KeyCorp (KEY) 2004 Q4 法說會逐字稿

Good morning, and welcome to KeyCorp's fourth-quarter 2004 earnings release 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.

Mr. Meyer, please go ahead, sir.

Thank you, operator.

Let me also add my good morning and welcome to KeyCorp's fourth-quarter Earnings Conference Call.

As always we appreciate you taking some time to be a part of our discussion.

Joining me for today's presentation is our CFO,Jeff Weeden.

In addition we also have a number of our Senior Execs available for the Q&A portion of our call.

If I could ask you to turn your attention to Slide 2 which is our forward-looking disclosure statement, it covers not only our presentation but also the Q&A that will follow.

If you'll turn to Slide 3, this slide provides an overview of the progress that we have made on our strategic priorities.

One of my top priorities when I became CEO was to improve the risk profile of Key.

I told you that we would be focusing on our relationship businesses and evaluating those areas that did not meet our risk return targets.

This evaluation resulted in the divestiture over the past 3.5 years of over 5 billion in Commercial and Consumer Finance loans that didn't meet our criteria.

In the fourth quarter, we sold approximately 1 billion of broker-originated home equity loans and moved the indirect auto loan portfolio of approximately 1.7 billion to the held for sale status.

I think many of you will recall that in May of 2001, we announced that we were exiting the auto footprint, auto lending, and indirect auto leasing businesses.

Once we sell the remaining indirect portfolio, we will have completed the exit of the consumer auto business.

Key will retain its commercial finance business with the auto dealers.

Jeff will discuss the financial impact of these actions, but I think it's important to point out that these moves are consistent with our strategic goals of improving Key's long-term credit-adjusted returns.

In the fourth quarter we also completed two acquisitions.

The first was EverTrust in Everett, Washington, with assets of approximately 780 million and deposits of just under 600 million.

This acquisition elevated Key to the second largest financial institution in Everett and strengthens Key's position in the high-growth I-5 corridor up near Seattle.

In December, we completed the acquisition of American Express Business Finance with a commercial leasing portfolio of $1.5 billion.

This transaction makes Key Equipment Finance one of the nation's largest small ticket leasing companies.

In 2004 Key improved its financial performance.

In the fourth quarter, we reported higher revenue and improved asset quality compared to the previous quarter.

The revenue increase was the result of a slightly higher net interest margin, continued growth in our Commercial loans, and stronger trends in our market-sensitive businesses.

Stronger financial markets contribute to an increase in trust and investment services revenue as well as Investment Banking and Capital Markets income. 2004 was our best year ever for Investment Banking with a number of closed equity offerings up 66 percent from the prior year.

Asset quality continued to improve in the fourth quarter with nonperforming loans declining for the ninth consecutive quarter.

And finally yesterday, Key's Board of Directors approved an increase in the quarterly common stock dividend from $0.31 to $0.325 per share, the equivalent of $1.24 moving up to $1.30 on an annual basis.

If you'll turn to slide 4, you can see that this is the 40th consecutive year that our dividend has been increased and that places us among a very select group of companies in the S&P 500.

The Board's decision to increase the dividend reflects their confidence in the future direction of our Company.

Jeff will comment on our 2005 earnings outlook, but let me just say that I was pleased with our performance in 2004 and feel that our Company is well-positioned as we head into 2005.

Over the past several years we have continued to improve our risk profile, strengthen our management team, and focus on higher return relationship businesses.

And I believe these actions will allow us to continue to deliver long-term value for our shareholders.

Now I will turn the call over to Jeff Weeden for more details on the first -- on the fourth quarter.

Jeff?

Thank you, Henry.

I'll begin with the financial summary shown on Slide 5.

We earned $0.51 in the fourth quarter on a reported basis and $0.70 per share adjusted for the cost associated with exiting the indirect auto and brokered home equity lending businesses.

This compares to an earnings per share of $0.61 in the third quarter and $0.55 in the year-ago period.

I'll cover the reconciliation reported to adjusted earnings in just a minute.

Total adjusted revenue, which excludes the cost of the businesses we identified for exit was up $71 million in the fourth quarter due to an increase in the net interest margin in average earning assets, as well as solid performance from our fee-revenue businesses.

As Henry mentioned, we also had another improvement in our asset quality results during the quarter.

Turning to slide 6, our fourth-quarter results were impacted by our decision to exit the brokered home equity business and the remainder of our indirect automobile lending business.

As can be seen from the slide, we incurred $0.13 of charges for the write-off of goodwill associated with the indirect auto business in the fourth quarter.

This represented the majority of the charges associated with exiting this business.

Slide 7 reconciles reported fourth-quarter earnings to adjusted earnings, and then compares the adjusted results to the prior quarter.

On an adjusted basis, fourth-quarter total taxable equivalent revenue increased 71 million compared to the prior quarter or 6.4 percent.

The increase was the result of a 3 basis point improvement in the net interest margin, higher earning assets driven by improved commercial loan growth, and strong results from Investment Banking, brokerage, and nonyield loan fees.

As a result of continued improvement in credit quality on an adjusted basis, we did not record any provision for loan losses in the fourth quarter, and as I will review in a later slide, net charge-offs from the nonexit portfolio -- portfolios were 35 basis points in the fourth quarter.

Expenses were up 39 million or 5.7 percent in the fourth quarter as a result of higher variable pay in the form of commissions and incentive compensation driven by revenue increases.

We also incurred higher costs for marketing, professional fees, and a number of other miscellaneous expense categories, which were partially offset by reclassifying $9 million of franchise and business taxes to income tax expense in the current quarter.

This reclassification of franchise and business taxes to income tax expense contributed to our higher effective tax rate in the fourth quarter.

Going forward, we believe a good effective tax rate to use on a taxable equivalent basis for the Company is in the 34 percent range.

Turning to Slide 8, the Company's net interest margin increased 3 basis points in the quarter from 361 to 364.

Our expectation is for the net interest margin to be in the 360 range in 2005, adjusted for the portfolio sales.

At the end -- at year end, the Company was slightly asset sensitive to a 200 basis point increase in short-term interest rates over the next 12 months.

Moving to Slide 9, we experienced growth in our commercial loan portfolio in the fourth quarter, driven by strong results from our commercial real estate and leasing divisions, both of which were positively impacted by acquisitions completed in the current quarter.

Excluding the impact of acquisitions, average balances of commercial loans were up 1.5 billion or 16 percent annualized when compared to the third quarter.

Average balances of consumer loans decreased 1.4 percent on an annualized basis.

As we have been discussing this morning, we sold our brokered home equity loans and moved the remainder of our indirect auto portfolio to a held for sale status in the fourth quarter.

We did experience good growth in our branch-base retail banking division where average loan balances increased by an annualized 15.1 percent during the fourth quarter when compared to the third quarter of 2004.

Turning to Slide 10, our average core deposits increased 1.6 billion or 14.8 percent on an annualized basis during the quarter.

Excluding acquisitions, average core deposits were up 1.2 billion for an annualized 11.2 percent.

Slide 11 shows our trend in net charge-offs.

Excluding charge-offs we took on the brokered home equity loan portfolio and the indirect auto portfolios in the fourth quarter, charge-offs represented 35 basis points of average total loans for the quarter.

Our prior long-term target for charge-offs over the cycle had been in the range of 60 to 65 basis points.

With the actions taken in the past several quarters and our most recent action on the loan portfolio, our new long-term target for charge-offs over the cycle is in the range of 50 to 55 basis points.

In addition, our expectation for charge-offs in 2005 is to be below this over-the-cycle range.

Slide 12 is our trend in NPAs to total loans.

At December 31, 2004, NPAs represented 55 basis points of total loans and other real estate owned which should place us at approximately the peer median at the end of the year.

Turning to slide 13, our loan loss reserve at December 31 represented 1.66 percent of loans, and on Slide 14, you can see the improvement we have experienced in our coverage ratio of our allowance to nonperforming loans which stood at 360 percent at year end.

Looking at Slide 15, the Company's tangible capital ratio is within our targeted range of 6.25 percent to 6.75 percent.

During the quarter, we did not repurchase any of our common shares, leaving 29.5 million shares available under our current Board authorization.

We will continue to use share repurchases as a tool in the management of our total capital levels.

Finally, Slide 16 provides our first-quarter and 2005 earnings outlook.

Our plans call for mid single digit loan and earning asset growth in 2005.

As I said earlier, we expect the margin to be in the 3.60 percent range for the year, and we expect credit quality to remain relatively stable to the adjusted levels we experienced in the fourth quarter.

Our guidance for the first quarter is for earnings per share to be in the $0.60 to $0.63 per share range, and for the full year EPS to be in the range of $2.55 to $2.65 per share.

That concludes our remarks and now I'll turn the call back over to the operator to provide instructions for the Q&A segment of our call.

Operator?

(OPERATOR INSTRUCTIONS) We will take our first question from Lori Appelbaum with Goldman Sachs.

Please go ahead.

Hi, my question relates to the source of the very strong commercial loan growth that you are experiencing. 16 percent growth is the strongest that we've seen -- among ones that we have seen this quarter especially from midwest-based banks.

When I look at straight corporate loan growth in the back of your presentation it looks like growth there was only 3 percent and utilization rates haven't changed.

So all the growth was coming from the real estate capital group and equipment financial [indiscernible].

Maybe if you can be a bit more specific on where this growth is actually coming from and if any of it is related to the national markets.

Lori, it is Henry.

We really saw wide-based growth in our commercial activities, although some of the increase in commercial real estate that you see there came from the EverTrust acquisition, where a significant portion of their assets were commercial real estate assets.

But beyond that, and Jeff gave a number that was, you know, minus the acquisitions we saw pretty broad-based growth.

There were no specific segments left behind, although I would tell you that while we saw growth in the midwest, the midwest is not the leading region, the northeast continues to be the strongest.

And while the Beige book came out and said that 11 of the 12 fed districts were growing a little bit more robustly than the fourth fed district, within the fourth fed district we are starting to see, although much later, some pick up in the northeast Ohio marketplace where we really saw the southern part of the fourth fed district for us primarily Columbus, Akron, Canton, Cincinnati, picking up in prior quarters so we are cautiously optimistic about the fourth fed district.

Lori, I would add one other thing to that, and the fact that during the past year Tom Bunn and his group have made a number of strategic hires throughout the year and some of the disruption that's happened in the country as a result of other M&A activity and we have actually picked up some ground in those particular areas and I think you saw that growth in commercial real estate that is broad based across the country.

We have made a number of investments to hire people and to increase our resources that we have in that particular area, and certainly the leasing side of the equation has been very important to us, along with the lead with leasing initiatives that have taken place throughout the entire -- past 2 years within the Company, that particular team is really hitting on all cylinders.

Thank you.

We will take our next question from Jeff Davis with FTN Midwest Securities, please go ahead.

Good morning.

Henry, I know you're not going to want to say specific entities or regions, but could you comment generally on where you view the Company from the repositioning effort.

Have you done most of the divesting you want to do whether by portfolios or regions or is there still a little more repositioning to go?

Jeff, it is a dynamic process that keeps going.

We had identified the lower risk adjusted yielding and lower growth businesses and we have taken action on those.

That just moves somebody who is close to the bottom to the bottom.

And we'll continue to look at moving businesses up in return or growth or out.

To say that I'm done would be wrong.

On the other hand, Jeff, I don't want to imply that there's something big about to happen.

We continue this process with Jeff really bringing economic profit added as one of the primary measurement tools.

So I've, really in the moves that we took in the fourth quarter, completed the actions that I started on May 17, of 2001.

My hope was that the smaller segments that we had left after 2001 could produce the kinds of returns and growth, but it became obvious to me in the lowest rate environment that we have seen in 40 years where some of our competitors in that business, not banking competitors, but automobile-making competitors who were lending at 0.0 made it very difficult for me to make returns when I am competing against that kind of -- so we just said, hey, that is not a business that is ever going to be advantageous to our shareholders so now we are out.

Okay, Jeff, if I may ask a follow-up.

Jeff you may have said it but I didn't catch it, on the stable margin, what are you assuming on rates?

We continue to use the blue-chip rate forecast which calls for basically 5 rate increases throughout 2005 here to about a 3.5 percent funds rate by the fourth quarter.

Okay.

And the 360 includes the flatter curve with it?

The 360 includes the flatter curve, that's correct.

Thank you.

We will take our next question from Nancy Bush with NAB Research LLC.

Please go ahead.

Good morning, I have got some balance sheet questions, mainly in the deposit area.

I am kind of looking at your period-end balance sheet versus your average balance sheet.

It looks like foreign deposits were up big on a period-end basis, not so much on an average basis.

Could you just comment on that.

Was there big addition of foreign deposits very late in the quarter?

Yes, there was an addition at the end of the quarter to fund some -- a loan balance that came on also at the end of the quarter.

And the average balances so we just viewed it as another funding alternative to use.

All right, and I would -- I ask the same question about noninterest bearing funds, which were up on an average basis and down on a period-end basis.

So I guess I am just a little confused.

Are you adding noninterest bearing funds?

Or what is the direction.

Noninterest bearing funds obviously on any spot, particular spot, they can fluctuate somewhat because of corporate balances, but we have been growing our noninterest-bearing deposits and we have had a lot of success on the commercial side of the equation, Small Business.

I think if you look through some of the line-of-business information, you will see deposits are growing there those are primarily in the noninterest bearings.

But commercial deposits continue to grow.

We have a commercial real estate servicing division that continues to service more loans and adds more escrow balances to that.

So we view that as a very good business actually.

Just finally I will ask one pricing question.

If you look at either the average or the period-end balance sheet, the major -- it looks like the major growth occurred in the core deposits in the now and money market deposit accounts but your rates were only up 7 basis points during the quarter on average.

Looking at some of your competition where those rates paid were up 3 times that or more and I guess I would ask are you going to have to do some kind of catch-up on pricing there, are you going to be able to lag price these accounts?

Well, we have introduced new products in the fourth quarter, and those new products require new balances be brought to us to qualify for those higher rates, if you will.

We have eliminated the -- both the teaser rates that a number of competitors have been using where they pay a bonus rate for a 3 month or 6 month time period and have gone to a more fair and competitive pricing we believe, basing it off of relationship pricing, fulfilling the overall strategy of the organization.

So we think that deposit pricing obviously, as rates continue to move up, will increase but we have factored in that into our guidance for our net interest margin for 2005.

Thank you.

We will take our next question from Betsy Graseck with Morgan Stanley.

Please go ahead.

Thank you.

Good morning.

One -- two quick questions actually.

Just following up on the balance sheet side.

It looked like in the other earning assets, primarily in available-for-sale and in the short-term investments that the yields came down Q on Q. I am just wondering if you could share with us what you did to affect that kind of result?

I would think it is a function of shortening duration, but if you could give me a little more color on that, that would be helpful.

Well on the available-for-sale category, we obviously moved the loans that we had associated with indirect auto --

Right.

-- into that category during the fourth quarter.

So it may just be a timing of some of the items that we had coming in.

Plus there are some other items that flow through that yield from time to time, dealing with our prior -- I believe prior securitization, some IO strip income that may flow through there that hit in the third quarter and may have made the third quarter a little bit higher.

Can you talk to what the duration of the portfolio at this stage relative to the third quarter.

You mean the duration of the investment portfolio.

Correct.

The investment portfolio is around 2.3 years at the end of the year which is down slightly from the end of the third quarter.

Okay.

And then second question was just on deposit fees.

You indicated in the release that there were some pricing changes made in the Consumer Banking area that resulted with a drag on net interest income.

I am assuming it's in the deposit, you know, service charge on the deposit accounts.

Could you talk to where you feel you're priced competitively in deposits, and the types of growth that you're anticipating on the back of these pricing changes?

Let me take that one because the marketplaces that we're in, both in the northwest, the Rockies, the midwest and the northeast are very competitive.

We have good competitors, and there is a variety of pricing alternatives out there.

We are focusing more and more on relationship banking.

And as we give our relationship managers and KeyCenter platform people the tools to understand the relationship, we are able to combine more and more of the business that individuals have.

And I think that fee income from charges on deposit accounts and noninterest bearing accounts are going to continue to come under some pressure.

But as rates rise, the value of the deposits to us continues to expand.

So it is a combination of those factors, but the reason I wanted to just jump in is to -- is to say that we look at all of our micro markets and how the pricing in those micro markets is being done, and we adapt our pricing to be competitive.

We try to have a product that is near the top, but our goal in a sales organization is not to have the highest price, it is to do the best job in sales, and I think that goes back to Jeff's answer to the last question, you know, we saw some very good results from that relationship sales approach in our fourth-quarter numbers.

Sure.

So then is it -- is it fair to say that during the quarter you practically went out to the relationships that you had and -- and said, look, because you've got these various products with us and we are going to combine them into one relationship, products so to speak, your pricing as a result of that is now lower.

Is that part of what drove the decline Q on Q?

No, what we did in the fourth quarter is we introduced some new products.

We also eliminated a number of products, and we made it very clear in one-on-one contact with our clients that by moving more balances to Key, they could get fees waived.

So the offset that you see in terms of what I would say is a little weaker than I had hoped service charge income, we see in the fact that deposits were up.

Right.

Margin expanded.

Some of the margin expansion is due to noninterest bearing deposits that are free.

Sure.

It is that combination that affects that.

Sure.

That's helpful.

Thank you.

We will take our next question from Mike Mayo with Prudential Securities.

Please go ahead.

Prudential Equity Group, Mike Mayo, good morning.

Good morning, Mike.

If we can have just more detail on the commercial loan growth.

I know you started but perhaps additional detail about the growth by region, and in terms of your expectations for commercial loan growth in '05, kind of what your thoughts are about pricing.

Are you willing to accept additional margins -- are you willing to accept margin pressure?

Is that in your expectations for additional growth, but most importantly, what percent of your commercial growth, and as you said 16 percent before the deals this quarter, what percent of that is due to the national or syndicated market?

Mike, this is Tom.

Hey, Tom.

First off, if you look at KCIB which represents a majority of the commercial loan book, really excluding the -- only the business banking business in the consumer side, we were up 7 percent quarter over quarter.

When you adjust for the two acquisitions, which were included in that, the EverTrust which includes some real estate loans and the American Express acquisition, our loan growth on a comparable basis was up 4.5 percent quarter over quarter.

So we still showed -- that was on top of 4 percent the previous quarter.

And as I said in Boston last November, we saw a bottoming in February of our real estate and our commercial and corporate loan business in outstandings.

Leasing had been a steady grower really over the last 2 or 3 years.

Since February, initially with real estate and then with commercial, and as Henry said earlier, strongest in the northeast, we've seen steady growth, quarter over quarter as reported.

The last region to come back really was the midwest as Henry said.

The northeast, followed by the northwest and then the Midwest.

The Rockies have been a little more unpredictable, some up, some down, but we are seeing some good steady growth.

I think as we look into '05, we are cautiously -- as Henry said cautiously optimistic that this growth will continue.

Our real estate business is really seeing the benefit of a lot of initial activity late last year across our Income Properties group that really started showing outstandings earlier -- second -- late second quarter end of third quarter.

Basically creating construction and relending money.

And then -- so then you -- you bill that into '05, we think that will continue as well.

The other piece that Henry mentioned was the institutional side of the real estate business which has also seen growth, and we think that will continue.

That has benefited from something Jeff said earlier which was some strategic hires we made in that business that have -- that have been very positive in their reported results.

So generally, we feel cautiously optimistic as we go into '05.

To answer your question on the syndicated business, I think it is very critical we make the point that our syndication business is focused on transactions that we lead.

We are not building these businesses on the backs of syndication transactions that we are buying from other people.

With that said, we are -- we are active as Henry said.

There was a very large transaction at the end of the year which was a -- a broadly, nationally syndicated transaction that we were one of the lead banks in.

So we -- we do own a targeted basis due some of that business, but especially in the back yard, our middle-market business is very relationship-driven.

It is our goal and our progress is demonstrating that we are really focusing on lead relationships which answers your -- which goes to your last question which is rate pressure.

Again, as I said in Boston, we feel that the rate pressure is most seen in the national credits, most seen in the national leveraged credits.

We are not nearly as active in those markets as some of our competitors, and we are in our regional areas and our middle market areas where there is great competition but I think the general margins are more sustainable.

Not to say you won't continue to have -- as I said good competition, but you will see we think -- as Jeff said a sustained margin.

And just so I interpret you correctly.

You say this pace of growth should continue.

When you say "this pace of growth" are we thinking kind of that mid double digit, the 16 percent you had this quarter or something differently?

No, I think what we are giving for guidance, Mike, is the -- in the mid single digits is what we are anticipating for total loan growth year-over-year.

Commercial may be a little stronger.

And we are also factoring in that we have exited some of these other portfolios.

But year-over-year should be in the mid single digits as our guidance.

Thank you.

We will take our next question from Ed Najarian with Merrill Lynch.

Good morning, guys.

Two questions.

The first one, I guess, comes back to Mike's question.

I am just wondering why -- and maybe you can just sort of answer it succinctly, if you have an upbeat outlook for what is going on in your businesses for '05, the economy is pretty strong and you've got 16 percent annualized growth in the fourth quarter, why you're saying mid-single digits, why such a modest outlook?

That would be the first question.

The second question is, in terms of credit quality, you indicated, I think, a pretty stable outlook from here on credit quality.

Number one, does that mean stable NPAs and number two, if it does, are we about to move back to more of a situation where provisions should match or be close to matching charge-offs or do you still expect to draw down the reserve for a few more quarters?

Thanks.

First I will answer the question with regard to NPAs and provision and reserves, if you will.

With respect to NPAs, we do expect stable product quality.

So we are not anticipating degradation, if you will, in the loan portfolio, which should lead to, again, charge-off and quote, unquote provision levels is really what I was trying to refer to in my comments.

Provision levels in the kind of similar to what our charge-off rate was in the -- in the fourth quarter.

So we will be looking at something in that mid-30 basis-point range next year, and of course we look at the reserve each and every quarter and have to make an evaluation on the overall credit quality.

So it's going to be dictated as to how credit quality looks, based on our -- my comments, though, it would be something to plan for would be the charge-offs and provisions would probably be fairly comparable to one another in 2005.

With respect to the 16 percent annualized growth that we had in the fourth quarter adjusted for the -- the sales -- excuse me, the acquisitions that we had on the commercial side of the equation, we have been coming off fairly low levels, and so we've had quite a little bit of activity coming on.

Some of the commercial real estate that we have added we will also -- as you know we are in the moving business, not the storage business, so a lot of those credits will be coming off, and being got into the syndicated market and sold to others.

We retain a lot of that servicing and continue to build those escrow balances which is why, you know, our guidance for next year has factored in that we will move those -- those credits mid-single digits on commercial overall.

We could be better in one quarter, down another quarter depending on how much of that credit we move off of our -- off of our balance sheet.

Okay.

So if I -- to sum it up.

A lot of that is based on sort of your outlook for -- for moving loans off the balance sheet then as you go -- move through the year?

That's correct.

Okay, thanks, that's helpful.

We will take our next question from David Branmeyer [ph] with Wills [ph] Capital Management.

Please go ahead.

Yes.

I was wondering if you could give a little more color on your expense levels.

What is the efficiency ratio for 2004; what is your expected efficiency ratio for '05?

Well, you can compute the efficiency ratio for 2004.

And our expectations for 2005 would be to have an improved efficiency ratio over the adjusted ratios again backing out the write-off of the goodwill, if you will, that we had in the fourth quarter.

But looking -- looking forward.

Expenses are going to continue.

We will have some growth in expenses in 2005, but the overall growth level in expenses -- our expectation is to be below what we are growing on a percentage basis with respect to our revenues.

Okay.

Then do you see any, I guess extra charges coming from the integration of the recent acquisitions or, you know, how much would you take out in the long run?

Well, in the -- in the case of the acquisitions, the -- the cost associated with further integration is largely immaterial.

I mean it -- we can have a couple of million dollars in any given quarter, but it is not something on the expense base that we have as an organization that would be of a material nature.

And, of course, we will continue -- part of the goals behind the AMEX acquisition is to continue to expand our presence in the small-ticket leasing business and grow that.

So we want to make, you know, continue to make investments, obviously, in our sales force and where we will get our savings will come from some of the -- the corporate side or the back office-type side of the equation.

Okay.

Thank you.

We will take our next question from Gerard Cassidy with RBC Capital Markets.

Please go ahead.

Thank you, good morning.

Getting back to your comments about the outlook for interest rates using the blue-chip forecast rates in terms of the fed funds rate going up possibly 5 times this year, on the flattening of the curve, with your margin expectations, do you anticipate that the curve will come down anywhere from 75 to 80 basis points in that scenario?

I think that is factored into -- if you look at the blue chip rate forecast, and Joe Vayda who is here can probably give us a little bit more specifics on that, but it is a flattening of the curve that we have.

This is Joe Vayda.

I will just comment that what we project out as a continued flattening of the curve, it's important to recognize what part of the curve and that is not only the movement but also how it affects our activities.

We would expect some flattening out in the -- out to the 2, 3 year time period and a greater flattening thereafter and we have seen most of that already.

Recognize that most of our business activities are on a shorter end of the curve.

So we're not expecting much of an impact from a further flattening of the curve on the margin in either direction.

Noninterest bearing liabilities, if you will, become more valuable as the overall rates go up even if it is on the shorter end of the curve.

And as those noninterest bearing liabilities becomes more valuable, are your corporate customers asking for more credit from those liabilities so that they don't need to pay you as much in fees for services?

Or what's happening with that?

Well I think if you saw deposit service charges in the fourth quarter were down.

Half of that decrease came out of our annualized service charges.

So corporate customers obviously choose to either pay hard-dollar costs or they pay in the form of compensating balances.

And we've seen some of that, you know, come out of our deposit service charges here in the fourth quarter, but it led to also contributing to a higher net interest margin in the fourth quarter.

One final question and I may have over -- just didn't hear it.

In the losses from securitizations in the quarter, was that tied to the divestitures?

Or was that something separate?

I think overall I don't recall the losses on securitization specifically that we had in the -- in the fourth quarter.

Lee, do you have anything?

I think what you are seeing there, Gerard, is that's the line in the income statement that's used when we have losses on loan sales, and so some -- most of what you see is the effect of moving those portfolios into the held-for-sale category.

That is the $46 million of loss went through that particular line, if that's what you are referring to on the "other income."

Great, thank you.

We will take our next question from Matt O'Connor with UBS.

Please go ahead.

Yes, it seems like the balance sheet actually took a curve toward the end of the quarter and I was just wondering if you can give us a sense of the spread of these assets, when you expect to sell the indirect auto loans and what you will be doing with that straight up capital.

Well, Matt, we have already reinvested the -- the proceeds, if you will, when we acquired AMEX Small Business ticket leasing portfolio in December.

So that added about 1.5 billion in assets coming on.

And then the -- the assets that are identified obviously here for sale, the remaining -- the 1.7 billion, that is a fairly close match.

Those do have a little bit higher yield on those particular assets.

They also have higher credit costs associated with the assets.

We've factored that in to our margin guidance for 2005 already, which, you know, something in that 360 range.

We were at 364 at the -- for the fourth quarter, so we've -- we've tried to calibrate and take that into account that those are higher yielding assets; however, they are also factored into the fact that we are lowering our long-term target on charge-offs and giving guidance, if you will, in that mid-30 basis point range for charge-offs in 2005.

Okay.

Can you give us a sense of what the yield is on the 1.7?

The yield, we had on about 650 million, the yield was around 16 percent.

And on the -- about a 1.1 billion the yield is right around 7 percent.

And how about the yield on the AMEX portfolio you acquired?

The yield on the AMEX portfolio is in the 9 percent range.

Okay.

Great, thank you.

We will take our next question from Jason Goldberg with Lehman Brothers.

Please go ahead.

The majority of them have been answered, but I guess the 4.5 percent kind of core commercial growth that Tom gave earlier, do you have a sense in terms of what that split was between I guess national real estate and just kind of -- you know kind of pure CNI.

Well pure CNI was up basically I think on an annualized basis it was up about --

Commercial loans, CNI was up 2 percent for the quarter.

KEF was up 7 percent unadjusted.

So the leasing business was up 7 percent unadjusted.

You would have to adjust that down for a month.

So it would be up about 5 percent, and real estate would be up about 10 percent on an adjusted basis.

So you had 2 percent, 5 percent, and 10 percent roughly, Jason, I haven't -- but that all comes -- totals up to the combined 4.5 percent for the -- for the quarter.

That's helpful, thanks.

We will take our next question from Denis Laplante with Keefe, Bruyette & Woods.

Please go ahead.

Good morning, thank you.

During the course of the year, it looks like particularly if you adjust for the fourth-quarter losses that there were 3 separate securitizations that occurred, totaling roughly gains of about $60 million.

If you could verify that number.

And what is the plan.

Do you plan to step that up in '05, keep it the same, reduce it?

And then the second question I have on the schedule you provided, where you broke out the various special items related to the disposition of the consumer portfolios.

I can understand why there is no tax effect on the goodwill, but the difference between the provision and the other charge, there was no tax effect on that.

Could you go into that a little bit?

Yes, Denis, I will answer that question.

There were deferred tax assets associated with that particular business that was put in for -- or put in the held-for-sale category, and those particular assets will not be realized, and so we ended up writing off about $8 million of deferred tax assets, if you will.

And so that obviously flowed directly to the bottom line there and impacted that -- that particular number.

Okay.

And did that -- so were those numbers showed -- they were shown on a -- on a net basis then?

Of those deferred tax assets?

In other words those charges that flow through the income statement?

Yes, they were.

If you look at -- well, if you look at -- there's 2 line items that were identified in the slide, as well as the press release.

And in the press release, even on the first page, you will see that the reclassification of the indirect auto portfolio, the pretax amount was $14 million.

The after tax amount was $16 million, that's inclusive of the goodwill.

Embedded in that was an additional $8 million of deferred tax items -- deferred tax assets that were written off.

Okay, all right.

That had a major impact on that.

As far as securitizations go, we securitize basically in the third quarter of every year our student, or excuse me, our student lending portfolio, which is about $1 billion portfolio that we end up securitization side with securitization.

The gain on that is generally around 1 percent.

So it's around $10 million.

That's when that flows through in the third quarter.

The other gains, if you will, that are out there are not on so much on securitizations, but they're home loan sales.

Again, getting back to what we do in the commercial real estate side where we originate the credits and then when it's ready to go in for permanent financing, we move those particular credits off to permanent lenders, and then we would recognize any kind of gain on that particular transaction at that juncture.

Okay, so would -- would your numbers match with mine then if you added in the home loan sales that basically there were 3 quarters during the course of the year where those numbers totaled give or take 60 million for the year.

Is that a good number and is that a reasonable number to assume for '05?

I think we had a couple of loss items that went through there.

We generally average somewhere between 15 and 25 million in any given quarter.

So your 60 may be a little bit light from -- from that perspective.

Okay, good, that's helpful.

Thank you.

Gentlemen, at this time there are no additional questions.

Mr. Meyer, I will turn the call back over to you for closing comments.

Thank you, operator.

Again, I think the momentum here at Key is continuing to build.

I don't want to be overly optimistic given the pluses and minuses in terms of economic numbers that we see on a weekly basis, but the fourth quarter for us was a very strong quarter.

The strategic decisions that we made really complete a chapter that we opened more than 3 years ago.

And I am very confident that the balance sheet and earnings momentum in our Company is stronger as we enter 2005 than we have seen it here at Key in almost the last decade.

So I will leave you with those thoughts, and thank you again for spending this hour with us this morning.

Ladies and gentlemen, this will conclude today's conference call.

We do thank you for your participation and you may disconnect at this time.