KeyCorp (KEY) 2003 Q4 法說會逐字稿

Good morning and welcome to the KeyCorp fourth-quarter 2003 earnings results conference call.

This call is being recorded.

At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.

Thank you, operator.

Good morning and welcome to KeyCorp's fourth-quarter conference call.

We appreciate you taking the time to be a part of our discussion today.

Joining me for this presentation is our CFO, Jeff Weeden, but also available for the Q&A portion is our Chief Accounting Officer, Lee Irving, and our Chief Risk Officer, Kevin Blakely.

Our Investor Relations team is also here.

Before I begin the presentation, I would refer you to our forward-looking disclosure statement on slide 2.

It covers not only our presentation, but also the Q&A portion of our call.

As we turn to slide three, before we look at our quarterly results, I want to make a few comments on our 2003 performance.

As you know, it was a tough year for Key and many of our peers, especially those that did not benefit from the windfall in mortgage banking.

The soft economy and historically low interest rates put pressure on net interest margins and created a challenging environment for generating commercial loans.

Market-sensitive businesses were also negatively impacted, especially through the first part of the year, although I am encouraged by the improvement that we saw in the fourth quarter.

The positives in 2003 include a 9 percent growth in core deposits and an effective expense control, with expense levels that were up only modestly from the prior year.

I'm especially pleased with the progress that we have made with asset quality.

Earlier this year, we were able to declare victory on our runoff portfolio and our credit measures across the board have improved.

We ended the year with a strong capital position that allowed us to repurchase 11.5 million shares in 2003.

This morning, we also announced our 39th consecutive year of dividend increases.

And finally, we have made progress in aligning our businesses around targeted customer segments.

Just as a way of an example, in the McDonald Financial Group, we have teamed up our financial advisers and private bankers to better serve our high-net-worth customers.

This has contributed to an 18 percent increase in the number of new accounts and a 5 percent increase in brokerage assets in the fourth quarter.

Again, the term that we use that others have not been able to accomplish is the alignment that has become the buzzword in both our McDonald Financial Group and also in our Commercial Bank, where we targeted seven specific segments where we really thought we could make a difference to our clients.

We aligned our investment banking with our commercial banking, and in 2003, which was a down year in the syndications markets, the link (ph) table shows that Key was the lead on 64 deals, up 56 percent from the prior year.

If you turn to slide 4, we show our priorities for 2004.

Jeff will discuss our financial outlook in his presentation, but these are the high-level strategic thrusts that are critical for Key to continue the improvement in its performance.

Although we remain cautious with our views on the economy for 2004, we continue to see evidence that the business climate is improving.

One area that continues to do well is leasing, where originations were strong in the fourth quarter and balances were up 11 percent from the year-ago period.

Our number one priority this year is to profitably grow revenue by focusing on those targeted customer segments in Key's commercial and consumer businesses.

We are also encouraged with recent trends in the market-sensitive businesses and we believe that we are very well positioned to take advantage of a positive move in this economic environment.

Credit quality remains an important issue for us, with additional improvement expected this year.

Expense discipline is also an ongoing initiative at Key.

In order to achieve our efficiency ratio target of the mid-50s, we will need both stronger revenue growth and continued tightly controlled expenses.

And finally, our management team and Board remain committed to increasing shareholder value.

We have made a number of changes that should help us deliver on this commitment, including the expanded use of some of the new tools, like economic profit added, and incentive compensation programs that again better align management and shareholder interests.

With that, let me turn the call over to Jeff Weeden for a financial review of our quarter.

Thank you, Henry.

Before I begin going through the financial slides today, I want to note that we are shortening our comments due to the fact that we have incorporated more information into our press release materials.

This will allow us to get to the Q&A portion of our call sooner.

Turning to slide 5, we earned 55 cents in the fourth quarter.

Total taxable equivalent revenue increased $6 million from the previous quarter as a result of the increase in the net interest margin and an improvement in market-sensitive revenue.

Average core deposits were up again this quarter, however at a slower pace.

Also, net charge-offs were the same level as the prior quarter, and we experienced a 12.7 percent decrease in nonperforming loans.

Compared to a year ago, nonperforming loans are down 249 million, or 26.4 percent.

And finally, we repurchased 4 million shares in the fourth quarter.

Turning to slide 6, the Company's net interest margin increased 5 basis points in the quarter, from 3.73 percent to 3.78 percent, as cash flows returned to more normal levels on mortgage-backed investments.

Average earning assets did not expand, as commercial lending demand remained soft and we did not increase our investment portfolio.

Our sensitivity to rising interest rates remains very modest at less than 1 percent of net interest income to a 200 basis point rise in interest rates over the next 12 months.

Our expectation is for the liability-sensitive position to continue to decrease over the next several quarters, as we anticipate rates rising in the second half of 2004.

Slide 7 highlights the changes in non-interest income from the last quarter to the current quarter.

Non-interest income on a sequential basis increased $3 million, which really doesn't tell the whole story.

The investment banking income was up 16 million from the prior quarter, as a number of transactions closed in the fourth quarter.

We are also encouraged by the discussion activity occurring between companies, which should bode well for 2004 investment banking revenue.

Trust and investment services revenue was also up $8 million as a result of strong financial markets and repricing of certain services in the McDonald Financial Group.

Revenue was down from loan securitizations and sales.

As you may recall, we typically complete an educational lending securitization during the third quarter, and this year was no exception.

Slide 8 on the expense front shows our costs were essentially flat with the third quarter.

Personnel costs were down $1 million.

Also included in personnel expense from the quarter was $9 million of severance costs.

Base salaries were down $4 million from the prior quarter and down $1 million from the fourth quarter of last year.

Slide 9 summarizes our asset quality highlights.

As I said earlier, net charge-offs were basically unchanged from the prior quarter level and represented 78 basis points of average loans outstanding in the fourth quarter.

We also experienced a nice improvement in our NPLs and NPAs during the quarter.

NPLs declined 101 million to 1.11 percent of loans, and NPAs declined 109 million to 1.20 percent of loans in ORE (ph), representing reductions of 16 and 17 basis points respectively.

While still above the peer median, our overall trend has been quite positive here in the last five quarters.

Our allowance for total loans at December 31 remained unchanged from the prior quarter at 2.24 percent of loans, and represented 203 percent coverage of NPLs at the quarter end.

With the positive trends we have experienced in nonperformers in 2003 and if the economy continues to improve, net charge-offs in 2004 could exceed provisioning levels.

However, we have not incorporated the release of any reserves into our 2004 earnings guidance.

Looking at slide 10, the Company's tangible equity to asset ratio remained at 6.94 percent at December 31, unchanged from the prior quarter.

We also repurchased 4 million shares in the current quarter, up from 2.5 million in the third quarter.

At the end of the year, we have 21 million shares remaining under our current Board authorization.

The Company intends to continue to execute share repurchases in the open market in the coming quarters under this authorization.

Now turning to slide 11, our 2004 and first-quarter earnings outlook, we are anticipating improvement in general market conditions for market-sensitive businesses, stable to improving asset quality and a modest pickup in commercial lending activity as we progress throughout the year.

Trust and investment management revenue should continue to show signs of improvement given current market conditions, and investment banking revenue opportunities remain favorable compared to 2003.

We will continue to focus on our costs, spending where we believe we can have a positive impact on future earnings.

With the above in mind, we estimate 2004 earnings per share to be in the $2.25 to $2.35 range and first-quarter earnings in the range of 52 cents to 55 cents per share.

That concludes our remarks, and now I will turn the call back over to the operator to provide instructions for the Q&A portion of our call.

Thank you. (OPERATOR INSTRUCTIONS) John McDonald with UBS.

I was wondering about net charge-off outlook.

Had charge-offs at 78 basis point for the fourth quarter.

Do you have a range of expectations for 2004 (ph) on charge-offs?

John, we would expect that we would see improvement in our charge-offs.

As you recall, our long-term goal was to get to a 65 basis point charge-off level and we would expect to see progress as we proceed through 2004 on the charge-off front.

Thanks, Henry.

Jeff, could give us a little color on what drove the margin improvement?

What drove the margin improvement was really the reduced cash flows coming from the mortgage-backed securities.

That accounted for basically the five basis point improvement in the margin in the quarter.

Okay, thanks.

Last question is just on the deposit fees.

Those have been weak in the last two quarters.

Does that reflect some of the pricing strategies you are pursuing, or could we get a little more color on that?

John, I believe that is part of the pricing strategy.

It has been particularly soft on the consumer side.

As you recall, last year in the fourth quarter we rolled out free checking throughout the entire system.

I think we have had a great deal of success of bringing in deposit accounts as a result of those particular initiatives, but it has put pressure on fee incomes front.

Do you expect that to grow -- what kind of growth rate do you expect on deposit fees next year?

Would that be in line with your deposit balances?

John, it is going to depend upon the interest rate outlook, too, as you go forward.

We may see more on the commercial side, as commercial customers start to draw down their deposit accounts instead of paying with balances.

But I would think that deposit fee growth would be very modest in 2004.

Okay, thanks.

Denis Laplante of Keefe, Bruyette and Woods.

Congratulations on the better disclosure.

M&A pipeline, can you talk about -- or just the investment banking pipeline -- how it compares at this point compared to the last several quarters?

Dennis, it's Henry, and Chris Norman (ph) reports to me earlier this week, as we prepared for the questions we might get, that we have one of the best backlogs that he can remember in many quarters or many years.

The one caveat that he reminded me that I'll just pass on is that backlog does not a cash register ring.

On the other hand, clearly the backlog is the pipeline that gives us the opportunity for those deals to close.

So we are cautiously optimistic.

Could you describe where the backlogs are coming from?

Is it an advisory capacity or is it an underwriting capacity?

Is there any other parts of the business, or could you give a little color on that?

I can only tell you, because I don't' have enough detail, Denis, that Chris said it is across the board.

And in fact, we were involved in both M&A deals and some IPOs in the fourth quarter.

So, it is pretty broad-based, but I don't have the real detail on it and I'm not sure we've given that out anyway.

Thank you.

One question and a follow-up on one of the line items in fee income, the loan securitization line.

You had about $22 million in fees there.

Could you give us a little color on how you generate income on a regular basis?

How much of that is loan sales and did you have any kind of securitizations non-education this quarter?

During the quarter, the loan fees or the loan sales, if you will, that are generated there, as you recall, in our commercial real estate business on a very regular basis -- every quarter -- we are into the market.

As those particular loans come up for term, we keep the construction and then we term out the loans to end holders.

And so that's that particular type of activity.

There was a small amount of activity related to some mortgages, but predominantly it is on the commercial real estate front.

And that is the ongoing number?

And is 22 million a reasonable run rate in that business?

I think you just have to look back at the historical rates in that particular area.

It can fluctuate around, Denis, as you know, depending upon market conditions and the loans that are coming up for term at that point.

Denis Laplante.

Thank you.

Nancy Bush with NAB Research.

My question would just be sort of an overarching one.

You are giving guidance of $2.25 to $2.35 cents for '04, and if you are starting the year at kind of a 52 to 55 cent range, that implies that there is kind of a hockey stick at the end of the year.

And I'm just wondering what the major improvements are that you are looking at in the second half of the year, and can you make that range of earnings if commercial loan growth does not improve any?

Nancy, this is Jeff Weeden.

I think as we look at the year, typically we would have -- and we have historically had very strong fourth quarters.

The first quarter is generally a little bit softer quarter for us and the Company generally strengthens as we go through the year.

As we look at it, we are anticipating some commercial loan growth in the second half as we progress through the year.

Leasing, I would point out, has been very, very strong for us.

And so, it was up, as Henry made in his comments, 11 percent for the year.

I think if you look on a line of business reporting basis, leasing was actually up about 13.4 percent.

So we are looking at continued strength in the particular -- some of these particular areas, as well as on a credit front.

Again, there was a previous question on credit, and the credit costs should continue to improve as we go through 2004 here.

As we have done in the past, I think we have held expenses very well controlled, and our plans would call for us to again control our expenses as we go into 2004.

I guess I would ask, do you feel more comfortable -- do you feel more solid about forecasting earnings at the beginning of '04 than you did at the beginning of '03?

Because you were subject to some revisions as you went through '03.

And do you do feel better about making a forecast?

I feel better about the economy this year than last year, certainly.

Nancy, it's Henry, and I can tell you that the feel in the economy, we are still looking backwards at third-quarter 8.2 percent GDP.

And while we do believe that commercial lending is a lagging indicator and we still think there'll be some drawdown on excess cash that companies have, we continue to hear very optimistic reports from our small and medium-size businesses about their expectations for 2004.

So as we have reported before, we really use the blue-chip economic indicator model.

We cannot believe that we are smarter than they are.

And they have a pretty flat first half of 2004 and a little bit more economic activity, as judged by interest rate levels in the second half.

It is not a steep hockey stick, but we are expecting more activity in the second half.

If I could ask one final question.

Your loan-to-deposit ratio would dictate that you would be naturally liability sensitive, and if we're facing the possibility of rapidly rising rates as the economy does get better in the second half, how do you expect your margin is going to behave?

I think if you looked at our flows of funds, we are -- I would say that we are more naturally asset-sensitive just because of the variable nature of our portfolio.

We have a high degree of variable rate loans in our portfolio and do not, as I said earlier, when we have commercial real estate loans that finish up with the construction phase, they get turned out to outside parties.

So we keep the variable rate portion and term out the fixed rate when it goes to final term.

So as we progress through the year, our AL position, which has been liability sensitive for all of -- I believe 2002 as well as 2003, fairly neutral in 2002, but a little liability sensitive in 2003, I think has been a good position for us to be in, with the slope of the yield curve.

We are gradually changing that position as we anticipate rates rising in the second half of the year and base our forecast on that particular model.

Thank you.

Tom McCandless with Deutsche Bank Securities.

Going back to the asset-based and the leasing activity, something that you started to talk about about a year ago, I know you had dedicated initiatives to go out and push this product more aggressively to your customer base.

I'm just wondering now that the year is over with, how did the results turn out relative to your original expectations, and what are your expectations in 2004?

This is Kevin Blakely.

Are you talking about asset-based lending or leasing?

Both.

The leasing company had a very good year, and actually probably surpassed what we expected for it.

Asset-based lending was right on track.

We enjoyed a pretty good growth in that portfolio.

It performed as well as we could expect.

And what about the initiatives for '04?

What are the expectations?

Will they maintain that base of expansion or will it slow or will it accelerate?

Tom, this is Jeff Weeden.

That particular group is an extremely focused sales organization, and they are -- their lead with leasing that they took through the entire company remains in place.

They are focused.

They are out talking to customers and they are bringing in business.

On a line of business basis, as I said earlier, they are up 13.4 percent on their balances, and they see themselves as continuing with momentum into 2004.

Thank you.

Betsy Graseck with Morgan Stanley.

Just a couple follow-ups.

One is on the margin question.

And in just looking through the disclosure on the average balance sheet, it looked like you had some declines in your cost of funds that was one of the primary drivers to the margin, but you mentioned the mortgage aspect of it as well.

Could you just go through what the most important elements of that margin decline were coming from?

Margin decline or improvement?

Margin improvement, sorry.

The primary element, I think, if you would look at -- the line item I looked at was the securities available for sale.

Cash flow is slowing down on that.

We had a pretty sharp decline in the third quarter from the second quarter.

I believe it declined almost 70 basis points, or 71 basis points.

So this quarter, just from the fact that cash flow slowed down dramatically and the amortization slowed down, you ended up with an improvement there.

So that equated to about 5 basis points on the overall margin impact.

Okay, so that helped, but when I look at your total yield on the average earning assets, it's essentially flat.

Correct.

Okay, so the improvement in securities made up for the decline in the yield on the loans?

And then the overall margin seems to have been mostly impacted by the decline in the cost of funds.

The decline in the cost of funds did benefit the margin during the quarter.

Asset levels, if you will, yields overall were held flat.

But you just have normal repricing of liabilities that continue to roll off, particularly in the CD and some of the other categories there.

Right.

And then your free checking is working in your favor again, and the fact that your non-interest-bearing funds have been going up.

Non-interest-bearing funds have been going up, the but the value, of course, associated with them in an extremely low rate environment is the same as the value associated with them in a higher rate environment.

Year-over-year, the margin, if you will, the spread, declined by 10 basis points for the (ph) entire year, where the net interest margin was down 17 basis points, primarily driven by the fact that the Fed cut rates in the middle of the year and the value associated with non-interest-bearing accounts in general declined.

Right, so that should help you as rates rise at some point.

Okay, thanks.

Gerard Cassidy of RBC Capital Markets.

Can you tell us what level of tangible capital and Tier 1 risk-based capital that you are targeting or comfortable with?

Yes, we even put it in our press release.

If you look at the tangible equity capital is the rate that we primarily target there.

And our targeted rate is between 6.25 and 6.75.

We were at 6.94 at both the end of the third quarter and the fourth quarter.

With share repurchase activity as well as our dividend that we paid in the fourth quarter, net of any dividend reinvestment, capital was held flat.

On a Tier 1 basis, our targeted level is in the 7.5 to 8 percent range.

Okay.

Regarding the asset quality, obviously loan loss reserves to total loans are very healthy at the current levels.

Is there any targeted level that you want to keep that reserve to total loans at through an entire cycle?

Actually, what we do is each quarter we take a look at what is necessary to maintain in the reserve, Gerard, and we will adjust it upward or downward as circumstances dictate.

Are you concerned if the accountants in the SEC start to really focus on reserves being too high that they may come in and sit down with you and possibly suggest, if your nonperforming assets continue to decline, the way they have done in the last 12 months, that the reserves could be on the high side?

If you recall in my comments that I made -- this is Jeff Weeden -- in my comments that I made, I said in 2004, if we continue to see the improvement in nonperforming loans as well as the economy, the charge-offs may exceed the amount (indiscernible).

So we may draw down reserves at that point in time.

But again, I think as Kevin answered it, we go through the reserve and do a very detailed calculation every quarter to determine the adequacy of that, based upon all the portfolio and the grading of the portfolio as well as our economic outlook.

Thank you.

Jason Goldberg with Lehman Brothers.

Most of them have been answered, but the tax rate came down a bit this quarter.

Is that sustainable?

Are you looking for that to go back up next year -- in '04?

Jason, we would look for a tax rate -- our normal guidance is anywhere from, on a tax equivalent basis, 31 to 33 percent is the range.

It came down a little bit this quarter, but I would use something in that range, probably 31 to 32 percent would probably be a pretty close range to use.

I think the last couple quarters you've had some residual write-downs, and it looks like this quarter you had some write-ups.

Any more color on that?

We just simply have in our auto leasing portfolio, which is continuing to go away on us -- it is down to around 300 million at the end of the quarter.

As those leases pay off and leave, there is just less write-downs, so that has a major impact on that.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Jeff Davis with FTN Securities.

A two-part question, unrelated.

First, the private equity portfolio, the $8 million (ph) gain this quarter.

What are the prospects for gains in that portfolio for the coming year?

Jeff, we don't forecast specific line items getting into that level of detail.

I would say that the particular portfolio, though, is on a marked-to-market basis, and we look at that portfolio every quarter.

With the economy continuing to show improvement and throughout 2003, I think you could see the difference in an improving economy, what 2003 was over 2002.

I think the prospects look more favorable for that particular line item; however, we would not forecast an individual number for that.

And the portfolio is about 750 million?

That is correct.

You wouldn't happen to know how much in write-downs you took 2001, 2002, and in effect might we see if not cash recoveries mark-to-market recoveries on that?

Jeff, I don't have that number off the top of my head, and I think a lot of those investments would have been monetized, either taken write-offs or taken in the form of actual losses.

Okay.

And then if I could ask a follow-up question.

Henry, you may have covered this.

I was off the call for just a bit.

Press has talked about interest and that Key may have been in strong.

Could you comment on that, as well as your interest in depository acquisitions?

Jeff, obviously I think you all know that I can't comment on hypothetical situations or potential acquisitions.

I can tell you, and we have said this before, that we are interested in adding to in-footprint banking operations, and much as we did with NewBridge in 2003, we do have an interest in adding to what we think is a top-notch player in the asset management group, Victory Capital, but I can't comment on specific opportunities.

And Jeff, does that factor at all into your capital management per se, at least near-term, with regards to buy-back activity?

Well, I think Henry answered that question in the sense that we have been buying back shares, Jeff, and my comment was we will continue to buy back shares in future periods as we look forward here.

With respect to pacing anything off potential M&A activity, I think it is just speculation.

Okay, thank you.

Joe Duwan with Fox-Pitt Kelton.

I wanted to follow up on your comments on commercial loan growth picking up in the second half of the year.

Are you seeing any geographies seeing a pickup at this point?

I would imagine the Midwest might be little bit slower than other areas.

I think we have seen pretty much across the Company, Joe, across all the regions, where there is increased activity, there is conversation.

And certainly, we put a slide in, if you saw you the commercial loan utilization rate, people are continuing to put in credit facilities.

The utilization rate now is down to around 35 percent, so it has dropped from 37, 38 percent, 40 percent earlier in the year, down to 35 percent at this time.

There is activity, but there has not been a lot of drawdown yet at this point in time.

We actually, Joe, we're not seeing what I thought, which would be a discernible difference in our four regions.

I think the Midwest is, both from talk and from lack of any real metrics, may be a little bit slower.

But it is not like we've got one or two of the regions that are really -- have shown empirically that loan growth is back and activity is picking up.

We are still -- again, as I said earlier, we're cautiously optimistic, but we're not seeing great differences across the northern part of the country.

All right.

Thank you.

Mark Lynch (ph) with Wilmington Management.

I noticed the jumped in COLI income and was wondering whether that was due to higher crediting rate, increased investment or an unfortunate event?

Typically, there are fourth-quarter dividends that are declared in the COLI portfolio, so it ends up being a little bit of adjustment that happens every fourth quarter.

I don't think there is anything unusual.

That rate may come down again in the first quarter of next year.

Okay, thank you.

Kathryn Murray (ph) of Newberger Burns (ph).

I was wondering if you could give us a little bit more color on the continued dropped in the utilization rate in the commercial portfolio.

And I guess in particular I'm wondering two things.

Are there any loss of share issues that might be impacting that?

And separately, has there been any change in how customers may be financing themselves that would be continuing to drive that down beyond just the economic environment?

Kathryn, this is Kevin Blakely.

With regard to the commitment utilization, I think what is driving that figure down a little bit is the fact that we have had some success in executing on our strategy of attracting some bigger and better clients to the Company.

We have put out more commitments, drawn in a lot more ancillary business, but they just haven't drawn down on those commitments yet.

So that has a tendency to compress that figure to some degree.

Just in terms of customer behavior, I would assume based on the comments everybody has made earlier that there is not really much indication of pickup in utilization yet on kind of an apples-to-apples basis.

That is correct, Catherine.

Okay, thank you.

A follow-up from Tom McCandless.

A couple of different type of questions.

First, let's tag on to the credit discussion.

I'm trying to understand better, with a little more transparency or granularity with respect to your excess reserve positioning.

Some companies have -- not many -- have gone to the extent of putting in sensitivity of rates (ph) of their customer base as to how that might change their required reserves.

I'm not suggesting you need to do that at all.

But within the context I'm trying to understand your comments about charge-offs might under good conditions -- or improving conditions, I might say -- exceed provision, I'm trying to get a handle a little bit better on, sure, the migratory trends and your criticized classified assets, and trying to understand your reserve sensitivity.

And wondering if -- and I don't recall this -- if you have also begun to carve out a piece of your total reserves for your unfunded commitment, and it is the growth of these unfunded commitments that are taking on a lot of your excess reserves?

That is the first long-winded question.

Yes, Tom, this is Kevin Blakely again.

Let me address the reserve, the way that we build the reserve.

We also look at the individual credit grades in our commercial portfolio, as well as our consumer portfolio, and we allocate different amounts to each of those grades.

Obviously, as credit quality deteriorates, we allocate more to those categories.

As the portfolio improves, it frees up a little bit more of the reserves over a period of time.

We rebuild the reserve each and every quarter and make an assessment as to where we anticipate things are going to be going in the future.

We do factor in unfunded loan commitments, and those unfunded loan commitments are graded and receive an allocation also.

And overall -- I believe that you asked what was the direction of our criticized classified.

I can give you some good news there, that pretty much across the board, things continue to improve.

That was a trend that we saw beginning to break, I think, in the third quarter of '03 -- or '02, I'm sorry.

We have had six quarters of improvement and we are again cautiously optimistic that we will continue to see improvement in 2004.

But, Tom, maybe not at the same slope or pace that we saw it through 2003.

Okay, that is helpful.

Then the second question has to do with the high level of capitalization in the Company.

A couple of thoughts in that regards, questions, comments, observations.

Number one, is any amount of share buyback embedded in your '04 EPS guidance?

Tom, I think my comment of stating that we will continue to execute share repurchases in future quarters, it can be implied that we have share repurchases built into our forecast.

Okay.

Secondly, can you give us some thoughts as to some of your guideposts as to what you're thinking about in terms of how you manage that, sort of the pace of whether or not you're buying back stock?

It looks like your buybacks clearly have accelerated, but I'm trying to understand how you balance out perhaps opportunities, organic growth and still maintaining flexibility for a somewhat overall uncertain environment.

I think we have a great deal of flexibility with the capital levels that we have.

If you look at net activity for last year, for 2003, between our dividend and our net share repurchases, net of what we reissued in either dividend reinvestment plans or employee benefit plans, we paid out 80 percent of our earnings last year.

So we do have a capital level that gives us a great deal of flexibility.

It is something that, of course, we will look at for potential other growth activities that are out there.

Certainly in 2003, the balance sheet did not expand and it led to the increase in the overall level of our capital ratios, if you will.

But that is something that we manage on a quarterly basis.

We look out obviously beyond that, but we make determinations every quarter on the levels that we will target towards.

Okay, and then one last question on the business line perspective.

Your press release suggested that your KeyCenters and the Consumer Bank have gone up, perhaps on a net basis for the first time in a while.

And yet the head count is down and there is also some commentary about severance charges.

I'm just wondering if there is any relationship between the severance charges and how do you expand the footprint, brick and mortar, and cut heads?

Tom, I think you have to look at the actual branch count is still down slightly from last year-end.

Looking at it -- if you're looking at the delta between the third quarter and the fourth quarter, third quarter FTE account goes up in the consumer bank just as a result of vacations and having to staff for people that are out.

We do take on additional help at that particular time of the year.

When those individuals, obviously, are done with vacations and come back, then those other people that are there on a temporary basis, head count normally goes down.

Most of our reductions that we had were in the staffing areas of the Company, not front-line people out in the field.

We have added people this past year.

We have added 250 people to our investment specialists, Series 6 (ph), Series 7 (ph) people throughout the Company.

And we're continuing to invest in people that are customer contact people and trying to manage our staffing levels on the back end support side, if you will.

Tom, this is Henry.

I want to change the mix, and that is not easy to do.

But I asked -- after a disappointing 2003, I asked all of the staff groups to come down in personnel costs in 2004, and I redistributed some of that to the revenue side.

So you won't see a dramatic head count reduction, but we do need the severance to get the staff people out that we can then invest in the revenue people.

Again, my highest priority is to profitably grow revenue.

So there are some mix changes behind the absolute numbers, and that is why the severance.

Thank you.

Sally Pope Davis with Goldman Sachs.

I got on the call a little bit late, so you may have covered this, and this is a pretty straightforward question.

Henry, you had talked that in the fourth quarter you would close on a fairly large investment banking transaction.

So I was wondering to what extent you could give us some sense of how important that particular transaction was to your overall increase in investment banking.

We have been very open about our position in the Boise Cascade OfficeMax transaction.

We had a fee in that transaction of about $6.25 million.

That was important for morale.

It was important for fee income.

It was important to show that we are capable of playing at that level.

But I think that, Sally, are all the details that we have given.

That is great, because that means you had a lot of other fees in there as well.

Yes, we did.

We did not categorize it as a good quarter because of the one deal.

We really saw -- and I will be very honest -- we will not be closing on many $6.25 million fees.

There are not many OfficeMax Boise Cascade deals.

Our bread and butter is more of the smaller deals, the middle market, where we really have a relationship and bring a capability that very few regional banks bring.

And that's why as the environment improves, we're very, very confident that we are going to see more activity on that line.

That is great.

Thanks, Henry.

Roger Lister with Morgan Stanley.

In November, Moody's put your rating on the negative outlook, joining S&P also with a negative outlook.

Moody's cited inadequate sort of growth in core deposits and also sort of weak profitability, which seems a little late in the day given some of the things are improving.

Have you had any specific discussions with them on trends in core deposits and so on that would address that concern?

Yes, we have had conversations with Moody's, as well as S&P.

We meet on a regular basis with our rating agencies.

But I would say that we did provide them with information showing the growth and the strength that we have had in the core deposit front.

They are an independent agency that we have a rating on, and that is their opinion on the outlook.

They did not change their rating.

They simply changed their outlook at that particular point in time, so --.

They would be great out West, because I think after the horses are gone, they would be sure to close the barn door.

Yes, there does seem a little sense of that.

Although I guess it is not clear entirely to me what specifics they were looking at.

I don't know if you can provide us with any additional insights as to that.

As Jeff said, a lot of it was earnings, and we couldn't argue. 2003 was not a good year for us.

A lot of it, as we have said and as all of you know, because of our business mix and the environment that we were in.

But there was probably more focus on lack of earnings growth and they had a point there.

The other issue that I think is related more to the C&I portfolio and the growth of C&I lending, to what extent are you building into your outlook for earnings a loss of some of the DDA balances from the business sector as they cap those to provide funding for capital?

I think we are factoring in some of that decline, but there's two components to it.

If they are currently using those balances to pay for analyzed accounts, then that would offset in the fee income side of the equation in deposit service charges.

So there is kind of a natural offset there.

We do look for DDA balances on the commercial side to be drawn down.

That's one of the first things we will look for preceding commercial loan volume increases.

So that might feed into a line swing between net interest income and the margin, while adding to your fees?

That is correct.

That would be the anticipated switch.

Okay, thank you.

This does conclude today's portion of the question-and-answer session.

At this time, I will turn the call back over to Mr. Henry Meyer.

Thank you, operator.

Once again, I want to thank all of you for spending the time with us.

We do think the expanded press release and additional information will be helpful to you in understanding some of the drivers and line items.

And as always, please don't hesitate to give Vern, Lee, Jeff, any of us a call if you want specific follow-up.

Have a great day, and again, we appreciate your time and attention.

This does conclude today's call.

At this time, you may disconnect.