows more efficient, and going from this customer back office and seeing how we can either use technology to help achieve those or just process redesign. And this $200 million will pull out a chunk of those but we still believe there is still ammunition left to use for that. The other thing is that even though this $200 million does include some acceleration as far as from the branch consolidations, just because of the changes in our consumer behaviors that we still think that they'll be on -- continue to provide some efficiencies from right-sizing that branch distribution as well.

Okay. And that’s sounds like 2020 guidance, but it sounds like even beyond the second half, there's still room for you guys to keep pretty significant downward pressure on expenses. Is that right?

We can manage those, so we can continue to generate nice positive operating leverage in the future. You're right.

And Steve, we talk about it and have talked about it publicly, as journey of continuous improvement. And as you think about how we’re aligned, how we go to market, technology, digitization of the enterprise, process improvement, all these are things that will be continually part of our focus. This is not a one and done.

Okay, great. Thanks for all the color.

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

Hi. Good morning.

Good morning.

Sorry to reask Matt’s question another way. I’m just trying to figure out why the stock got down when the market opened. So, in terms of your outlook, it seems like consensus is at the lower end of your net interest income range, at the midpoint of your fee income range, and at the low end of your expense range. And I guess, I just wanted to confirm that that's fair. And so, any move up in the range on expenses will have to do with better revenues?

I would say that as far as our outlook, one thing that consensus would not have reflected was Laurel Road. And we talked about there’d be a slight dilution from that of $0.02 a share. And our expense guidance, again, the range is more tied to what we would see from a revenue perspective. And so, if revenues are up, we would expect to probably at the higher end of the range, given some the cost to support that.

Got it. And regarding Laurel Road, I think, if you get the question, is really now the time to layer in consumer risk on your balance sheet given that we're late cycle, Beth, you write-off some the statistics in terms of income and FICO that were quite compelling. I'm wondering sort of what additional layers in terms of underwriting do you plan to -- due to enhanced, the process Laurel Road has today, especially as you're going to go to a retention model rather than originating sale.

I would offer -- this is Mark Midkiff. I would just offer that we do think that what we've seen at the underwriting is very sound and very complementary but obviously will be under our lens and our buy box. And I think that will be very focused around relationship where we get just better overall credit performance than when you're working at a transactional level. So, that will be an enhancement. And of course, we've looked at this on a stress basis and feel very comfortable overall relative to our risk appetite as well. It’s just kind of a normal ongoing outlook for losses in that business.

Got it. And just one more question, if I can. Beth, you noted strong dividend growth of 62%. Given where your stock price is trading relative to your return potential, I'm wondering if your CCAR ask for 2018 -- sorry 2019 would perhaps be more focused on buyback than dividend growth.

Erika, obviously, we are in the early days of starting to look at CCAR 2019. And we have always been talking over the last couple of years of supporting dividend growth, and this year we were approaching that 40% dividend target payout ratio. But, we will definitely look at the mix and make sure that whatever we choose for this year's capital return that we are really optimizing our use of capital for our shareholders and that would be a consideration.

Got it. And one more, if I can. As we think about first quarter trust and investment management income, fees rather, Don, I'm wondering there’s like a 9% step down in AUM. I'm wondering what the stepdown would be in the first quarter to reflect that stepdown in AUM?

We could see some very modest pressure on that line item for first quarter, but generally in line with what were shown in the fourth quarter levels.

Next, we'll go to Geoffrey Elliott with Autonomous Research. Please go ahead.

Hello. Good morning. Thanks for taking the question. Could you give us some thoughts on the investment banking and debt placements line? How do you think that could evolve across a range of scenarios, one where we kind of stay in tough markets like we encountered in December, and then, another, where we get something more akin to what was experienced over the last few years?

This is Chris Gorman speaking. So, that's a line that we're really proud of fact that we've been able to consistently grow over the last decade. Obviously, it's market-dependent. As we see the markets right now and as the markets are currently functioning, we believe we will continue to grow that business in 2019 as well. That's a business that we grew -- we grew that top-line this year 8% in a down market. If you go back to 2015, we've grown that line 46%. So, it's a business that is based on client relationships; it's based on serving clients; it's based on serving many of the same clients many times. So, we feel good about where we're positioned with respect to our investment banking and debt placement line. The interesting thing, if the markets seize up a bit, that's when it could get more interesting for us in terms of opportunities to put things on the balance sheet and serve our clients.

As Don mentioned in his comments, we only put about 16% of the capital we raised last year on our balance sheet.

And I would just add that part of what I have always felt is a strength of our platform and some piece of how we look at our outlook against investment banking and debt placement fees. While market sensitive fees obviously is the breadth and depth of our platform, again, we have a broad range of capabilities and we are not dependent on a certain area of the markets. And given that it’s relationship based, midmarket, we do have the option to balance sheet but we also can do a variety of things across advisory fees for M&A. We do loan syndication, debt placements, equity raises, sponsors, we do -- in our commercial mortgage business we have such a breadth in that platform that we really do have confidence that can generally produce those kinds of results.

Thanks. And then, if I could squeeze in a quick one on Laurel Road. I guess, there is quite a few banks who’ve got similar sorts of businesses, Citizens has got something, First Republic's got something. SoFi isn’t a bank, but I think is active in that space. What is it that makes Laurel Road different from those other platforms out there that at high level it kind of feels like the customer bases is the same 33-year old doctor or dentist with good FICO?

We anticipated that we might have an opportunity to speak more holistically about the strategic fit as well as the strength of this platform and why we found it attractive. So, I have asked Clark Khayat, who is in the room and really spearheaded this transaction for us and spoke to this at our Investor Day. I'm going to ask Clark to share. We are very excited and think this is a highly disruptive not only demographic but relationship based and differentiated platform. And with that I'm going to identify that Clark is in the room and ask him to take that question.

Thanks, Beth. So, I guess I’d answer it a couple of ways. One, as we talked about in October, we hit on a couple themes, two of which were distinctive platforms, the other was targeted scale. So on the distinctive platform front, this is a very compelling end-to-end digital platform. So, contrary to many others, it's not just the digital entry point, it is legitimately end-to-end, highly efficient, highly customer oriented. And just as a side note, they enjoy NPS scores on a consumer side that are high 60s, low 70s, which are numbers that frankly most banks just do not enjoy. And that is a function of the process and flow and experience they've built on this end-to-end platform. So, we do think that is quite distinctive relative to others. You noted the customer focus and we've talked to targeted scale by identifying client segments with whom we want to do business. This one we do think is different than most, even though others may reflect those sort of demographics. And I think a fair bit of this is driven by a very extensive partner network they've built that positions them as sort of partners with these trade associations, member entities, other groups to talk directly to those end users in a way that we think is quite distinctive to the way a broad, mass market business might work. So, there's more to that. But I think to your question, those two points in particular I think were the most compelling to us and give us confidence that that we not only like this customer base but that we have the opportunity to continue to grow it intelligently, leverage the partnership network they’ve built. And then, as Beth noted, they have begun to build an extension of products for these clients based largely on the clients asking for them. So, the opportunity to not only be a compelling single product provider but then to build sustainable, durable and long-term relationships that are more broad-based across product sets with this attractive client basis is another thing that's very consistent with our relationship strategy. So, we just think the complement to the way Key thinks about its businesses and the way Laurel Road has built this platform, we just haven't seen ones that are as consistent and compelling as this for us.

Thank you.

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

Hey. Good morning. Look, I hate to beat a dead horse with the expenses. But, I think the communication on the guidance is really important. So, Don, when you say low-single-digit decline, I assume you're basing that off the GAAP reported number of $3,975 million. Is that correct?

That's correct. Yes.

Okay. So, during the course of the year, you called out about $75 million of non-core items. You have next year about $36 million, by my calculation, or $35 million, something like that of FDIC expense charges that are not going to be there. So, those two things alone get you to about $110 million. Obviously, you have the Laurel Road of $50 million. But, net-net, it looks like on an operating basis, the core number is closer to like 3.9, 3.91, [ph] which kind of suggests that your guidance isn’t really -- doesn't imply any reduction in expenses, if you use the midpoint of the range. So, I guess, my question is, what am I missing in terms of the moving parts? Because, like I said, if you kind of make these adjustments, it doesn't seem like there's any real reduction on a nominal dollar basis, on an operating basis?

Take $3.975 billion for the full year and backup the one-time charges, and then add to that $50 million for Laurel Road, it’s $3.925 billion. I'd say that the midpoint of our range would be about 2% below that. So, I think that we are showing reductions in the non-interest expense. And as we highlighted at the Investor Day that that one -- the low-single-digit decline also reflected the benefits of the FDIC special assessment reduction.

It just doesn't seem like it's all that impressive, the midpoint versus kind of the core number, but fine. I guess, just second question, the -- just to change gears a little bit. Obviously, a lot of attention in the market on leverage loans, and can you just remind us how much of your exposures here, how you manage risks? How you manage your exposures either -- both as a lender and any indirect exposures you may have through other CLOs or BDCs or anything like that?

Sure. This is Chris. Let me address kind of how we approach the leverage finance business. First of all, we are focused exclusively on the industries in which we play. So, we know exactly who we want to do business with. In terms of that portfolio, it's about 1.8% of our assets and it's a portfolio that has a lot of visibility and a lot of velocity. We feel really good about that portfolio, based on all the metrics and frankly all the time we spend looking at it. So, it's a portfolio that has been flat literally since before we grew our asset base by 40% when we bought First Niagara. Mark, would you add anything?

And I would just add, it is client based, it’s our capital markets business, we manage it to be a fixed amount. We do not allow it to grow, we recycle capital within that. Mark will talk about some of the credit attributes, but it is therefore eight client relationships where we are leading activities on behalf of our capital markets, and we manage it very rigorously. And it is a very small portfolio relative to our balance sheet.

Yes. And it’s -- I would only add consisted -- in terms of fundings, it hasn't moved around a lot. We haven't changed market. It is relationship-based, as Chris said. And then, as Beth said, recycle capital, but also very consistent in terms of leverage turns, debt-to-EBITDA, leverage has been very consistent and stable for a long time.

And we said that portfolio is $2 billion or less at any given time.

Next question is from Terry McEvoy with Stephens. Please go ahead.

Good morning, everyone. A question on Laurel Road, if that business does a $1.2 billion of originations like it did last year and all of it’s held under balance sheet, does it swing from 2% dilutive to something accretive at that point? Or maybe asked another way, what's the breakeven size in terms of balance sheet size for that business to contribute to the bottom line?

What we've said, I think just was the assumption that we acquired at midyear that we'd only have a half year’s worth of production next year and we would expect it to be accretive in 2020 and beyond. So, it's a fairly short window, as far as the dilution impact to the acquisition.

And then, how does Laurel Road potentially change your tech spending budget, which I think from your Investor Day was $700 million, $800 million? Were you investing in student platform? And is that platform scalable or something with their technology that can be utilized at Key to offset some of the tech spending expected this year?

Part of the $50 million in expenses that we're assuming as far as the increase is really continuing to have Laurel Road maintain the same kind of pace of investment they've been making from the digital platform. And we'll continue to include that in our assumptions going forward.

And we’ll go to David Long with Raymond James. Please go ahead.

Good morning, everyone. Maybe my first question for Chris. Just the discussions that you're having with your larger corporate customers related to using Key’s balance sheet versus the capital markets, has there been a change in tone in those conversations over the last few months?

David, there really haven't been. I mean, when we are out talking to our clients and our prospects, we're constantly figuring out what is the optimal approach for them to take. And those discussions really haven't changed markedly in the last several months. Obviously, there were periods of time in December where markets were dislocated and people were putting off deals. But, the strategic discussions that we're having with our clients are ongoing and they're constructive.

Got it. Thanks for that color. And then, Don, not to beat a dead horse again on the expenses, but the guidance that you've given with the efficiency, that cash efficiency ratio target, that's based on an operating or core basis, not on a GAAP basis. Is that accurate?

We would say that for the second half of the year that we shouldn't have a lot of notable items. So, our expectation is that they should be one and the same for the second half the year as far as the efficiency ratio.

Next question is from Mike Mayo with Wells Fargo. Please go ahead.

So, help me with my thinking, I almost see a contrast. So, most of the largest banks are expanding digital consumer banking outside of their footprint, right, Citigroup, JPMorgan, Bank of America, PNC, U.S. Bancorp. And just remind us where you are in expanding with digital banking outside your footprint. And on the other hand, now you have Laurel Road, which is leading with consumer lending and looking to go from a single product to multiple product relationships. So, I’m wondering you have gathering deposits out of footprint by a lot of your competitors and now you're going to be trying to leverage lending outside of your footprint, perhaps you get more deposits or just help me with that thinking.

Hey, Mike, it’s Clark Khayat. So, as Don said earlier, and I think this is the most critical point to hit, we are really focused on being core funded. So, we are not looking to use this platform or frankly or any other platform at this time to drive out of footprint deposits for the sake of deposit. So, we would, as you noted, sort of use the Laurel Road platform out of footprint to drive consumer relationships and lending and where it make sense, continue to expand that relationship with the deposit but we want the deposit in the case where we have a broader relationship with that client. So, but, we continue to think about supporting client relationships with deposits. We did that we think very effectively in the fourth quarter. And as we move forward, whether it's in footprint or out of footprint, we do have lot of commercial clients outside of the footprint today, the branch footprint. We would continue to look to raise deposits, as long as those clients have broader relationships.

And then, I guess, Don or Beth, what is the impact that you're seeing in your markets from the other large banks expanding into your MSAs with digital banking? And I guess, you're not really seeing anything yet, but there is that threat you'll see more competition today over the next five years. Are you worried about that, are you preparing for that, are you looking to strike back with more efforts of your own?

Well, clearly, we are developing our own digital banking capabilities for our own clients. So, this is not where we would gap relative to the offerings that we see of other banks coming into the market who come in a digital only platform. And we would certainly have every product and capability for own clients in addition to a branch network in addition to our brand that we have in our markets. So, we feel well positioned. And we will continue to invest in our digital capabilities, this being Laurel Road as an example of where we do believe it accelerates our platform both from lending as well as the potential for deposit taking, and that we do believe in the near-term we see adequate core funding in our markets to support our strategies. And we compete very well because we certainly have the capabilities; we certainly have the ability to more broadly serve those clients. And so, we do not feel gaped in our capabilities.

And we'll go to Kevin Reevey with D.A. Davidson. Please go ahead.

Good morning.

Good morning.

So, Beth, the follow-up on the last question related to mobile and digital. What kind of adoption rate do you see with your existing client base? I know you guys have made a lot of investments in that area.

Kevin, I don't have those numbers off the top of my head. So, I'll apologize for that. But, I do know that we've had very strong adoption and transactionally, as everyone has reported years ago, what happens in a branch versus what happens mobile and digitally those line crossed. And there is no growing back. It is clearly a customer preference to be able to transact their business. And you may recall, several years ago with First Niagara, in advance of that integration, we deployed all new customer portals across every -- from commercial to consumer to our private banking clients to new digital platform that enables that. And it is a very, very robust platform. Additionally, we have our financial wellness, which is a digital-led experience as well that we have consciously made sure interacts with our branch experience. But that platform was a digital -- and you may recall several years ago, we purchased HelloWallet to really help facilitate that. So, we have looked at this as how do we create not only the ability to transact in a mobile and digital world but also how can you have relationship attributes including advice and planning through our HelloWallet. So, it is an area where we are canting and following and making sure we support our customers’ preferences in that regard.

We've even expanded it into business banking. So, as we think about digital, as we think about digital origination, as we think about wellness, we've taken the technology and the capabilities and expanded that in obviously into our business banking arena as well.

And then, with that said, how are you thinking about looking at your branch network and rationalizing your brick and mortar footprint?

This is Chris. Last year, we took out 38 branches, I think this year 2009, (sic) [2019] you can expect us to really ramp up in that regard. We feel like we're pretty good at it. As we went through First Niagara, we rationalized the fleet. We think with the technology, with the digital capabilities that we have, we have the capability to keep our clients and thin out some of the branches. And you'll see us actually step that up this year over last year.

And then one last question related to the government shutdown. Are you seeing any of the effects of that in your local markets at all?

At this point in time, we are not seeing the impacts broadly in our markets, but we have done a variety of measures to be able to make sure that we can both reactively and proactively support customers of ours who are impacted directly by the partial government shutdown. And we have targeted programs or special assistance for those who have various types of loans with us. We're aggressively waving fees and have introduced a loan product with a very low rate to help create liquidity for those who may be impacted by a disruption in their income. So, we are making sure that we too are in the banking landscape to be responsible to help support the employees that are impacted by the partial shutdown. But from a loan perspective from disruptions in markets more broadly, we are not yet seeing that.

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

Again, we thank you for taking your time from your schedule to participate in our call today. And 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. Thank you and have a good day.

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