KeyCorp (KEY) 2005 Q1 法說會逐字稿

Good morning, and welcome to KeyCorp's First Quarter 2005 Earnings Results Conference Call. [Operator Instructions] At this time I will turn it over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.

Mr. Meyer, please go ahead, sir

Thank you operator.

Good morning and welcome to KeyCorp's First Quarter's Earnings Conference Call.

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

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

We also have several members of our -- our executive team available for the Q&A portion of our call.

Side two is our forward looking disclosure statement.

It covers not only our presentation but also the Q&A portion that will follow.

Before Jeff reviews our numbers, I want to provide some overview comments on the quarter and the progress that we've made on our strategic priorities.

Over all I was pleased with Keys performance in the first quarter which benefited from revenue growth and improved asset quality trends.

Relative to the year ago quarter tax equivalent revenue was up $60 million.

Primarily due to growth in commercial loans and higher fee income.

Asset quality continued to be a positive story.

Nonperforming loans decreased for the tenth consecutive quarter, are -- and are at the lowest level in a decade.

Net chargeoffs as a percent of average loans fell to their lowest level since the fourth quarter of 1995.

These positive changes reflect the overall improvement in the economy and the changes that have been made to our business mix to improve Key's risk profile.

As you will recall, last quarter we announced our plans to exit the indirect auto business and place 1.7 billion of prime and nonprime auto loans in the held for sale category.

During the first quarter we completed the sale of approximately 1 billion in prime portfolio and recognized a gain of $19 million.

On Tuesday of this week we completed the sale of the nonprime portfolio, which will be included in our second quarter results.

With the sale of these portfolios Key will have completed our exit of the consumer auto business.

We will continue our commercial finance business with auto dealers, i.e., the floor plan business.

Jeff will review our earnings guidance for 2005, but first quarter was certainly a solid start to the year.

Our focus remains on three strategic priorities; growing profitable revenue, maintaining or asset quality, and remaining disciplined expense managers.

I'm pleased with the progress we've made in these areas, and I feel the company is well positioned for the future.

Now I'll turn the call over to Jeff Weeden for a more detailed review of the quarter.

Jeff.

Thank you, Henry.

I'll begin with the financial summary shown on slide four.

We earned $0.64 per share in the first quarter compared to $0.51 if the fourth quarter and $0.59 per share in the year ago period.

Total tax equivalent revenue was up $60 million in the first quarter compared to the same period one year ago.

And was down $11 million from the adjusted tax equivalent revenue of the fourth quarter.

An increase in average earning assets resulting from solid commercial loan growth helped increase net interest income from both the prior quarter and the same period one year ago.

Our net interest margin remained relatively stable in the current quarter compared to the fourth quarter and NPLs decreased by $11 million while NPAs were down $8 million.

Slide five compares our first quarter results to our adjusted earnings for the fourth quarter and to the same period one year ago.

The fourth quarter adjusted earnings numbers exclude the actions taken for exiting certainly consumer portfolios.

As we have discussed in the past, typically or first quarter shows some slowdown from our seasonally strong fourth quarter results.

I will review in a minute a roll forward from the fourth quarter to the first quarter for both noninterest income and expense.

Turning to slide six, the Company's net interest margin increased by two basis points in the quarter from 364 to 3.66%.

As a result of the sale of the prime indirect portfolio in March and the nonprime portfolio in April, we expect the net interest margin to contract in the second quarter.

Our expectations for all of 2005 is for the net interest margin to be in the 3.60% range.

At March 31 the Company was in a slight asset sensitive position to a 200 basis point increase in short-term interest rates over the next 12 months.

Moving to slide seven, we continued to experience growth in average balances in our commercial loan portfolio in the first quarter as a result of the full impact of the leasing acquisition completed in December and strong results in our commercial real estate and corporate banking divisions.

Excluding the impact of acquisitions, average balances of commercial loans were up 2.1 billion or 5% unannualized when compared for the fourth quarter.

Average balances of consumer loans decreased 3.5% unannualized in the first quarter as a result of the sale of certain indirect portfolios in the first quarter of 2005 and the fourth quarter of last year.

Our community banking based home equity lending balances were flat in the current quarter compared to the fourth quarter and up 6% from the first quarter of last year.

Turning to slide eight, our average core deposits were relatively stable in the current quarter compared to the fourth quarter and up 7.4% versus the first quarter of 2004.

Now, slide nine rolls forward the fourth quarter noninterest income on an adjusted basis to the first quarter.

As you can see, we experienced approximately $30 million in gains associated with the sale of the prime auto portfolio and the mark-to-market on the derivatives used to lock in our rate exposure in the auto portfolios in the current quarter.

All other investment banking activities were down a net 21 million following a very strong fourth quarter.

We also realized less gains on the sale of other loans and securitizations in the current quarter when compared to last quarter.

Service charges on deposits to clients in the current quarter by $7 million from the fourth quarter, all of this declined from the fourth quarter was -- was the result of lower overdraft fees.

Analyzed deposit service charges were little change from the fourth quarter levels.

We expect that we are getting near the bottom of the decline in deposit service charges at this time.

Turning to noninterest ex -- expense, in the first quarter, as a result of an interpretive guidance applicable to all publicly held companies issued by the SEC related to accounting for operating leases, we incurred a charge of $30 million in net occupancy to adjust our accounting for rental expenses associated with certain operating leases to the straight line from an escalating basis.

In addition, we set aside $20 million in the KeyCorp foundation to fund future contributions of the organization.

Excluding these two items noninterest expenses were down primarily due to lower incentive compensation accruals.

Slide 11 shows our trend in net chargeoffs.

In the first quarter net chargeoffs were 32 basis points of average loans.

As Henry said this is the lowest level we have experienced since the fourth quarter of 1995.

Our long-term over the cycle target for chargeoffs remains in the range of 50 to 55 basis points.

Our expectation for chargeoffs in 2005 is to be in the mid-30 basis point range.

Slide 12 is our trend in NPAs.

At March 31 NPAs represented 54 basis points of total loans and other real estate lo -- owned.

This represented almost a 50% reduction from the year ago.

Turning to slide 13, our total loan loss reserve at March 31 represented 1.65% of total loans, and on slide 14 our coverage ratio of our allowance to nonperforming loans stood at 370% at March 31, 2005.

Looking at slide 15, the company's tangible capital ratio is within our targeted range of 6.25% to 6.75%.

During the quarter we repurchased 2.5 million of our common shares leaving 27 million shares available under our current board authorization for repurchase.

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

Finally, looking at slide 16, which provides our second quarter and full-year 2005 earnings outlook.

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

As I said earlier, we expect the margin to be down in the second quarter compared to the first quarter adjusting for the sale of the indirect auto portfolios.

And for the full year we expect the margin to be in the 3.60% range.

We also expect credit qualities to remain relatively stable to the levels we experienced in the first quarter with chargeoffs in the mid-30 basis point range.

Expenses are expected to be up from prior year levels; however, still well controlled.

Our guidance for the second quarter is for earnings per share in the range of 62 to $0.66 and for full year EPS to be in the range of $2.55 to $2.65.

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] Gerard Cassidy, RBC Capital Markets

Thank you.

Good morning, guys.

Question I have is on the average balance sheet that you provided to us.

You showed that your cost of funding, of course, went up similar to most people because of the rising rate environment.

But specifically the -- I think it was the other time deposits that were reported.

The yield on that actually was down year-over-year.

Can you share with us how you managed to be able to lower the yield on the other time deposits on a year-over-year basis?

It -- Gerard, it just basically refers to balances that have been continuing to roll off and the new balances that have been coming on have been less than the rates on the rolloff still.

We would expect if you look at fourth quarter to going into first quarter that those rates would now begin to rise slightly.

Okay.

And on the margin for the -- you indicated in your prepared remarks that you thought the margin was going to come in closer to 360 for the next quarter.

Is this primarily due to the deposit side of the equation or the asset yields maybe not going up as much?

Well, Gerard, it's really 360 is our -- our guidance for the entire year.

For the second quarter we would expect that the margin could go down as much as 10 basis points as a result of the sale of those indirect auto portfolios.

The prime portfolio was sold in the March.

The nonprime portfolio, which is a much higher yielding portfolio was sold here just this Tuesday.

So it's on the asset side of the equation in that held for sale category on the margin analysis that's in our press release.

Thank you very much.

Nancy Bush, NAB Research.

Good morning.

Just a continuing question on the average balance sheet and sort of the mechanics of the margin.

I'm looking at page 12 of the release.

Can you just -- ?

I mean, everybody has seen sort of a slowing of growth in the core deposit categories this quarter.

Could you just speak to what you're seeing?

And I notice now accounts were up on an average very slightly and noninterest bearing down.

And also this -- the comment you made about deposit service charges sort of bottoming out here, if you could just tell us what you're basing that on.

Okay.

With respect, Nancy, to the -- to the margin and to deposits, the first quarter is typically a slow time in -- in our deposit cycle.

If you look at prior years, you'll see that typically core deposits decline slightly or are flat in the first quarter compared to the fourth quarter.

What we are experiencing is we did see some growth come in in the month of March, and that is continuing here as we look at the first few days of April.

Overall, I would expect that seasonal pattern would continue.

With respect to the deposit service charges, we did have -- all of our decline came from the overdraft fees.

That's where we had a $7 million decline between the fourth quarter and first quarter.

Part of that too is seasonal.

If you go back and look at prior years, we would typically have a decline from the fourth quarter to the first quarter in -- in our overdraft fees.

We were encouraged that we did not have or did not experience a decline in our analyzed service charges.

However, as rates go up, that line, too, may show some -- some pressure on it.

Maintenance fees were stable in the -- in the two comparison quarters, so from that perspective we're not saying that the deposit service charges are going to -- to increase, but we do believe that we are nearing the bottom in that particular cycle.

Thank you.

Kevin Reevey, Ryan Beck.

Good morning.

Can you give us a sense as to whom you're stealing market share away from both on the -- the loan side and deposit side?

And then my second question is related to loan pricing.

Can you give us a sense as to how you're pricing your loans, because we're hearing it's becoming increasingly competitive especially in the Midwest?

Thank you.

Okay, I think -- .

Let me, it's Henry.

I'll take that one starting in reverse order.

The competitive pricing remains very aggressive.

We are much more concerned about whether we're starting to see credit quality, ie, are some of the terms and conditions of the underwriting being affected.

And we continue to be very, very solid in -- in trying to hold the line there.

But I would be less than honest if I didn't tell you that the competition in terms of pricing is still very, very aggressive.

And there is no one competitor that we're taking business from.

We do have some disruption, which is typical across at least the Key franchise, which is broader than most.

Anytime there's disruption in terms of acquisitions that other companies are doing, there is more opportunity for us to gain some share.

And those things are happening, but it's really -- it's broad-based, and it's pretty consistent across all of our markets.

Thank you.

Kevin St. Pierre, Bernstein Research.

Yes.

I'm sorry, I couldn't hear you.

I was wondering if you -- following up on that question, if you could comment on the pricing for interest-bearing deposits and -- and characterize the competition that you're seeing there?

Your results during the quarter were apparently a bit better than some of your direct competitors.

But we have done on our deposits, we talked about I think in the first quarter call is we've gotten away from a lot of the promotional pricing where you have a rate special for a three-month time period, a teaser rate environment.

We've gone to the relationship-based pricing.

We give our customers a fair price then on their total relationship with us and get away from the -- some of the churning, if you will, that is taking place in that portfolio in the past.

So from that perspective, we're becoming much more competitive on our base rates for the total relationship rather than just having a teaser rate out there for a three-month or six-month time period.

Right.

Great.

Okay and on the deposit service charges, you mentioned the -- the 7 million decline was completely overdraft.

I was wondering if you can break out your deposit service charges by type and what percentage of total deposit charges are NSF fees?

Well we have not typically done that, but deposit overdraft fees today would represent basically about 25% of the total deposit service charges.

But it's broken out in a number of different categories that we have.

And I think in talking about that point for just a minute, if you will, what we are seeing our customers are using the Internet, they're using their debit cards, they're using other methods to really track what they have in their accounts and are -- are becoming much more astute with regard to managing their overall accounts.

We did see year-over-year a $4 million increase in our electronic banking fees from the -- from the first quarter of last year to the first quarter of this year.

Okay.

You've -- you had no change in your fee structures regarding NS fee -- NSF fees or anything?

No, we have not.

Thank you.

Christopher [Tonnar], Morgan Stanley

Good morning, guys.

I have a quick question on credit quality.

It remains very good.

It looks like the outlook is -- is also positive.

It's hard to ignore the announcements from the auto industry over the last month or so.

Could you talk a little bit about how you expect that to impact your Midwestern franchise.

Chuck, you want to make any comments on that?

We, obviously, look quite carefully at the automobile industry and our exposure we think is quite well spread.

We -- it's not a particularly material part of our overall portfolio.

Our total exposure outside of floor plan is less than $1 billion in commitments.

And we continue to watch it fairly carefully.

There are one or two names in particular we're looking at, but they're quite small in our portfolio.

And we just continue to watch it as carefully as we possibly can.

And if I could follow up, when you say exposure is less than a billion, is that direct exposure to, auto suppliers in the regions or is that just the majors?

It's everything.

We've -- we've categorized it as widely as possible including tires, parts, you name it.

So we try to take as broad a view as possible.

Okay.

Thank you.

That was Chuck Hyle, who is our Chief Credit and Risk Management Officer and part of my Executive Leadership Team.

Ed Najarian, Merrill Lynch.

Hi.

Good morning, guys.

I want wonder if you could give us maybe a little more insight and a little more granularity in terms of some of the trends that you're seeing both in the trust and investment services income as well as investment banking and capital markets?

Thanks.

With respect to to trust and investment management income, in that particular line item there's some detail that's in the press release that would show that the decline is coming out of the brokerage side of the equation.

There was softness that has -- has occurred in the markets.

I think overall activity is down compared to last year in the fourth quarter.

So that's the majority of it.

We have seen some increase in strengthening in -- in the institutional side.

These are up on the institutional side of asset management and they're flat to down on the personal and the custody side.

Okay.

Great.

Thanks.

Jeff Davis, FTN Financial.

Good morning.

Nice quarter.

Henry, could you comment on -- on your thoughts on where the Company stands strategically relative to your long-term goals of producing a 16, 18 ROE and consistent 8 to 10% EPS growth every year?

Well this quarter, if you really take out the accounting and the then the -- the sale of the portfolios, we had a relatively clean and very positive quarter in terms of getting the Company where we need to -- to be, to return 16 to 18%.

It's really continuing that execution and the focus on growth.

Many of the potential investors who talk to us about maybe being an investor are worried about growth.

And it's going to take us a few quarters to show that we can produce the growth with this franchise that we have.

And as we -- under a lot of leadership from Jeff Weeden look at economic profit added and start to change our business mix, we're going to give up a little on yield.

Jeff talked about that.

Because we're talking higher risk but higher yield portfolios.

But the credit adjusted yield, we're convinced, is going to produce benefit to our shareholders.

So I -- I think we're going to get there maybe a little bit sooner than we had planned, and that was always just a couple of years but not a one-year time horizon in terms of getting us into that 16% to 18% ROE.

We're -- we're well on our way, and we're continue to be buoyed by an economy that is not booming but we're doing a lot of the little things right and we see steady, consistent, albeit we're cautiously optimistic maybe an overused term.

But this is a fragile marketplace.

Markets can be up 100 one day and down 100 the next.

There's a lot of concern about oil.

I think confidence in 2005 has been shaken a little bit here in early April and late March, but we don't see any major difference from the very solid trends we've established in the first quarter.

So you took over three or four years ago.

Would you say you're 80% along the way from your strategic plan from repositioning the Company?

And then let me -- let me weave that a little bit further on thoughts from acquisitions and what you might -- you might or might not add this coming year?

Well, I -- I don't get the percentage part of it.

I am further than 80% in terms of putting together the management team that is necessary to achieve those kinds of results.

I don't think that we're 80% there in the financial results yet.

On the other hand, instead of trying to put a marker on what percentage of the way we're there, I think the foundation that we're building in terms of having a consistent strategy, focusing on returns, and working with our lines of business that we're well along the way.

It's just starting to show up in the financials.

We had to get out from underneath the significantly higher credit losses that our portfolio was producing, higher-risk portfolio, and none of that can be accomplished by flicking a light switch.

And again, I think there's nothing in these numbers or last quarter's numbers that wouldn't give me a lot of confidence that our goals are realistic and that we'll, in fact, get there.

And then lastly [any] thoughts on acquisitions for the coming year?

Any good company that's going to grow is going to grow first by executing on its business as usual, it's organic.

And then I hope in 2005 we'll be able to continue to add through acquisition parts of businesses, pieces of businesses as we did in 2004.

One of our better acquisitions was accomplished in KeyCorporate Investment Bank with the American Express Business Finance leasing package, but we also added some deposits in Michigan.

We added a small bank in our market place out in Seattle.

I would hope to continue to do those kinds of things.

Thank you.

David George, A.G.

Edwards

Good morning.

Thanks for taking my question.

Question about CNI.

Can you talk about your loan pipeline at the moment as well as kind of your strategy toward the syndicated loan market, just kind of some strategic thoughts as -- as it relates to your participation there?

Thanks.

Tom Bunn is here, David.

And I'll ask him to comment on that.

Tom?

Thank you Henry.

From the standpoint of the CNI side, we are pleased with our last couple of quarters, and we feel like we will see steady -- steady and don't expect spectacular but steady growth across the franchise geographically and business wise for the rest of '05.

We've certainly seen that in the first quarter.

From a syndicated finance standpoint, our league table position in syndicated loans continues to improve, which positions us as the lead bank to a greater and greater number of our clients and all the research demonstrates and I think we're seeing it in realtime that at the lead bank you get a greater share of the fees that that company generates.

So we are very pleased with our increasing role as our client's lead bank.

It's a focus we've had, and we're leveraging that across our other product set.

So that's where we are.

Okay.

That's helpful.

Thank you.

Denis Laplante, KPW.

Good morning.

Thank you.

I had two questions.

On the miscellaneous income on page 13 of your releases seems to be above run rate.

Is there anything unusual there?

And the second question I had is -- is you indicated that on the commercial loan growth on an average basis that you're X acquisitions are up about $2 billion which is a 20% annualized run rate.

And I'm interested in terms of how that business breaks down between Tom Bunn's word and the true middle market end of the business and anything else that you'd want to characterize in terms of breaking out the -- the CNI.

Denis, this is Jeff Weeden.

I'll take the -- the question with respect to the other income.

The other income line item had a small gain in it this year that was -- that was $4 million.

So it's not a real large item.

I think the difference between this year and last year really relates to last year there was a loss on that same particular item, so it was basically a recovery this year of $4 million and a loss last year on that particular item.

And then on top of that in the leasing business we've had the auto leasing business that was a drain that portfolio you can see is basically well below $100 million.

So we had the least residual losses that were going through that particular line item.

Now we're into the commercial leasing business, which typically throws off gains and is very consistent.

The last couple of quarters the gains have been coming off that particular portfolio.

So primary difference Denis, this year versus year.

Last year leasing residual values and also a small loss that was in there.

This year a small gain, and then the leasing residual gains.

Tom, if you'd take the second.

Sure.

Dennis, actually a majority of the commercial loan portfolio resides in KCIB.

We actually are responsible for all the relationships down to $10 million in revenues across the franchise.

So if you look at KCIB and you look at a number you just quoted, about a $2 billion tax acquisition growth for the quarter, we represented about 1.7 billion of that growth or about 6% quarter-over-quarter.

That was spread pretty consistently across commercial growth, real estate growth, and KEF growth even without the acquisition.

So -- so those numbers are, again, geographically spread and business spread.

Now, in terms of -- I believe the number that -- well, I'm not sure.

I guess that was including all commercial loans including the real estate numbers.

If -- if you -- if you look at the syndicated, though the middle market, if you split those numbers up because I know you had a one large credit this quarter that significantly influenced the averages, would you be able to give us a little more color there?

In terms of the breakout between -- not only in -- in -- because you have all of the wholesale space, but the true middle market that -- that George runs and -- and let's say the larger corporate that -- that Chris runs.

Actually, Dennis, what we look AT&T is the commercial loan book, which is the middle market, which is George's book grew 2% quarter-over-quarter for about an 8 -- 8% annualized growth across all the regions.

We actually, if you look at the institutional side which is Chris's area, we don't expect that loan book to grow with the exception of a transactional flow like the one we had.

Basically we don't view that as a growth book, and I -- and it's not a significant book in our -- in our $32 billion KCIB portfolio anyway.

Thank you.

John McDonald, Banc of America.

Hi.

Good morning.

Jeff, you had mentioned that deposit fees probably bottoming.

Just wondering if it was a sequential weakness this quarter?

What could drive better deposit fee growth going forward?

John, there is so sequential weakness that we typically have going from the fourth quartering to the first quarter, but I think on top of -- of that what we said was that we believed we were near the bottom.

It didn't mean we were at, by any way, the bottom, and that's based upon what analyzed deposit service charges may do in the event we have a rise in rates.

Then that would bolster the margin at that particular point in time.

There would be more value associated with those particular deposits.

Henry, I'm not sure if you covered this.

But any impact on the auto sector's problems on the economic business activity in your markets that you've either seen or expect to see?

Well, Chuck Hyle commented on just sort of what our exposure is, John.

But the -- there's no question in the Midwest there is a very slow segment that is related to the auto industry, and there's some negative issues in there for some of our smaller companies.

Many of them contract with the big auto manufacturers with longer-term contracts, and they don't necessarily hedge the front end.

And as I think everyone knows, an awful lot of commodities and while steel backed off a little, steel prices went up significantly.

So those companies are suffering a little bit more than others, but in terms of our portfolio, we keep an eye on it.

We've got it under the focus, and it's not so large that it gives us any heartburn right now.

So it is slow.

It is causing what has been reported in the fed beige books as a fourth fed district, which is the great lakes being slower than other fed districts, and I think a lot of that revolves around the automotive side.

But we are looking at it, and more than just looking at it, John.

We see some companies having some trouble, but we don't see any huge losses coming from that portfolio.

Okay.

And just one final thing for Jeff.

On the net interest margin guidance kind of holding at 360 for the year with the 10 basis points coming in the second quarter.

I guess it implies some things get better in the second half, Jeff?

Is that repricing on some of the assets?

What are the assumptions there?

What would be the offset to get the margin a little higher by the second half of the year?

It really does really does relate to being asset sensitive.

And as we look going out into the -- into the balance of the year, we would expect that with our pricing that we have on our deposits that we would have a slight increase in the -- in the margin from the second quarter going on out to the third and fourth quarter.

Okay.

Thanks, guys.

Gerard Cassidy, RBC Capital Markets.

Thank you.

Henry, can you reiterate -- you mentioned something about the -- it's very competitive out there on the -- on the loan side, and you're starting to see some weakening in the underwriting standards.

Is there any particular sectors that you're seeing in that end over other sectors?

Just to make sure you heard me right, Gerard, I said we're being very, very cautious about not letting a weakness in the underwriting standards come through.

What we are seeing is a continuation of the very competitive pricing, but we're -- we're -- we're not seeing a whole lot, and we aren't bending to the -- the underwriting easing.

So, that -- just to make sure that that part of it is clear, and then the second part of the question was?

On the pricing, then, where are you guys seeing the most competition on the pricing in terms of the portfolios?

Clearly the Midwest.

I think it has been discussed by other banks, but both the asset pricing in the Midwest and the deposit pricing in the Midwest is as competitive as any of the four regions that we operate in.

I do think that the deposit side is seeing a little bit more reasonable approaches, and that is helping us.

A question came up earlier about how the deposit costs are -- are being handled, but while we see some -- some more reasonable approaches coming into the marketplace, I can tell you without any hesitation that the Midwest on both the asset side and the liability side is the most competitive of all of our regions.

How about by loan types?

Is it more in the consumer marine side for you guys or commercial or commercial real estate?

It's pretty broad-based across all of the categories, because there are some very strong consumer both deposit and consumer lending organizations in the Midwest.

And we see it primarily in the upper middle market as being very, very price-competitive.

So it's pretty broad-based.

As Tom Bunn was giving me some input in the last day or two, there really isn't much lumpy in this portfolio in terms of differences.

It's -- it's pretty broad-based in terms of both the growth and the pricing aggressiveness as it relates to geography.

Great.

And just one last question.

Did I hear you correctly that you folks have about a billion dollars of -- of indirect exposure to the auto industry, the suppliers and such, but that did not include the floor planning portfolio and if it did not how big is the floor planning portfolio?

Floor planning is about two -- just about $2 billion spread over a very wide range of dealerships.

Great, thank you.

And the billion dollar number -- just below a billion dollar I gave earlier is commitments and not loans.

The actual loans outstanding are considerably smaller number than that.

Mike Mayo, Prudential Equity Group.

Hi.

Just one clarification.

The margins you're down by 10 basis points in the second quarter.

Is all that due to the sale auto?

Or what's the core decline of the margin you expect?

Mike, this is Jeff Weeden.

That's all as a result of the -- of the auto sales, those two particular portfolios.

So on a core basis you expect it to stay kind of flat?

Yes, flat to maybe even increasing a couple basis points.

And the period end commercial loans were kind of flattish with year-end even though the average loans were up quite a bit.

Can you elaborate on that and kind of your expectations for commercial loan growth the rest of the year?

Yes, Mike.

What we had in the month of March, we did see a slowdown in some of the lending activities as well as the paydown on the part of the credit we talked about in our fourth quarter earnings call.

The expectation as we go forward here on the commercial side as well as average earning assets -- average earning asset in loan growth we've given for the year is in the mid-single digit range.

I think on commercial loans we would look for upper single digit growth for the balance of the year.

And in terms of deposit fees, I know it's the third question on this.

You're saying you're nearing the bottom of that.

I understand of the commercial side where you get the better earnings credit.

I mean, you have to -- the fees are reduced by the higher interest rates to the commercial.

On the retail side, I mean we're hearing that competition is heated up and maybe you haven't seen the bottom.

So why do you feel more confident about the retail deposit fees?

Mike in that particular area we've come down significantly from where we are just two years ago.

I think in 2002 we were running at deposit service charges for the organization at about $100 million per quarter.

Now we're down in the $70 million category or range.

And looking at what we have in the various categories within the deposit service charges, there's -- there's not a lot of -- of further erosion, at least that's the expectation, Mike.

Okay.

And just generally it seems like you're nudging up guidance a few cents.

What one factor would lead you to do that?

In other words, your range of 2.55 to 2.65 versus consensus for right around 2.57 or so?

Mike I guess I would point to the fact that in January on our call we gave a range of 2.55 to 2.65.

So we have not changed our guidance for the year, and this is our initial guidance for the second quarter of 62 to $0.66.

So you feel about the same about things?

Yes, we do.

All right.

Thank you.

Scott Siefers, Sandler O'Neill.

Sorry about that.

Good morning, guys.

I was just curious if -- if you look at the guidance on earning assets and loan growth for the remainder of the year.

At least optically it'll -- it'll give the -- the appearance of a slowdown and kind of sequential growth rates you guys have had in the last couple quarters.

I know at least a portion of that is the auto portfolio coming off.

There's some acquisitions in there.

I guess you just alluded to at least some commercial slowdown in March.

But as you guys are thinking about the -- the entire loan portfolio, I wondered if you could kind of summarize the dynamics that -- that you see there and why we should kind of -- kind of expect at least on the optically a bit of a slowdown?

And then the second question is just to what extent has the kind of aggressive pricing dynamics that you guys have talked about on both the loan and deposit side been baked into your -- your margin expectations for the remainder of the year?

Okay.

Scott.

With respect to the -- the loan growth, again we've had a paydown on the -- the one credit that we were involved with that we talked about at the beginning of the year.

That particular credit paid down in March and paid down again in April.

We expect other paydowns in April and May, so that particular credit will be primar -- should be off of the books here second quarter, early third quarter in that type of a time frame.

So that is having an impact on the overall growth rate and expectations, if you will.

We've also seen some softness in the consumer growth.

The consumer growth quarter-over-quarter are our home equity lending was flat, which is basically the community-based bank type lending.

That was flat quarter-over-quarter.

It was up 6% year-over-year but very -- very much flat on a sequential basis.

We would expect to see some growth start to come back into that particular portfolio.

Our overall guidance still remains that we expect mid single digits earning asset growth for the -- for the year.

I think we've stayed very consistent with that.

Our margin guidance assumes that pricing pressures will still remain in the marketplace, so we are assuming that it will be a very competitive market out there.

And I guess that summarizes our guidance on -- on both of those issues.

All right.

Thank you very much.

Thank you.

That will conclude our question-and-answer session today.

At this time I'd like to turn the conference back over to you Mr. Meyer for any additional or closing remarks.

Thank you, operator.

Again, let me thank all of you for participating in Key's first quarter conference call.

I feel positive about our results and the strategic steps we're taking in the quarter.

As always, please feel free to call our Investor Relations Team, Vern Patterson and Mike Conway with any additional questions.

Thank you and we are signing off here in Cleveland.

Thank you for your participation.

That does conclude today's conference, and you may disconnect at this time.