KeyCorp (KEY) 2007 Q2 法說會逐字稿

Good morning and welcome to KeyCorp's second quarter 2007 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.

Please go ahead, sir.

Thank you, operator.

Good morning and welcome to KeyCorp's second quarter earnings conference call.

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

Joining me for the presentation is our CFO, Jeff Weeden; and also joining us for the Q&A portion of the call are our Vice Chairs, Tom Bunn and Beth Mooney; and our Chief Risk Officer, Chuck Hyle.

Before Jeff reviews our financial results I want to make a few comments on the quarter.

Overall, I was very pleased with the Company's financial results, especially in light of the continued competitive pressures and the challenging interest rate environment.

Key's results were driven by good performance in several of our fee-based businesses and effective expense control.

We have also continued to invest for our future.

Our investments include human capital, making sure that we have the right people, and providing the necessary training in technology, including our new teller 21 platform, that is scheduled for implementation across the Company in the second half of '07 and the first half of 2008; and in infrastructure, with plans to modernize a significant number of our branches over the next three years.

Beyond our financial performance, we also had some positive news on the compliance front.

As we previously reported, the Comptroller of the Currency, and the Federal Reserve Bank of Cleveland have removed the regulatory agreements with Key.

I am extremely appreciative of the commitment and level of effort put forth by our employees and with the support provided by our Board of Directors, as we strengthened our Anti-money Laundering and Bank Secrecy Act compliance programs.

Now I'll turn the call over to Jeff for a review of our financial results.

Jeff?

Thank you, Henry.

I would like to direct everybody's attention first, to slide two, which covers our forward-looking disclosure statement.

This will cover both the presentation and the Q&A segment of our call today.

Looking at slide 3, which is our financial summary, as Henry mentioned, we had a very good second quarter with EPS from continuing operations at $0.85 per share compared to $0.74 per share from the same period one year ago.

Our ROE in the second quarter of 2007 was 17.66%, up from 15.85% in the second quarter of 2006.

Turning to slide 4, the Company's taxable equivalent net interest income from the second quarter increased $6 million from the first quarter and decreased $20 million from the same period one year ago.

For the second quarter of 2007, our net interest margin was 3.46%, down 4 basis points from the first quarter level and down 22 basis points from the same period one year ago.

We believe that most of the near-term negative pressure that we have been facing on our net interest margin is coming to an end, and we should see greater stability of the margin around the mid-3.40% range for the second half of 2007.

As of end of the second quarter, our exposure to a 200-basis point change in short-term interest rates over the next 12 months remains relatively neutral.

Slide 5 highlights the changes in noninterest income between the second quarter of 2007, the first quarter of this year, and the second quarter of last year.

The strong growth in our year-over-year results reflects increases of $67 million in principal investing gains, $23 million from loan securitizations and sales, and higher revenue from several of our other fee-based businesses.

We also had a $40 million gain related to the sale of MasterCard shares, compared with a $9 million gain in the year-ago results.

Trust and investment services income was down due to the McDonald branch divestiture.

In the first quarter of this year, we had brokerage income from McDonald Investments recorded in this category of $16 million, and in the second quarter of last year, that amount was $34 million.

Adjusting for the McDonald brokerage revenue reported in prior periods, we experienced good growth in trust and investment services revenue, with growth coming from Key investment services and from both our personal asset management area in Key Private Bank, and our institutional asset management area in Victory Capital Management.

Service charges on deposit accounts were up compared to both the prior quarter and the same period one year ago.

Investment banking and capital markets income was down $5 million from the same period one year ago and up $8 million from the first quarter.

As we head into the second half of 2007, our pipeline for investment banking opportunities remains solid.

Turning to slide 6, we have prepared a similar comparison of the increases and decreases in noninterest expense between the second quarter of this year and the first quarter of 2007 and the second quarter of 2006.

As a general comment, we are pleased with the overall expense control we experienced in the second quarter.

Excluding the $42 million charge related to litigation in the second quarter and the $14 million swing we had in the provision for unfunded commitments to an expense from a credit in the first quarter, our noninterest expense decreased by $25 million compared to the first quarter.

The decrease is related to the McDonald's branch divestiture.

Excluding this impact, total noninterest expense was flat between the second quarter and the first quarters of this year.

The personnel expense compared to the first quarter of 2007 decreased $17 million.

The McDonald branch divestiture had the largest impact on these numbers, accounting for $13 million of the change between the second quarter and the first quarter of this year.

Turning to slide 7, our average loans from continuing operations increased $646 million, or 1% unannualized from the first quarter of 2007 and were up $1.3 billion or 2% compared to the same period one year ago.

Average commercial loan balances were up 2.9% in the current quarter versus one year ago and up 0.9% unannualized from the first quarter of 2007.

Average consumer loans were down 0.4% from the same period one year ago and up 1.1% unannualized from the first quarter level.

Our outlook for both commercial and consumer loan growth is to be in the low to mid-single digit range for the balance of 2007.

Turning to slide 8, the sale of the McDonald branch investment network had an impact on our average balances comparisons between the second quarter of 2007 and the first quarter of 2007 and the prior year comparisons.

During the first quarter, we transferred, as part of the sale, approximately $1.3 billion of NOW and money market deposit accounts to the buyer.

On an average balance basis, the balances transferred represented approximately $700 million for the first quarter of 2007 and $1.5 billion for the second quarter of 2006.

Adjusting for these balances, core deposits were up approximately $0.9 billion compared to the first quarter of 2007, and up $0.5 billion compared to the same period one year ago.

Our DDA balances continue to show year-over-year and linked quarter growth.

With growth coming from both personal checking accounts and escrow balances in our commercial mortgage servicing area.

Our CD balances were down slightly compared to the first quarter of this year, as we adjusted our product offering to make our MMDA and NOW account offering more competitive.

This caused consumers to begin to move money back into MMDA and NOW accounts in the later part of the second quarter.

Our expectation for the second half of 2007 is to see our core deposit growth in the low to mid-single digit range on a linked quarter basis.

Slide 9 shows our asset quality trends.

Net charge-offs in the quarter were $53 million or 32 basis points compared with $44 million or 27 basis points in the first quarter and 34 million or 22 basis points for the same period one year ago.

Nonperforming assets at June 30, 2007, totaled $378 million and represented 57 basis points of total loans, other real estate owned, and other nonperforming assets.

This compares with $353 million or 54 basis points in the first quarter of this year and $308 million or 46 basis points for the same period one year ago.

The loan loss reserve at June 30, 2007, represented 1.42% of total loans and our coverage ratio of our allowance to nonperforming loans stood at 342%.

We expect credit quality to remain fairly benign with a modest bias or an increase in net charge-offs over the remainder of 2007.

Our guidance remains for net charge-offs to be in the 30 to 40-basis point range for the second half of 2007.

Looking at slide 10, the Company's tangible capital to tangible asset ratio was 6.89%, and our tier 1 capital ratio was 8.10% at June 30, 2007.

During the second quarter, we repurchased 6 million of our common shares and reissued 0.9 million shares under employee benefit plans.

At June 30, 2007, we had 16 million shares remaining under our current Board repurchase authorization.

Our capital levels allow for future growth opportunities, both organically and through acquisitions, in addition to continued use of share repurchases in the overall management of our capital levels.

Finally, turning to slide 11, which summarizes my comments on the outlook for the second half of 2007.

Included on this slide is our second half 2007 earnings outlook of $1.50 to $1.60 per share.

2007 will be the last year in which we provide specific EPS guidance.

However, we still plan on providing our outlook with respect to some of the main drivers of earnings, such as those listed on this slide in future updates.

That concludes our remarks.

Now I'll turn the call back over to the operator to provide specific instructions for the Q&A segment of our call.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Gerard Cassidy, RBC Capital Markets.

Good morning, thank you.

Jeff, could you -- just to follow-up on your last comment about the guidance for EPS is going to stop after '07.

What was the thinking behind you guys changing your position on providing guidance?

Well, we have looked at a number of other banks that provide guidance and most of the guidance that's provided today by companies happens to be in the form of specific line items rather than a specific earnings per share.

As you recall earlier this year, we went away from providing quarterly guidance and went to an annual guidance, so this is just a continuation of now moving away from earnings per share guidance altogether.

Okay.

It looked like, from your prior quarter, when we look at the '07 earnings outlook, the guidance then was $2.80 to $2.95 for the full year and now it looks like you've bumped that up to $3 to $3.20 on an annualized basis in the second half.

What was -- even though your margin is pretty much unchanged, what's the positive change that's upped the earnings guidance, if I'm interpreting it correctly?

Yes.

Well, there are a couple of things.

One, we've had -- just the strength we've had in the second quarter with respect to principal investing, and then our outlook for the balance of year with respect to other fee businesses.

I think in Tom Bunn's area and the National Banking area, they are very positive on the second half of the year with respect to some of their fee-based businesses.

I think in terms of looking at principal investing for the balance of the year, the outlook remains favorable.

As I think we said in our press release, we don't expect it to be at the same level we experienced in the second quarter, but we do expect it to be favorable compared to prior years.

And I think we also had favorable loan growth in the second quarter.

So that gives us more confidence as we head into the second half of the year given our pipelines and some of the activities that are taking place in the community bank, as well as things that are happening in the National Bank to provide the guidance that we did.

My final question is, speaking of loan growth, do you guys participate in the syndicated leverage loans that are being driven today by all the privatization of companies?

If so, what's the size of that portfolio in the commercial loan category?

Chuck Hyle will answer that.

This is Chuck Hyle speaking.

We are not material participants in the leverage loan business.

We don't do a lot of -- in fact, we do very few of the larger transactions through a very small group and a very small portfolio that focuses on some leverage lending.

But the portfolio today is actually smaller than it was two years ago.

It's not a big business for us.

Thank you.

Our next question comes from Brent Erensel, Portales Partners.

I'm just wondering on the litigation reserves if they are all over and done and behind us now?

Second, would you say the same about the MasterCard gains?

Then third, you've had a number of peers or smaller brethren that have had some problems with private real estate developers.

And I'm wondering why, or can you talk us through that in terms of why you avoid that or how you look at it?

The first thing I'll cover is the litigation.

This is Jeff Weeden.

The litigation reserve that we established was for a case that was in Hawaii that we had an unfavorable outcome on and we've taken a full accrual for that particular case.

We'll still continue to pursue what other avenues we have available to us, including appeals.

With respect to MasterCard, we recognized in the -- we sold about 60% of our holdings in the second quarter.

So we still have additional holdings of that particular company.

The last question with developers, Chuck Hyle will respond to that.

Let me address the private developer side.

Our national commercial real estate business is, first of all, focused more at the larger end of the business and I think that certainly is helping us in this particular part of the cycle.

The second point I would make is that we very much restrict, essentially restrict any of our branches or smaller end of the business to get involved with smaller developers.

We stay very much away from that and we run it on a national platform, so we feel we're well diversified and we run it through professional commercial real estate people and that's been our model for quite some time.

We have also, as we said in previous calls, started ramping down our residential side of the real estate business starting a number of quarters ago, condominiums almost two years ago, and residential probably closer to nine months ago.

Thank you.

Our next question comes from Gary Townsend, FBR.

Good morning.

How are you, gentlemen?

With respect to guidance, first of all, it seems as though you are expecting some acceleration in the second half.

Can you just discuss the drivers in the second half of the year and whether there would be, in your estimate, any nonrecurring income?

Gary, this is Jeff Weeden.

As we look at the second half of the year, I think we just -- what we're looking at is a stability in the margin around the mid-340 range.

We're looking at controlled credit costs, I think with our guidance that we've provided.

We're seeing some asset growth and I think in terms of the fee income side, and Tom Bunn can address the pipeline for investment banking, but I'd also remind everybody that typically we have either in the third or the fourth quarter a securitization that we complete in our student lending area, and that adds to fee income also.

And historically, if you go back, we typically have stronger thirds and fourth quarters with fourth quarter typically being the strongest and first quarter typically being the weakest of our quarters on a historic basis.

That's really a lot of the basis behind it.

Tom, do you want to comment on your business?

Sure.

Clearly, we don't have a crystal ball on the condition of the markets for the next six months, but from the standpoint of what Jeff said, we tend to be seasonal on our business with third and fourth being our strongest quarters.

We're pleased with our first half performance, but we are optimistic about our pipeline in all our major areas, including both M&A and capital markets, inclusive of equities and fixed income in syndication.

So we feel good about the second half.

We expect, barring a capital markets issue, we expect that to be a strong half.

Thank you.

Could you also just briefly discuss what you're seeing in terms of migration analysis in your loan portfolios?

This is Chuck Hyle.

We've, I think, probably like most banks, have seen some migration in our portfolios.

I think clearly the home builder section is one area that we've been watching quite carefully and we have seen migration there.

We don't believe that there will be any material loss that comes out of that, but we certainly have seen some migration.

We don't expect the residential side of real estate to improve much until well into 2008 and react accordingly.

We've seen a little bit of migration here and there, but nothing really terribly dramatic across the rest of the portfolio.

Thanks for your comments.

Our next question comes from Matthew O'Connor, UBS.

Good morning.

Your commercial mortgage loans held for sale increased sharply versus last quarter.

I was just wondering if you could give a little color in terms of the market conditions for those loans and is there any mark to market write-downs in the second quarter?

This is Tom Bunn.

The market is consistent, spreads have narrowed which allows for a more difficult -- well, not more difficult, a smaller gain in the securitization loans held for sale.

Overall, we feel like that market will remain open.

Our volume is very good, our volume is better than it's been -- well, it's better than we expected to be for the year and better than last year.

So while spreads have narrowed, we do feel good about volume and we do feel good about the market receptivity.

Okay.

And no material mark to market write-downs this quarter from the narrowing of spreads?

No.

No.

Okay.

Just separately, your service charges grew nicely year-over-year.

I'm just wondering if you could give us some color, in terms of was that being driven on the consumer side or commercial side?

Consumer side.

It's really driven by I think the success that the Community Bank had last year with their nanocampaign and the adding of accounts, so they've been consistently adding checking accounts during the course of the past, basically, 9 to 12 months.

So that's just added to additional activity charges that are out there and we renegotiated a contract with a, on check processing and that also contributed to the increase in the fees.

Okay.

Then just lastly, if I may, your private equity gains are obviously very strong and it sounds like a pretty robust outlook there.

Can you just give us some thought in terms of what's driving all that?

I thought the portfolio's only $600 million or so, that's pretty out-sized gains.

The portfolio, I believe is, closer to $900 million, is what we have on the books.

So it's a combination of both funds as well as MEZ and some direct investments.

And we've had a couple of companies that have gone public and they've been very successful in that process.

So that's what's driving the profit.

Okay, great.

Thank you very much.

Our next question comes from Mike Mayo, Deutsche Bank.

Good morning.

Good morning.

What's changed with your guidance?

Capital markets are strong, that's not new.

You have seasonal strength in the second half of the year, that's not new.

So fundamentally, what are you feeling better about to raise expectations for the second half of the year?

You mentioned principal investing, is there -- and the securitization gains, that was kind of known before.

Anything else in the back of your mind that you feel better about?

I think in terms of while we can talk in terms of a number of different things, we've covered a number of those at this point with respect to just better level of activity coming from fee income.

I think in terms of the community bank, some of the strength that they had in the quarter with respect to deposit service charges, I think just the fact that we performed so much better in the second quarter and we've had pretty much effective expense control.

So we'll continue to watch our costs so that we can get some positive operating leverage in the second half of the year.

And what is it about the service charges that are doing so much better?

Well, Mike, I think we've had several years where deposit service charges have decreased and part of it is that the community bank model is taking hold and we're just getting more accounts that we're attracting to the Company.

With those accounts comes additional activity charges.

And separately, you're out of the merger penalty box, so what are your thoughts about buying banks, where, what size, merger of equals, et cetera?

Mike, it's Henry.

I can just tell you it's nice to be out from underneath the restraints that were there.

We continue to look for add-on acquisitions in the markets that we're in.

That hasn't changed.

It isn't like we're at the starting line of an auto race and we've got a green light and we're just going to go spend money.

We've been talking to banks, we have some particular focus on areas where we think we're undershared and we'll try and be opportunistic as time goes here.

The market still seems very rich on the seller side, so we're going to proceed in the same disciplined way we have in the past.

And merger of equals?

We never say never to anything, but right now we've got some momentum in our business model and we'd like to try to take advantage of those areas.

We have 23 districts in the community bank and a number of those areas are not optimal in terms of profit maximization for our shareholders and we want to work on those areas first.

And then also adjacent markets?

Again, if the right opportunity is there and the right opportunity for our existing shareholders to benefit from that kind of an investment, we'd look at it.

It's been harder to do those kinds of investments than areas where we already have a presence given the cost issues.

So we don't prioritize it that way, but we would never say never.

All right.

Thank you.

Our next question comes from Terry McEvoy, Oppenheimer Funds.

Good morning.

Could you talk a little bit about asset quality trends within the equipment finance line of business.

If I remember correctly, that area drove much of the increase in Q1 in terms of nonperforming assets.

And then a second question, within Key's private equity unit last quarter, there was a real estate-related investment also moved into nonperforming status.

Any update there and any movement in the second quarter within that overall line of business?

This is Chuck Hyle.

On the leasing side, we've seen over the last couple of months really a stabilization in that portfolio, the small ticket side is stabilizing and plateauing and we think things have moved in the right direction there.

And on the big ticket side, it's been pretty much the same.

So I think the outlook for us is a bit better there than it was at the turn of the year.

As far as the real estate investment we commented on in the first quarter, we now have control of that asset.

We are running the marketing of those units and our experience over the last month or so is actually better than our expectations a quarter ago, so we're quite optimistic on that particular property.

And within your four major markets, could you talk about deposit trends, growth by region, pricing competition by region, et cetera.

Yes.

I would be glad to answer that question, Terry.

This is Beth Mooney.

We are starting to see some good growth in our Western markets, both in our commercial loan book as well as our consumer loan book.

As we've talked in recent quarters, consumer loan growth specifically in the home equity product has been difficult to show growth given the level of payoffs in the market given the interest rate environment, but we've seen stability in our Western markets in both commercial, business banking, and consumer loan growth and in the Great Lakes in our Northeastern markets, we're seeing nice commercial and business banking loan growth, but given those housing markets, we do not see the consumer loan growth rebounding there yet.

As it relates to deposit markets, we are seeing linked quarter growth in our deposit offerings and the pricing still remains incredibly competitive in Great Lakes and our Northeast markets and there is a much more rational pricing in the West and as a result, we get some of our strongest growth with our current price offerings in our Western markets.

Thank you.

Our next question comes from Ed Najarian, Merrill Lynch.

Good morning, everyone.

My questions have been answered.

Thank you.

Our next question comes from Kevin St.

Pierre, Sanford Bernstein.

Most of my questions have been answered as well.

Just a couple of quick follow-ups.

On loss provisioning, would you anticipate provisioning to match charge-offs over the second half of the year?

Will we see a relatively stable reserve to loan ratio, or how should we look at loss provisioning?

This is Jeff Weeden.

The expectation for purposes of how you project on out would be that provisioning and charge-offs would approximate one another.

Great.

I apologize if I missed the commentary during the discussion.

The strength in noninterest bearing deposits had somewhere near 20% annualized growth on a linked quarter basis.

Could you tell me what's driving that.

A lot of that is coming from our commercial mortgage servicing area.

We continue to add servicing as well as the escrow balances that are associated with that.

Great.

Thank you very much.

Our next question comes from David Pringle, [Sales Point Research].

Good morning.

Thank you.

You had mentioned that you expected a slight upward bias in credit in the second half.

Could you give us an idea of what areas you expect that in?

And then I have a follow-up.

This is Chuck Hyle.

I guess the portfolio that we are most focused on, as we said in the past, is the residential real estate side of the business.

We have seen some migration and while we see perhaps some increase there, we don't believe that the charge-off numbers will be materially increased from where they are today.

And we're also watching the community bank and the business bank.

I think that's where we are in the cycle is that smaller companies may begin to feel a little bit of stress and strain.

Again, we haven't seen a lot of migration there, but we're keeping our eye on it.

And what leads you to believe that part of the C&I book would be under so much pressure?

Well, I'm not sure it's much pressure, it's a bit of pressure, and it's also a relativity point.

We've come off such benign times and we're at that point of the cycle and things have been very good for a very long point in time, so we expect maybe a little bit of uptick from the very good times we've been having over the last couple of years.

Sure.

Then are you at all willing to disclose your condo exposure?

We have not.

But if you look in the Qs and the Ks, you'll see the residential breakdown in there and it's in that number.

Sort of that 2 to 3 billion range?

And it's coming down quite well.

Thank you.

Our next question comes from John McDonald, Banc of America.

Just a quick reminder on your capital levels and buybacks.

Does the lifting of the regulatory agreements in your M&A interest change anything with regards to the buyback strategy?

No.

We'll continue, John, to manage our capital so that we have flexibility to both look at organic growth, M&A-related activities, as well as to continue to look at share repurchase.

And any change in terms of de novo appetite, either because things are getting crowded, or because you're having success in some of the best initiatives.

What's the update on just the de novo appetite?

John, this is Beth Mooney.

We've done a limited number of de novos this year.

Just a handful as well as a few consolidations and closures.

We're in the process of evaluating our de novo strategy for the next two to three years and I would see us selectively come up with a plan to build some incremental branches but we have not finalized those plans yet.

Could you see yourself using de novo to go into new markets, Beth?

No, John, I would not.

Henry mentioned that we are suboptimized in a number of our markets where we have high growth and low share, and I think we have ample opportunity to look at expansions in very attractive markets where we already have a presence.

Okay, thank you.

Our next question comes from Mike Holton, Merrill Lynch.

Hey.

A couple questions.

First on the back half of the year commentary around fee income.

I know it's a seasonally strong time for loan sales and securitizations line.

As you think about that year-over-year, should that be up over last year's back half?

I haven't given a lot of comparison there to look at compared to last year.

I'm really taking it and looking at from this point forward, simply because last year we had other businesses that were part of the Company that are no longer in there.

Okay.

Then you had mentioned MasterCard you sold about 60% of what you hold.

In your guidance for back half of the year, are you assuming any additional sales of MasterCard shares.

No.

Okay.

All right.

Thanks.

Our next question comes from David Konrad, KBW.

Excuse me, good morning.

I guess another question on fee income, in terms of trust in the trust and wealth management business was up really strong this quarter.

I think on a core basis, maybe 5% linked quarter and 10% year-over-year.

Just wondering in your guidance if that type of growth rate was sustainable, or what's your outlook for the next two quarters on the trust side?

This is Tom Bunn.

Let me address the Victory side of that and I'll let Beth talk about the retail side of that.

We've been very pleased with the growth in Victory from an asset under management side.

The acquisition of Austin Capital.

Some of the areas we've built out have shown very good growth as well as our core diversified and other strategies.

We expect that to continue, quite honestly.

We think the performance of those strategies is above benchmark and will continue to attract assets going forward.

David, then the retail sector, we have two drivers of our growth.

One, we are seeing growth in our core wealth management businesses to individuals, particularly around asset management, but probably the biggest driver for us is our platform investment program, Key Investment Services which we really effectively started in the first quarter of 2006 and that business has been growing north of 20% linked quarter and more than that year-over-year.

So the big driver for us is the success of that platform program that we're offering through our branches.

Okay, great.

Thank you.

Our next question comes from Michael Rogers, Conning Asset Management.

Yes, good morning.

I'm looking at page 17 of your handout on commercial real estate loans.

I noticed -- I'm sure it's come up before, but I haven't asked it anyhow.

The Southeast residential properties portfolio is out-sized relative to the rest.

If you could please give me some background on why this large -- relatively large seemingly out of footprint portfolio.

Secondly, is there any Atlanta and Florida exposure here where, particularly in Atlanta, I guess, things look particularly weak in terms of pricing conditions?

Lastly, how much does the market in general in that region have to fall before you get concerned about having to take real losses.

Let me address the first half of that from the standpoint of our strategy in the real estate business.

Tom Bunn.

We have always viewed the real estate business -- commercial real estate business as a national business.

Obviously, over the last five, ten years, the Southeast has been a very strong market.

We are in those markets physically and so therefore this would be the markets we live, these are markets we have offices in, and these are the markets we participate in.

That led us, as Chuck mentioned earlier, to begin to withdraw or reduce exposure in certain of those markets as much as two years ago.

We noticed hot condominium markets in Florida and some other regions, which has resulted in us, as Chuck said, being more active in managing our condo exposure in those markets.

We look at this business, we look at this business as a very geographically and product diversified business.

And unlike some of our businesses which are franchise-based, this tends to be national-based and Southeast just part of the national approach.

Chuck, do you want to talk about it?

Yes.

I think just really amplifying on that, we have -- you will see a trend line in the Southeast residential properties exposure coming down over the last number of quarters and we expect that trend to continue.

Again, a point I made earlier, we have tended to focus on larger entities in the real estate business.

Not the small guys, and as a result, we think they generally have staying power to get through any kind of trough.

There's still a lot of liquidity in the real estate business, less so, obviously in residential properties at the moment, but we have adjusted our portfolio strategy accordingly by de-emphasizing certain businesses early and emphasizing other parts of the real estate business that we think are on the ascendancy.

So that's how we tend to manage this business.

If I could ask, how much do you think you would have to see in any given market, or in a general sense, market prices drop in general before you get more concerned about real charge-offs here?

Well, that's a really difficult question to answer.

There's so much of this is driven by micromarkets and where you actually are.

A lot of variables.

Clearly, we have a -- we're watching very carefully certain markets in terms of new supply coming on and where market prices are going.

We continue to feel that we have good collateral, we've been very conservative in our underwriting standards in terms of LTVs, and in many cases we have the support of some quite large and strong sponsors.

So that gives us a view that we're in pretty decent shape.

Thanks very much.

Our next question comes from Jim Agah, Millennium Partners.

Hi, guys.

I'm sorry if you addressed this earlier.

I wanted to ask about the big revenue pickup in equipment finance.

Were there any residual gains in there?

There was a gain on the sale of certain leases.

That's the line items you saw in our income statement that related to a gain on sale of loans and securitizations.

That was the primary pickup there.

Okay.

That explains it.

Then the -- let me get to it.

The regional -- just the consumer bank -- I can't pull the slide up.

The consumer bank profitability, the revenue was down a lot quarter to quarter and year-over-year.

And I was trying to reconcile it to your fee income.

I think what you have to look at is, if you go to the press release and look at--.

Sorry.

Page 2 of the press release.

Yes.

You'll find in there that, again, last quarter included all the revenue associated with the gain on the sale of the McDonald branch network, and also the fee revenue associated with it.

Looking at that, there was approximately $193 million worth of revenue that would have been associated with the first quarter activity related to McDonald and the sale thereof.

And if you go back to the prior year, there's also additional revenue, I think it's around $54 million associated with that.

Again, we've got a schedule that's broken out in our first quarter press release, as well as going back and looking at the impact at least on net income in the second quarter press release on that page 2.

Okay.

As you go forward.

I know you guys mentioned there were some adjustments to your core deposit growth.

It looks a little better than reported.

The loan to deposit ratio is starting to look a little high.

Do you look at that ratio, do you target it, do you have an outer range limit, which suggests that at some point you have to get more core funded, you have to buy more regional banks?

I think in terms of the loan to core deposit and loan to deposit ratio, it is a ratio that we continue to track and follow.

It has actually shown dramatic improvement over the past five years.

It used to be on a loan to deposit ratio, we were up in the mid-140 range.

So it's come down to around 110%.

We believe we've made a lot of progress on that.

I think with our forecasted projected of both low to mid-single digit growth in both loans and deposits for the duration of this year, we're very comfortable with that overall ratio of where we are at today.

Perfect.

Thanks, guys.

We'll take a follow-up from Brent Erensel, Portales Partners.

Actually, I'm good.

Thank you.

We'll take a question from David Pringle, Sales Point Research.

I'm doing something wrong here.

What was your tax rate for the quarter, FTE?

Our tax rate for the quarter on an FTE basis was, I believe was around 30.8%.

And that was down a little bit from the first quarter?

It was and it's also below our guidance that we're providing.

We're providing a tax rate of approximately 32% going forward.

So 32%, so a couple of percent higher.

So effectively you had the MasterCard gain, higher securitizations, a very nice quarter in principal investing, and the $42 million in litigation reserves?

And we also had a charge that we put in for the provision for unfunded commitments, going to a $6 million expense from an $8 million credit in the first quarter.

What were the litigation reserves for?

I described those earlier.

Sorry.

They dealt with the -- a suit that was over in Hawaii, and we made a full provision for it.

Aloha.

Thank you.

It appears there are no further questions at this time.

Mr.

Meyer, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you, operator.

Again, I would like to just thank you all for participating in the call.

While there were some one-time issues in our second quarter, through it all we are experiencing some strong growth in the basic drivers of our earnings.

Our deposit growth, our fee income, both on the investment side, the service charge side.

So that's why the guidance of $1.50 to $1.60 for the second half of the year, and we feel comfortable with the positioning that KeyCorp is in at this point in time.

With that we're going to end the call.

Operator, again, thank you for your help and to all of you that stayed with us, thank you.

This concludes today's conference.

Thank you for your participation.

You may disconnect at this time.