KeyCorp (KEY) 2009 Q4 法說會逐字稿

Good morning and welcome to KeyCorp's 2009 fourth quarter 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.

Mr.

Meyer, please go ahead.

Thank you, operator.

Good morning, everyone, and welcome to KeyCorp's fourth quarter 2009 earnings conference call.

Joining me for today's presentation is our CFO, Jeff Weeden, and available for the Q&A portion of our call, our Vice-Chairs, Beth Mooney and Peter Hancock, Chief Risk Officer, Chuck Hyle, and our treasurer, Joe Vayda.

Slide two is our forward-looking disclosure statement.

It covers our presentation materials and comments, as well as the question-and-answer segment of our call today.

Now if you would turn to Slide number three.

Today we announced a net loss from containing operations of $258 million, or $0.30 per common share.

Although this remains a challenging environment, we are encouraged by the continued stabilization of the economy, and some positive trends in our fourth quarter results.

Our net interest margin increased 24-basis points from the prior quarter as a result of reduced funding costs and better earning asset yields.

And although net charge-offs remained elevated, we saw meaningful improvement in the fourth quarter in most of our credit metrics, including decreases in delinquencies, criticized and classified assets, non-performing loans, and non-performing assets.

Slide three shows the strategic priorities that guided our actions in 2009 and continued to be the primary areas of focus in 2010.

These priorities are built around three strategic imperatives; maintaining a strong balance sheet, reducing risk, and positioning the Company for growth.

While 2009 was one of the most challenging years in our Company's history, I'm pleased with the progress that we've made on these priorities.

The first priority is balance sheet strength, which is one of the foundational elements on which all of our business strategies are built.

We believe that strong capital, reserves and liquidity are critical, not only in today's environment, but also to support future growth opportunities.

During the year, we took a number of actions to strengthen our balance sheet, including generating approximately $2.4 billion of new Tier 1 common equity, and continuing to build our loan loss reserve.

At December 31 our Tier 1 common equity ratio was a strong 7.46%, and our Tier 1 risk-based capital ratio was 12.68%.

Both measures are up significantly from the year-ago period.

Over the past year, we also increased our allowance for loan losses by over $900 million to $2.5 billion.

At the end of the fourth quarter, our loan loss allowance represented 4.31% of total loans and 116% of non-performing loans.

Both of these ratios should place us in or very near the top quartile of our peer group.

And we made significant progress on strengthening our liquidity and funding positions.

Our average loan-to-deposit ratio at year end was below 100%, compared to several years ago when we were in the 140% range.

This improvement was accomplished by growing deposits, which reduced our reliance on wholesale funding.

We also exited non-relationship businesses, while increasing the portion of earning assets invested in highly-liquid securities.

Proactively addressing credit quality and reducing our risk profile has been and continues to be one of our top priorities.

One of our primary areas of focus has been to reduce our exposure to the higher-risk segments of our commercial real estate portfolio.

Since the first quarter of 2008, we have reduced our commercial real estate, residential properties exposure, by over $2.5 billion, or 69%, to $1.1 billion, which includes significant reductions in our California and Florida exposures.

We have also continued to address other parts of our commercial real estate portfolio, including working with our developer clients to provide interim financing on viable projects when long-term takeout financing is not available.

We have been successful in reunderwriting many of these credits, while strengthening Key's collateral position and adjusting pricing to reflect current market conditions.

And we have been aggressive in the disposition of higher-risk loans and assets.

Key was one of the first banks to initiate the sale of a large portfolio of at-risk commercial real estate home builder loans, and since that time, we have continued to sell both loans and other real estate owned.

A strong balance sheet and improved risk profile position us to leverage the investments that we have made and continue to make in our core relationship businesses, and despite this difficult operating environment, we have made progress in creating some distinctive businesses with attractive growth opportunities.

In community banking we're continuing to invest in our people, infrastructure, and technology.

In 2009 we opened 38 new branches in eight different markets, and we plan to open an additional 40 branches this year.

We have also completed 160 branch renovations over the past two years, and expect to renovate another 100 branches in 2010.

In addition, we created 157 business-intensive branches last year, which are staffed to serve our small business clients.

And while many of our competitors have reduced our commitment to this segment, Key is taking a longer-term view and will be uniquely positioned in our markets as the economy improves.

We are also investing in product enhancements, and innovation, driven by client insights in each of our community banking client segments.

Recent initiatives include our KeyBanc rewards offering, mobile online banking through iPhones and Blackberries, and upgrades in our treasury management capabilities, and we believe that our real competitive distinction is our people and the sales and service culture that we have built.

This difference was recognized last year with Key being the top-rated bank in Business Week's customer service champ survey.

In national ranking, we have continued to focus on reducing risk, and sharpening our focus on specific client segments where we have a sustainable competitive advantage.

Businesses that do not meet our risk-adjusted return hurdles have been moved to the exit portfolio.

As I mentioned, we have reduced our exposure to commercial real estate, and continue to look for opportunities to leverage our commercial real estate servicing capabilities.

We have also sharpened the focus of our institutional business, by aligning around four specific client segments and investing in the people that can capitalize on attractive opportunities again as the economy improves.

And we are emphasizing areas of synergy with client segments in a community bank, such as equipment leasing, and certain product offerings through KeyBanc Capital Markets.

In our equipment leasing business we are leveraging our scale and expertise to meet the needs of our clients across the organization, from small business all the way up to the large corporate clients.

And finally, we have continued to make progress on improving the efficiency and effectiveness of our organization.

Our staffing levels are down by over 2,500 FTEs over the past two years, and we continue to implement initiatives that will better align our cost structure with our relationship focus business strategies.

And we want to ensure that we have effective business models that are sustainable and flexible so that we are well positioned to capture new market opportunities.

We clearly have work remaining, but as we turn our sights to 2010 I remain confident that we are taking the right steps to emerge from this extraordinary period as a strong competitive Company.

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

Jeff?

Thank you, Henry.

Slide four provide a summary of the Company's fourth quarter 2009 results from continuing operations.

Unless otherwise noted, our comments today will be with regard to our continuing operations.

For the fourth quarter the Company incurred a net loss of $0.30 per common share.

Several items impacted our fourth quarter results, including continuing elevated credit costs, and realized and unrealized losses on CMBS holdings, and other direct or co-managed fund investments in our real estate capital line of business.

These realized and unrealized losses totaled $92 million, or $0.07 per common share.

After the fourth quarter write-downs we have a remaining carrying value of $29 million in our CMBS portfolio, and $63 million in our other real estate-related investments within the real estate capital line of business.

A significant positive item realized during the fourth quarter was the final settlement with the IRS of the tax years 1997 through 2006, which resulted in recording a credit to income taxes of $106 million, or $0.12 per common share.

Turning to Slide five, for the fourth quarter of 2009 the Company's taxable equivalent net interest income was $637 million compared to an adjusted $613 million in the third quarter.

The net interest margin expanded 17-basis points, to 3.04% for the fourth quarter, compared to the adjusted margin for the third quarter of 2009.

The Company benefited from an improved funding mix, as CDs, which were booked in 2008 continued to mature and reprice at current market rates, or move into lower-cost deposit products, such as NOW and money market accounts.

We expect this trend to continue into 2010 as we experience additional maturities of CDs booked in 2008 or earlier.

This repricing opportunity will continue to benefit the net interest margin in 2010, and with respect to the first quarter, we anticipate a five to ten-basis point further expansion of the net interest margin.

Turning to Slide six, during the fourth quarter the Company experienced a $4.3 billion decrease in average total loan balances compared to the third quarter of 2009, and a $12.8 billion decline compared to the fourth quarter of 2008.

The decline in average balances continues to reflect soft loan demand for credit from consumers and businesses as they continue to deliver given the uncertain economic environment, the impact of our exit portfolios as we continue to reduce risk in the Company, and the elevated net charge-off levels we have experienced.

The significant decline from last year is due in part to the build up in balances experienced in the second half of 2008, as clients drew on their lines of credit given the uncertainties in the markets, only to repay them in 2009, as the financial markets improved.

Until clients gain more confidences in the strength of the economic recovery, we expect loan demand to remain soft going in to 2010.

In addition, we will still face headwinds from the runoff of our exit portfolios and elevated net charge-offs.

On a more encouraging point, over the past quarter within the community banking part of our operation, we have seen a pickup in our commercial line pipeline reports from very depressed levels observed earlier in 2009.

Turning to Slide seven, average deposits were down approximately $600 million from the third quarter, and up $3.6 billion from the same period one year ago.

With respect to the individual deposit categories, we experienced an increase in DDA balances, as commercial clients continued to hold higher balances to offset analyzed deposit service charges, and alternative short-term investment opportunities are less attractive given the short -- given the low rate environment.

NOW and money market deposit account balances grew as money from maturing CDs shifted back into accounts -- back into these accounts, as current CD rates looked less attractive to clients.

We also some of these funds leave our deposit categories as individuals look for higher yields elsewhere, or invested the money in other products, such as annuities.

We expect this trend to continue into 2010 with a significant portion of money from maturing CDs either moving back in to NOW and money market deposit accounts or moving to other forms of investment.

As I mentioned earlier, the repricing of the CD book will also continue to benefit the net interest margin.

Slide eight shows the progress we have made over the past year to improve the liquidity position of the Company.

On this slide you can see the change in assets, and the improved funding mix of the Company over the past year.

As shown on this slide, for the fourth quarter of 2009 the loan-to-deposit ratio stood at 98%, a significant decrease from one year ago when it was 125%.

In this loan to deposit ratio, we have also included our discontinued operations balances.

Turning to Slide nine, net charge-offs in the fourth quarter increased to $708 million, and represented 4.64% of average total loans, compared to $587 million, or 3.59% experienced in the third quarter of 2009.

The increase from the third quarter was the result of charge-offs recorded on two specific customer relationships in the real estate capital line of business.

The charge-offs on these two relationships accounted for $131 million of the total net charge-offs for the fourth quarter.

We also continued to build reserves during the fourth quarter, however, at the slow -- at the lowest pace in over two years.

At December 31, 2009, our reserve balance stood at a little over $2.5 billion, and represented 4.31% of total loans.

In addition, our reserve for unfunded commitments increased by $27 million during the fourth quarter to $121 million, and when combined with our loan-loss reserve, total reserve for credit losses represented 4.52% of total loans at December 31, 2009.

Turning to Slide 10, our non-performing loans stood at $2.2 billion at December 31, 2009, and our non-performing assets were $2.5 billion.

These totals represented decreases of $103 million, and $298 million in non-performing loans and non-performing assets respectively from September 30, 2009.

As shown in the summary of changes in non-performing loans on page 27 of the earnings release today, the net inflow of non-performing loans continued to decrease in the fourth quarter, and while still running high, was at its lowest level of 2009.

Also shown on page 27 of the earnings release, are our 30 to 89-day and 90-day or more past due loans, which continued to show improvement in the fourth quarter.

These past-due loans declined to their lowest level since the third quarter of 2008.

Our coverage ratio of our loan-loss reserves to non-performing loans increased to 116% at December 31, 2009, and when combined with our reserve for unfunded commitments to our total loan-loss reserve, our total allowances for credit losses represented 121% coverage of non-performing loans at December 31, 2009.

In addition, non-performing loans are carried at approximately 76% of their original face values, and other real estate-owned and other non-performing assets are carried at approximately 53% of their original face values.

In total, we have recognized approximately $1 million in charge-offs and write-downs against these assets as of December 31, 2009.

Slide 11 is a breakdown of the commercial loan portfolio by line of business.

A couple of points to draw your attention to here are, first, you can see clearly the large increase in average commercial loan balances outstanding in 2008, and the subsequent decline that occurred in 2009.

Also, on a quarterly basis, average balances declined significantly in the second half of 2009, as business liquidity improved and companies used this as an opportunity to refinance in the capital markets or simply used excess liquidity to pay down debt.

Next, non-performing loans and net charge-offs in 2009 were driven by the real estate capital line of business within national banking.

This line of business accounted for approximately 31% of the outstanding average commercial loan balances, 55% of the commercial non-performing loans, and 66% of the commercial loan net charge-offs experienced in 2009.

In the appendix we have included additional schedules with respect to our various loan portfolios for your review.

And now concluding with our capital ratios on Slide 12, at December 31, 2009, our tangible common equity to tangible asset ratio was 7.56%, our Tier 1 common equity ratio was 7.46% and our Tier 1 risk-based capital ratio was 12.68%.

All of our capital ratios remain strong.

This, along with the Company's improved liquidity, positions us well to weather the current credit cycle and to continue to serve our client needs.

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?

Thank you.

(Operator instructions).

We'll begin with Betsy Graseck with Morgan Stanley.

Hi, good morning.

Good morning.

Could you talk a little bit about the outlook for NIM, and the impact that you anticipate from a rising rate environment?

Betsy this is Jeff Weeden.

I think in terms of how we have described the opportunity in the net interest margin is that directionally we're calling for it to expand in 2010.

The specific guidance that we provided was for approximately five to ten-basis points further improvement in the first quarter.

We are positioned currently in a very asset-sensitive nature, so for rising rates the Company will benefit.

This is probably the most asset sensitive we've been as a Company, at least in my tenure here at the Company.

And what's the baseline expectation a rate rise that backs -- that drives the five to ten-BIP increase?

There really isn't any rate rise increase that's anticipated for the first quarter.

Right.

That is driven by the fact that we have a CD book that was put on in 2008 that continues to roll off here through the first three quarters of 2010.

Right.

So could you just give us a sense of your NIM impact if you anticipate a rate rise?

So if rates were to go up 100 BIPS what's the impact on them?

Well, we basically have done a 200-basis point rise, which we typically would do over a ramp time period, and the impact that we would have on that versus a baseline would be about 3.3%.

Okay.

3.3% increase in NII?

Versus the baseline; that is correct.

Right, okay.

And then could you talk a little bit about what you think the organization can generate in terms of normalized ROA, or ROE when we get there?

I know it's still a little bit in the distance, but line of sight is improving, and the business mix did shift a little bit during this downturn, so could you just give us your sense as to what you think your organization can generate?

Well, Betsy, I think in terms of -- we haven't provided specifics in that particular area, but as a general rule, as we continue to work our way through the credit cycle, and we feel that we're still a long ways away from what we'd call normal credit conditions, so we're talking beyond 2010.

Credit rates -- credit charge-offs will still remain elevated in the current time, we still have elevated cost that are in place.

Our key (inaudible) initiatives continue to move forward.

We've talked about that.

We won't be at the full run rate on that until 2012.

But clearly, given the shift in the business mix and the continued refocusing of the Company to have a more efficient and effective balance sheet and organization, I think in terms of the industry and for Key we're probably looking at a 1% to 1.25% return on assets.

Okay.

And then last on TARP, can you give us an update as to how you're thinking on that?

Yes, Betsy, this is Henry.

We're continuing to work to position Key to repay TARP as soon as possible and practical, and we'll do so as a part of our overall capital management plans, and in a way that maintains the Company's strong balance sheet position.

Right now it's premature to speculate on that timing or any change in our capital structure that may be needed to do that, but we're continuing to keep that on our radar screen.

Okay.

So it's hard to say.

Is it going to be within the next year or so?

We haven't provided any specific guidance with respect to the repayment of TARP at this particular juncture.

Right.

Okay, but as soon as you can.

Okay.

All right, thanks so much.

We'll go next to Nancy Bush with NAB Research.

Good morning.

Henry this is one of these longer-term questions, as well.

I think everybody would concede that you've done a very, very good job of shrinking the Company, shrinking the risk portions of the Company, really getting through the credit cycle, and you're beginning to see the other side of that.

I guess the question would be, okay, how do you get out of the shrinkage mode into the growth mode, and since you in several markets where you don't have top market shares, is there any thought about a longer-term restructuring of the Company as far as your geographic emphasis?

Well, we've -- Nancy, you've followed us for a long time, and I've said before that there is no geography that's currently a part of Key that has a lifetime contract.

We continue to look at the returns that we get from different geographies, and lines of business.

We're constantly reviewing that, but we do think that there are going to be opportunities here beyond working through the FDIC troubled list.

I happen to believe that there's going to be consolidation in the banking industry, and I think strong capital positions, and good business models are going to be the winners there.

As we have said, we're shifting our business mix a little bit away from the national banking group, primarily some of the national consumer businesses that don't give us the hurdle rate returns that we need, and investing that in the community bank, not only in the effort to continue to be better self-funded, which we're now under 100% loan to deposit, but also in the small business and middle market areas, and looking at the synergies across the Key franchise, including using some of the products and services that the national bank provides.

So we don't think we're limited in terms of where those growth opportunities are.

We do think that we've got this transition period where we're working our way out of the exit portfolio and continuing to focus on growth, in effect running to stay even, but as that exit portfolio winds its way down, we'll be able to see the kind of growth primarily around our core relationship businesses.

That, again, we think is going to put us in good position.

What is your thought about becoming bigger and more concentrated in the Midwest?

Given that the economic outlook, I'm sure, is going to remain subdued there for a while, but that still is your major geography.

Do you want to be bigger in the Midwest, bigger in the Pacific Northwest, where would your preference be?

Yes, yes and yes.

Okay.

The truth is that we don't have the market share in some of our Rockies and Northwest states, but in the micro markets that we're in, we actually have very competitive share positions.

But we have been saying, again, pretty consistently for some time that we'd like to be one, two, or three, or 10%, in terms of market share, because we think that positioning maximizes profit potential, and we have been looking at FDIC-assisted deals.

Unfortunately, as I think everyone knows, I think I'm right when I say that Georgia has been the number one state, and number two, three, four, five and six aren't in our marketplace.

There's some good in that, and there's some negative in that we haven't seen the opportunities that we'd like.

But, again, beyond that -- and you started out by saying, Nancy, that this is a longer-term view -- we're trying to position Key to be an acquirer in what I think will be an inevitable consolidation that will happen over the next couple of years, not necessarily the first half of 2010.

And just a quick question for Jeff.

Jeff, are you at the end of shrinkage at this point?

Have you shrunk just about as far as you can in these risk areas?

Well, we still have, Nancy, additional runoff that's going to occur.

If you look at the elevated charge-off levels that we have experienced, and our guidance is that charge-off should be less in 2010 than they were in 2009, but they're still going to remain elevated.

Just doing that -- replacing that takes quite a little bit of effort in this particular economy.

I think until we see people have more confidence in the overall strength of the economy, and while we're seeing some pickup in the loan pipeline within the community bank, we still would not call it robust at this point in time.

So it's going to be a while, and I think we're going to continue to see pressure on those loan books, and it's really going to then shift over to into the investment portfolio and be stored there until we see opportunities to redeploy that back into the lending areas.

Okay, thank you.

We'll go next to Mike Mayo with CLSA.

Good morning.

Good morning.

You mentioned some one timers, I just wanted to make sure I have them all.

You said you benefited by $0.12 from the tax benefit and then you got hurt by $0.07 from some CMBS holding of $92 million, but I saw some other things in the press release.

So I guess you had some hedge on debt instruments, where you lost $39 million and you had investment losses on real estate of negative $34 million and it looks like you had fair value adjustments on derivatives negative $16 million?

Those were all in 2008, Mike.

Oh, okay, I'm sorry I read that too quickly then.

(LAUGHTER)

Those were 2008 items that you were just listing off, with the exception of the tax benefit that we recorded here in the current fourth quarter.

We did have -- now the $92 million or $0.07 as you were referring to on CMBS also involved other real estate-related investments, so we have direct, as well as co-managed fund investments that we have some losses on write-downs -- continued write-downs in the fourth quarter.

Okay.

And then you had $80 million from principal investing this quarter?

That's the gross amount.

It's $44 million after the portion that's attributable to others, so we have -- a portion of that -- under the accounting rules, we have a gross amount of $80 million, but net to Key is $44 million.

So we've actually broken that out in the press release, I believe that's on page 3 of the press release.

You can see that, perhaps more clearly on that table.

So should we think of that is non-permanent?

I would think in terms of the principal investing, if you look we had losses earlier in the year, again the end of the year, for the entire year.

I believe it netted down to about $4 million or so of the net loss.

So I would view that as volatile and nonrecurring.

Okay.

And just more generally, the gap between your preprovision, pre-tax profits, and your level of loan losses is very wide, and as long as it stays wide, I guess your book value will continue to go down quarter after quarter.

How should we think about when that might not be the case anymore?

In other words, you either need the revenues to go up, or the losses to go down, when do you think those lines will intersect again.

Well, also expenses coming down, too, I would say Mike.

So in terms of improving the preprovision profitability, and looking at the cost side, clearly costs are elevated at this particular juncture as we tackle some of the more problem areas of the Company.

And I think in terms of when we expect to "be profitable," we're not providing that specific guidance, but I would think in terms looking at 2010 in the whole, clearly losses we expect to remain elevated as we enter into 2010, and that costs will be a focal point -- continuing focal point for us.

Margin expanding here will be beneficial to profitability of the Company, but we also, as mentioned earlier, there's still pressure on average earning assets just as these loan portfolios continue to work themselves down.

So we haven't given specific guidance on when that profit turnover point is, but it is out, obviously in our own plans, in to the future.

And in terms of these elevated costs, the expenses that are elevated due to the problem assets, can you quantify that a little bit, because whenever we get back to normal, that will be gone?

That's correct.

So I think if you look at -- for example, in the fourth quarter, professional fees shot up as we addressed a number of issues that we faced in some of these assets.

They're probably about $20 million higher here in the fourth quarter than what they were running.

Okay.

The reserve for unfunded commitments.

The fourth quarter we actually made an adjustment based upon our prior three-year history here with respect to just loss-given default ratio -- rates and as a result of that, even though commitments really didn't change that much -- and as Henry commented on earlier, criticize and classified actually improved during the fourth quarter -- but our updated loss given default rates increased given that most recent history, so that drove some of that increase in the reserve for unfunded commitments.

Now, of course, as we have continued migration of credit going the other direction, at some point that'll actually bring down that reserve.

So that was $27 million in the fourth quarter, and then I think if we look at some other things, we've made some adjustments with respect to our pension here in the Company, so the pension plan was froze effective as of January 1, so there won't be any more new entrants, There's still -- it's a cash balance plan so there'll still be interest credit to the balances that are out there, but that'll also save us going forward anywhere $5 million to $10 million per quarter.

And then I think if you look at just the other real estate costs, going back through time, we basically used to run in the $5 million a quarter range, that's been up as high as $50 million.

It was $25 million in the fourth quarter, so over time that will also normalize.

All right.

So we're getting almost close to $100 million in expenses that would go away, ballpark?

Ballpark.

Okay, and then very last question.

The actual level losses went up a lot, from 3.59% to 4.64%, and it seems like real estate commercial mortgage is the main reason that was a big jump.

Was there anything one-time unique there?

Why so much of a jump this quarter?

Well, we put in the press release, Mike, there are two credits that really drove the increase, and I'll let -- Chuck will comment on those particular credits.

Yes, Mike, there were two real estate transactions that were really large by our standards.

One of them was a highly structured mezzanine transaction.

We have a very small mezzanine portfolio, I think it's down to about $280 million, so this was one that was -- had many levels to it, a very complex structure.

The underlying cash flows were actually holding up relatively well, but the structure was the Achilles heel, and so we recognized that loss.

The other transaction was a very large multi-bank essentially residential real estate transaction that was a late-stage transaction, and we all know what's happened in the residential real estate side of things.

A lot of the land associated with this deal is in the Southeast, and as we've said before, we've pretty aggressively attacked our residential real estate business, and shrunk that portfolio.

This was one that we -- was actually something of a hung syndication, so a bit larger than we would normally have, and we didn't have a very good view of where residential land prices were going, so we sold the asset during the course of the fourth quarter, and in line with what our expectations of other sales have been over the last couple of quarters, and put it -- drew a line under it, and put it behind us.

And, again, as we've outlined in previous quarters, we've attacked this -- that subset of the real estate portfolio quite aggressively, and it's getting down to fairly small numbers.

That's probably just -- I wouldn't call it one time, but you wouldn't expect to see that repeat in the first quarter?

That is not our expectation.

All right, thank you.

We'll go next to Ken Usdin with Banc of America-Merrill Lynch.

Hi, good morning.

Good morning.

Just an follow up on the outlook and how the cycle progresses, taking the context you are expecting charge-offs to be lower year over year, I'm just wondering.

The magnitude of reserve build has obviously shrunk a good amount, continued through this quarter, the reserve's up to $4.3 million.

You've had this turn -- nice turn in the NPA's.

What's the outlook for having to build additionally to the reserve from here?

And at one point -- at what point would you expect actually to -- to actually be matching if not even releasing as this book continues to shrink so meaningfully?

Ken, this is Jeff Weeden.

I think what we have to look at each and other quarter, and we have seen improvement in the overall non-performers here, so you saw less of a reserve build (inaudible), but I think what we are still guarded about is the strength of the overall US economy, and so as we get further into the recovery that's taking shape here, there will be a time, and I don't believe it's in the too distant future, where we will actually end up matching, and as you said, actually reserves will start to come down as we go through the cycle.

Part of the leading indicators that we have here are criticized and classified coming down, as well as non-performing loans coming down, and we experienced that in the fourth quarter, but charge-offs, as we also reported on, were high in the fourth quarter.

Can you give us a sense of magnitude on how your class acted and versus the prior quarters?

Well, I think in terms of -- Chuck can comment on that particular subject.

Yes, Ken, I think that we were very encouraged by how the criticized classified book worked through in the fourth quarter.

We saw a good migration in the right direction.

I think one of the things that I look at a lot is the ratio of upgrades to downgrades, and what comes in and what goes out, and those -- that ratio has improved quite materially over the last couple of quarters.

So I think it's a good indicator of our efforts to attack the portfolio pretty aggressively, and early on when we see a particular issue, and as a result, criticized classifieds are not just migrating better, but also paying down.

So I think we're encouraged by that.

As we all know, through the cycle we tend to see the early movements in the criticized classified as it flows through the delinquencies and MPLs and NPAs and into charge-offs over time.

But we have been pretty encouraged really across almost all of our portfolios on the change of tone in the criticized classified categories.

Great, thank you.

And one quick follow up just on CRE, that's -- MPLs were pretty flat there, but obviously there was this nice mix shift out of the residential but into the multi-family, and I was just wondering if you could give us a little bit more color on that sub bucket of the portfolio, and what trends you're seeing within some of those categories within income producing that actually did show increases, like multi-family and land and such?

Yes, I would say -- multi-family's an interesting asset class, because our expectation, as we've said on previous calls, is that loss content in multi-family will be relatively modest through the cycle.

The issue is how it ramps up during the rental intake, and we've been encouraged by a couple of things.

One -- the primary one is that absorption rates in virtually all states, even the four states that have been most materially impacted by the residential downturn, have held up pretty well.

The negative is that concessions or free rent months or whatever have clearly been a part of this process, so our expectation is that while we see some drift in to MPL and delinquency, over time our expectation is that most of this will reserve itself, so it's really more of a timing issue.

The other comment I would make is -- and this accounts for a portion of the increase in the MPL side for this quarter, is that we have done a number of TDRs, trouble debt restructurings, and a good portion of our TDRs, which I would say -- you can find it in the press release, but it's about $360 million for the fourth quarter, is an uptick in the MPLs, but our expectation as we have restructured those deals is they will come back into accruing over the next one, two, or three quarters.

So I think that's a little bit of a temporary aberration on the MPL side.

Okay, great.

Thanks very much.

And we'll go next to Paul Miller with FBR Capital Markets.

Hi, this actually [Jessica Helinda] in for Paul Miller.

I was just wondering if you could give us a little bit more color on your progress in the exit portfolio, and we saw a big jump last quarter, it looks like the balance has come down a bit this quarter, but are you primarily just waiting to run this down, are you actively trying to sell any portion of it, and what kind of prepayment speeds with you seeing in these portfolios?

Okay.

We have the exit portfolio, both in terms of -- in the press release it's included there.

It's also on Slide 21 of our materials for this conference call.

Looking at the various portfolios that are there, obviously on the residential property side, which is down now to about $431 million at the end of the year, that one we're continuing to work our way down, sell properties, get cash, and continue just liquidating on out that particular book.

The marine and RV floor plan, that's one that's going to be dependant on some refinancing in the industry so that'll go in ebbs and flows.

We had good activity in the third quarter, it slows down typically this time of year, to fourth quarter and then you should see some pickup, obviously, as we get in to 2010, later in the spring.

The commercial lease portfolio, there's a portion of that that's a little over $1 billion that's going to be our leverage lease book.

Those are very long lives.

The rest of it has a shorter duration on it, and we'll continue to pay down, but the leverage lease part of it so going to go in ebbs and flows on that.

Home equity and national banking is just going to -- there really isn't much of a market for these particular creditS, so you're talking about something that's just going to take a longer period of time to pay down.

The same with marine.

So if marine activity picks up, if the economy picks up, we would expect that people would trade in boats and look for new boats, and that would cause that prepayment speed to pick up, but this is certainly the slow time of the year for that.

And the other is just miscellaneous RV and other consumer loans, and that's got a longer tail on it.

Great, thank you, and then there's also one more question.

On -- in terms of investment banking and capital markets, we've a seen a loss there two quarters in a row, can you talk more about expectations going forward, and how we should think about that?

Well, I think if you look at, actually the press release, and look at the schedule that's on page 23, you'll see that within that the investment banking capital markets area, investment banking income was actually up about $22 million year over year, and grew by $7 million here in the fourth quarter versus the first quarter.

So why would I call it pure investment banking-related activities, actually has been doing very well.

What has not been doing well, obviously, are some of the portfolios that we have on a held-for-sale basis, or that have -- are on a mark-to-market accounting, and that would involve the CMBS bonds that are now down to $29 million remaining carrying value, and our investments in the real estate area with respect to either direct investments or co-managed funds.

We had a large mark on those in the current quarter, and those remaining carrying values now are down to about $63 million.

At some point in time in the not-too-distant future, we're going to be in a position where we'll get back to a more normal fee-revenue flow in that particular area, and you won't see those numbers coming through, and eventually these properties and these other investments may actually be written up at some point in time in the future, but we're not counting on that, certainly any time in the near term.

How do those carrying values relate to the par value of those bonds?

Well, the par value of the bonds, the $29 million at par value is $101.8 million and with respect to the other investments, of those that are remaining on the books a carrying value they're about 51%, so we already have written off a number of them down to zero.

Those are not included in that.

Okay.

Thanks very much.

And we'll go next to Gerard Cassidy with RBC Capital Markets.

Thank you, good morning, guys.

Good morning.

The question that I have for you is, Henry, is there any pressure from the regulators or treasury to pay back TARP faster than what you have maybe planned to do, similar to what we saw at the end of last year with some of our very large banks in this country?

We have not experienced any sway from our regulators.

They're not pushing us to do it, they're not pushing us not to do it.

It's up to us to figure out what the right time is for Key for our earnings, and for our capital, but I can say pretty definitively that the regulators have not been involved in any sway on that issue.

And -- and, Chuck, you mentioned the restructured loans, and I think you said they were up over $300 million -- about $360 million in the quarter.

Could you remind us what they need to do to come off of restructuring and go back in to the portfolio?

How many months do they need to pay you on the new terms?

And if I recall they have to go through calendar year end, as well.

That's correct, Gerard, it has to go through calendar year end, which, not surprising, there's more activity in this world in the fourth quarter, but it's basically six months of performance under the new -- whatever the new structure is.

Can you share with us what will it take for you guys to see in terms of credit where you're comfortable to say that the loan-loss reserves are now sufficient, there's no need to continue to build them up?

Will it be the inflows of new non-performing assets?

Will it be net charge-offs?

What are some of the metrics that you guys are monitoring carefully to determine when you finish building up the reserve?

Well, Gerard, we look at a lot of different metrics, as you can imagine.

We look at the pipeline; we look at the impact on criticized classifieds; we have a watch list, which is precriticized classified; we look at migration patterns; we look at just a ton of things trying to determine where things are going.

The calculation of our allowance is very quantitative, although clearly there's some judgment in it, but it's largely quantitative.

Jeff referenced earlier some of our methodological changes as we review loss rates, particularly through this very difficult cycle, and we do a lot of back testing on our models trying to get it as close to quantifying the risk in our portfolio as we possibly can.

So we look at all of those factors.

We look at, as I said earlier, the upgrade/downgrade ratios, and flows, and migratory patterns, and that's how we reach our conclusions on how large the allowance should be.

But most of those trends, as we said earlier, are moving in the right direction now, particularly through the fourth quarter for us, and therefore, we are certainly getting closer to a point where provision will be pretty close to charge-offs, and we just need to keep working our way through that.

Each month gets a little bit better, and so much really does depend on how the economic cycle is going to pan out.

We're still looking at it to be relatively modest improvement, but we're watching it very closely like everyone else is.

I know this is a tough question to answer, but when you look over the valley on credit, and we are sitting here possibly in 2012, and looking back on this time period, do you guys get any sense from the regulators or your own interpretation of -- and I know it's different for every company based on loan portfolio, but just using a metric of loan-loss reserves to total loans, for example, do you get a sense of where they may settle out in the long run, 175-basis points, 200-basis points of loans, or will banks be required to carry 400-basis points of reserves to loans as a normal number?

I think that's a really hard one to predict, Gerard.

We look at a lot of different things, we talk to a lot of different people, and this has been a very unusual and difficult and complicated credit cycle, and I think we're going to have to get closer to the other shore to try to figure out the answers to those particular questions.

Thank you.

Moving over to the securities portfolio, that's been one of the areas of real growth for you guys.

What is the duration now of the securities portfolio?

The duration of the securities portfolio is 3.0 years.

And if there was -- if the Federal Reserve was to raise short-term interest rates, let's say starting in July, and by the end of this year, we have a Fed funds rate of 150-basis points, the long end of the curve is 4.75%, something like that.

What would that do to the -- is there any extension risk, or how much extension risk might be in that portfolio under that kind of scenario?

Gerard, this is Joe Vayda, and on your question on the duration extension in the portfolio, most of the portfolio is in mortgage-backed securities, but you need to recognize that most of it is in short-tranche structured CMO product, and we're careful that what we buy has limited extension risk, so the answer to your question within that it is probably a year, year-and-a-half under the rate scenario that you're describing as far as an increase in the average life of that component of the portfolio.

And Joe, would that transcend in to a duration of the total portfolio going up to 3.5 years then, or is that too conservative?

Under your what if scenario, probably in the four-year area.

Four year, okay.

Great, appreciate it.

Thank you.

We'll go next to Matthew O'Connor with Deutsche Bank.

Good morning, this is [Rob Placer] from Matt's team.

Thanks for taking my question.

Just in terms of the balance sheet, any sense of what level and when your core loan balances may bottom?

This is Jeff Weeden.

I think what we look at on the loan balances, we have to determine, really, when do we think the underlying demand is going to come back more readily from our customers across the entire spectrum of our businesses.

So at this particular juncture, we're not providing that type of guidance.

We do believe that, as we made in our comments, that we expect to see loan balances continue to decline, and be under pressure because of what we mentioned earlier of the exit portfolios that we have, soft demand on the part of our clients, as well as still elevated charge-off levels that we expect to continue to experience.

Okay, thanks.

And we'll take a follow up from Nancy Bush with NAB Research.

Just a quick follow up for Chuck, please.

Chuck, you mentioned your real estate exposure in the Southeast, and there's been a bit of press in the last few days, on the outlook in Atlanta, and the [streets of Buckhead], and some other big projects there.

Could you just tell us what you've got in Atlanta?

Yes --

Nancy, I think -- this is Jeff Weeden.

If you look at page 17 of the -- of our earnings release deck that we put out you'll see the various regions.

In the entire Southeast region, we have -- in our non-owner occupied area, about $2.2 billion.

That includes the map that's a much broader area that we've had before.

I don't know if we have the map in this particular deck, but it's a broader area than just, obviously, the Atlanta or Georgia area, and it covers a number of different property types.

It goes all the way up to D.C., so it is quite a wide geographic area.

I would probably say anecdotally, Nancy, that a couple of years ago, we didn't like some of the dynamics in the Atlanta area, so we sold a number of projects, particularly in the multi-family area out of Atlanta, so we don't have a major presence there, but we've been very careful, particularly in condominiums, and in certain other areas in terms of the Southeast, so we've pulled back earlier than most, I think, so that may give you some flavor for where we are there.

Okay, thank you.

And with no further questions in the queue, I'd like to turn the conference back over to Mr.

Henry Meyer for any additional or closing remarks.

Thank you, operator.

Again, we thank you all for taking time from your schedule to participate in our call today.

If you have any follow-up questions you are direct them to our investor relations team, Vern Patterson or Chris Sikora, at 216-689-4221.

And that concludes our remarks.

Again, thank you and have a great day.

That does conclude today's presentation.

We thank you for your participation.