KeyCorp (KEY) 2010 Q1 法說會逐字稿

Good morning and welcome to KeyCorp's 2010 first quarter earnings results conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to Chairman and Chief Executive Officer, Mr.

Henry Meyer.

Please go ahead, sir.

Thank you, operator.

Good morning, and welcome to KeyCorp's first quarter 2010 earnings conference call.

Joining me for today's presentation is our CFO, Jeff Weeden and available for the Q&A portion of our call are our Leaders of Community Banking and National Banking, Beth Mooney and Chris Gorman, our Chief Credit Officer, Chuck Hyle, and our Treasurer, Joe Vayda.

Now if you'd turn to the next slide.

Slide two is our forward-looking disclosure statement that covers both our presentation materials and comments as well as the question and answer segment of our call today.

Turning to slide three, this morning we announced a net loss from continuing operations of $98 million or $0.11 per common share.

Lower loan loss position and continued expense control resulted in a narrowing of KeyCorp's first quarter loss, when compared to both the fourth quarter and year-ago period.

Our net interest margin increased 15 basis points from the prior quarter, primarily due to lower funding costs and improved yields on loans.

Expenses declined as a result of lower personnel expense.

Our efficiency initiative and a decrease in the provision for losses on lending-related commitments.

We also saw improvements in our key credit metrics including net chargeoffs, which declined $186 million and nonperforming loans, which were down $122 million from the prior quarter.

Both benefited from continued stabilization and commercial loan portfolio.

This was a second consecutive quarterly decrease in nonperforming loans.

Our balance sheet continues to reflect strong capital, liquidity and reserve levels.

At March 31, our ratio was a strong 7.53%, and our tier one risk-based capital ratio was 12.96%.

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

At the end of the first quarter, our loan loss allowance was $2.4 billion and represented 4.34% of total loans and 117% of nonperforming loans.

Both of these ratios should maintain our position at or near the top quartile of our peer group.

As Jeff will discuss shortly, we've continued to maintain a strong liquidity and funding profile.

Also, good progress was made on several other strategic fronts during the quarter.

First, we filled a key role in our management team.

Chris Gorman was promoted to head our National Banking Business.

Chris has been with the Company for 19 years, and was previously President of KeyBanc Capital Markets, where he was instrumental in integrating Key's corporate and investment banking businesses.

His breadth of experience, business acumen, and leadership ability make him ideally suited for this role.

And we continue to invest in our core relationship businesses, including our 14 state branch network.

We opened eight new branches in the first quarter and expect to open an additional 32 branches during the remainder of 2010.

We also have plans to renovate approximately 85 existing branches this year, which is in addition to the 160 completed over the past two years.

The new and modernized branches support Key's relationship strategy, by leveraging the branch network to offer the full breadth of solutions, expertise, products and services that Key has to offer.

We've also been transforming our operations through programs and technology designed to enhance the client experience and operate more effectively.

One measure of success that we've seen in our customer satisfaction scores, including being named Customer Service Champ by BusinessWeek last year and the recent results from the American Customer Service Index, a customer satisfaction survey conducted by the university of Michigan.

Key also received recognition from Corporate Insight's 2009 Bank Monitor, which highlights firms that excel in online banking.

During the past year, we also created 157 business intensive branches, which are staffed to serve our small business clients.

Key's focus on the small business segment has resulted in our moving to number 15 in 2009 from 21 the previous year, among the country's major lenders in the SBA 7A Small Business Financing Program.

This means that we have contributed to job creation in our communities, and are well positioned to serve our small business clients as the economy improves.

In National Banking, we have continued to concentrate on reducing risk and sharpening our focus on specific segments and clients where we can be relevant.

In our institutional business, we have aligned around four specific client segments, and continue to invest in the people that can leverage our capabilities.

We reduced our exposure to commercial real estate, and continue to look for opportunities to leverage our commercial real estate servicing capabilities.

And we're emphasizing areas that have synergy with the client segments and the community bank such as equipment leasing and certain products offered 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 our large corporate clients.

And finally, in both business groups, as well as our support areas, we've continued to make progress on improving the efficiency and effectiveness of our organization.

Our staffing levels are down by over 2600 FTEs and we continue to implement initiatives that will better align our cost structure with our relationship focused business strategies.

On slide four, we show our 2010 strategic priorities.

The first is returning the Company to profitability and setting the stage for long-term growth and stability.

Maintaining a strong balance sheet also remains one of our top priorities, including having strong capital, reserves and liquidity.

This gives us the flexibility to invest in our businesses and make new loans as the economy improves.

We will also continue to strengthen our risk culture by fine tuning our risk tolerances and increasing risk awareness throughout the organization.

And finally, we're positioning the Company for growth by investing in our franchise and our people.

Our first quarter results were encouraging, and reflect the work that has been done to strengthen and reposition our Company.

I remain confident that we are emerging from this extraordinary period as a strong, competitive company.

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

Jeff?

Thank you, Henry.

Slide five provides a summary of the Company's first quarter 2010 results from continuing operations.

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

As Henry mentioned in his comments, for the first quarter, the Company incurred a net loss of $0.11 per common share.

This loss is significantly lower than the loss of $1.03 per common share for the same period one year ago and a $0.30 loss per common share for the fourth quarter of last year.

The improvement in our results was driven by a lower provision for loan losses and improvement in our net interest margin and lower expenses.

Turning to slide six.

For the first quarter of 2010, the Company's taxable equivalent, net interest income was $632 million compared to $637 million for the fourth quarter of 2009 and $595 million for the same period one year ago.

The net interest margin expanded 15 basis points to 3.19% for the first quarter, compared to the fourth quarter of 2009.

And is up 40 basis points from the same period one year ago.

The Company continues to benefit from an improved funding mix as maturing CDs continue to reprice or move to lower cost deposit products such as Now and money market accounts.

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

This repricing opportunity, along with improved spreads on loan renewals, will continue to benefit the net interest margin.

For the second quarter of 2010, we anticipate approximately five basis points of improvement in the net interest margin with additional improvement anticipated in the third and fourth quarters of this year.

Keeping some pressure on the margin is the higher level of short-term liquidity and general lack of loan demand.

Turning to slide seven.

During the first quarter, the Company experienced an additional $2.9 billion decrease in average total loan balances compared to the fourth quarter of 2009.

The decline in average balances continues to reflect soft loan demand for credit for consumers and businesses as they continue to deleverage.

Also impacting average loan balances is the impact of our exit portfolios as we continue to reduce risk in the Company.

In addition, larger clients have had access to the public debt and equity capital markets in the past several months, and are using this access as an opportunity to issue debt and/or equity, thus reducing bank lending demand.

As a result of this and other items noted before, we expect average loan balances to continue to decline until business lending demand picks up.

Turning to slide eight.

Average deposits were down approximately $2.3 billion from the fourth quarter and up $6.6 billion from the same period one year ago.

The first quarter of the year is typically the softest period of time for deposit growth due to seasonal factors.

Further impacting us in the first quarter of 2010 is our pricing of certificates of departments where we experienced a decline in balances of $2.4 billion.

With loan demand remaining soft and our liquidity remaining strong, we have adjusted our pricing on many of our deposit offerings, during this low-rate period environment.

The net effect of which has led to an improvement in the net interest margin.

As I discussed when reviewing the net interest margin earlier, we expect to see further changes in the mix of our deposits over the balance of 2010, with a significant portion of the money from maturing CDs either moving back into NOW and money market deposit accounts or moving into other forms of investments, such as annuities.

Slide nine shows the much-improved liquidity position of the Company.

Over the time period shown on this slide, we have increased the size of the investment portfolio and the percentage of the balance sheet that is funded with deposits.

For the first quarter of 2010, the loan to deposit ratio stood at 93%, a significant decrease from one year ago when it was 115%.

In this loan to deposit ratio, we have also included our discontinued operations balances, not funded with the securitization trusts, which were placed on the balance sheet as of January 1, 2010.

These securitization trusts grossed up the balance sheet, but did not have an impact on the liquidity of the Company.

Turning to slide ten.

Net chargeoffs in the first quarter were $522 million and represented 3.67% of average total loans compared to $708 million or 4.64% of average total loans in the fourth quarter of 2009.

Net chargeoffs declined in the C&I and commercial real estate portfolios in the first quarter compared to the fourth quarter of 2009.

Fourth quarter net chargeoffs included two large credits representing $131 million of the total from that period.

As we have stated before, while we see net chargeoffs remaining elevated in 2010, we do expect that they will trend downward as we progress throughout the year.

In the first quarter, represented the first time since the second quarter of 2007, we have not increased the reserve for loan losses.

During the first quarter, the reserve for loan losses declined by $109 million to a little over $2.4 billion.

Even with this reduction, the reserve as a percentage of total loans increased to 4.34% at March 31, 2010, up from 4.31% at December 31, 2009.

In addition, our reserve for unfunded commitments decreased by $2 million during the first quarter, to $119 million.

And when combined with our loan loss reserve, total reserve for credit losses represented 4.55% of total loans at March 31, 2010.

Given our current reserve levels, and our outlook for lower trending levels of net chargeoffs, we see the potential for our reserve for credit losses to continue to trend downward, however, we would also caution if the economic recovery should falter, which we are not currently forecasting, then this could change our outlook with respect to future reserve levels.

Turning to slide 11, our nonperforming loans stood at $2.1 billion at March 31, 2010 and our nonperforming assets were $2.4 billion.

These totals represented decreases of $122 million and $82 million in nonperforming loans and nonperforming assets respectively from December 31, 2009.

As shown in the summary of changes of nonperforming loans on page 25 of the earnings release today, we experienced another decrease in net inflows of nonperforming loans during the first quarter, which represented our third consecutive quarterly decline in new inflows and the lowest level of new inflows since the fourth quarter of 2008.

Also shown on page 24 of our earnings release are our 90 day or more past due and our 30 to 89-day past due loans.

While the 90 day or more past due loans increased $103 million from December 31, 2009, the 30 to 89-day past due loans decreased by $294 million, to its lowest level since the second quarter of 2007.

Our coverage ratio of our loan loss reserve increased to 117% at March 31, 2010 and when we combine our reserve for unfunded commitments to our loan loss reserve, our total allowance for credit losses represented 123% coverage of nonperforming loans at March 31, 2010.

In addition, nonperforming loans are carried at 73% of original face values and other real estate owned and other nonperforming assets are carried at approximately 54% of their original face values.

Turning to slide 12, our capital ratios remain strong at March 31, 2010.

Our tangible common equity to tangible asset ratio was 7.37%.

Our tier 1 common equity ratio was 7.53% and our tier 1 risk based capital ratio was 12.96%.

On page 16 of our earnings release, we provide a reconciliation of our GAAP equity to our regulatory equity and the respective ratios.

For regulatory capital purposes, $651 million of deferred tax assets are disallowed as of March 31, 2010.

The effect of which reduced our regulatory capital ratios by approximately 78 basis points.

And before we go to our Q & A segment of our call, I want to review a new slide with respect to how we are thinking about Key's business model and the targets we are setting for success at Key.

On slide 13, you will see the long-term targets we have set.

We are already achieving some of these targets.

Others will take additional time and work.

For example, we have established that we will be a core funded institution and target a loan to deposit ratio of 90 to 100%.

At March 31, 2010, we were within this range.

Another objective is to return to a more moderate risk profile.

The metric we are using here is targeting a net chargeoff ratio of 40 to 50 basis points.

Clearly, we are high on this measure and it will take some time before we achieve this objective.

On growing a high quality diverse revenue stream, we have established two objectives here.

First, achieve a net interest margin greater than 3.50% and the other is maintaining noninterest income to total revenue of greater than 40%.

While we are above the 40% level today of noninterest income to total revenue, we are below with respect to the net interest margin.

Our trend with respect to the margin is positive, and we expect to make further progress throughout 2010 on this front.

A potential head wind on the noninterest income side is the changes to Reg E slated for the second half of the year.

We estimate this could further reduce deposit service charges once fully in effect by the end of the year, in the range of $50 million on an annualized basis.

We are working on solutions to help offset part of this revenue loss.

Creating positive operating leverage will take our continued focus on achieving our Keyvolution savings as well as growing our revenue streams.

As of March 31, 2010, we have implemented $191 million of the targeted run rate savings towards our goal of achieving $300 million to $375 million in 2012.

The end result of these goals should be a targeted return on average assets in the range of 1.0% to 1.25% for Key.

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

Operator?

Thank you.

The question and answer section will be conducted electronically.

(Operator Instructions).

We'll take our first question from Brian Foran, Goldman Sachs.

Good morning.

Good morning.

A question on slide 13.

The 1 to 1.25 ROI target.

What are kind of reasonable bounds to put on the ultimate size of the balance sheet to apply that target to?

Brian, this is Jeff Weeden.

I think in terms of our overall balance sheet, what we're looking at is probably something in that $90 billion range, so not materially different from where we are today.

And I'm looking at kind of extra securitized assets so we have a little bit more in there with the securitization trust that came on, $90 to $95 billion.

So not materially different from where we are today.

Again, it's going to be driven by the funding side until we see loan demands start to come back.

Okay.

And then on the CD book repricing, the 3.3% give or take costs between the two CD buckets you report is still very high relative to the industry.

Is there anything structurally that prevents that from coming down?

IE, do you have a slug of three to five-year money in there that doesn't reprice for a long time, or I guess how should we balance where that ultimate cost of CDs could go in the current environment?

Brian, I think what you are going to see is the balances are going to come down over time, as we've talked about.

The rate will come down slightly during that time period, but what you're coming down, if you come down $2 billion, we came down $2.4 billion.

That is coming out at that rate that you're looking at, and it's going into much lower cost of funds for the organization.

So there are buckets out there.

There's a bigger bucket in the third quarter.

There's second quarter, third quarter's got a bigger bucket.

There are longer terms, but the biggest buckets are going to come in the second and third quarter, and the fourth quarter of this year.

Then it starts to taper off and becomes longer term in nature.

But you'll see that overall rate will be relatively sticky just because the higher rate CDs as they mature, are going into other deposit categories.

Then if I could sneak in one last one again on this slide 13.

As Keyvolution continues to come in, does the overall reported noninterest expense continue to fall from this quarter's level or is it more about staying in this kind of $750 million to $800 million range maybe revenues recover a little bit?

I think for the time being, staying in that $750 million to $800 range is probably the appropriate range that we'll be in as we continue to implement the Keyvolution items.

Again, it's going to be not be fully implemented until we get into 2012.

We're still working on a number of initiatives.

Thank you.

And we'll take our next question from Gerard Cassidy, RBC Capital Markets.

Good morning, guys.

Jeff, in terms of you mentioned the balance sheet.

You think it would be around this $90 billion range.

What about the composition of the mix of the balance sheet at that time period when you see the ROA possibly getting to 120 basis points.

Do you still think that the securities portfolio would be as large as it is today relative to loans?

I think what we said we're going to be core funded.

If you look at the 90 to 100% loan to deposit ratio, I think that looking out into the future, we will have a higher investment portfolio for the organization.

So I think that's just a structural change that's taken place as a result as we look at the new liquidity requirements that may be coming down the pike at us, so --

In terms of the loan portfolio, it's obviously declined materially over the last 18 months.

Particularly in the commercial lending side.

The corporate lending, not commercial real estate.

Where do you guys see once normalization comes back to KeyCorp, where do you see the growth coming from, from the loan side, since I'm assuming commercial real estate and construction lending will not be the focus of growth after we ge back to normalization?

I'll comment just briefly, gerard and then ask Chris Gorman and Beth to comment on this.

In terms of how we look at it, you're right, the commercial real estate book is going to continue to trend down and we have our exit portfolios that are identified that we're reporting on, too.

Those will continue to come down.

I think the growth in the initiatives we're looking at are going to be on the commercial side.

It's not going to be a lot on the consumer side.

It is going to come from the commercial side.

The segments that Chris has targeted, as well as the segments that Beth targeted, Chris, you want to add any --

Sure.

There will be a couple area where I think we'll get some growth.

What we're doing throughout K & B is refocusing the business.

It'll be albeit a smaller business, but where we can get growth going forward from a loan perspective is a common set of clients that we think we can serve with all of the different products and advice and balance sheet that we have.

The other thing that we're going to do, Gerard, is we're going to take that business and migrate it even more to a middle market mid-cap kind of business that will then interface really well with what Beth is doing in the community bank.

Gerard, I would just add as no surprise, there has been a significant deleveraging of our client bases, traditional borrowers and companies and middle sized corporations that will have borrowing needs if the economy continues to expand.

But as part of this economic cycle, we've seen deleveraging, a building up of liquidity and cash in our client base so as the economy improves and as that -- those cash reserves get drawn down, I would see although none of us know when to call that inflection point, as our economy expands, I think borrowing will expand within our existing client base because we've had significant paydowns.

Then we obviously will work with Chris and our markets to continue to acquire and expand our client relationships.

As there begins to get a lot of end-market demand, I think what you'll see is it'll be some combination of, you know, deposits that people will start to run down a bit.

Some combination as Jeff mentioned, of going outside for capital and then of course people starting to tap their lines.

What we like about our business model is we're positioned for each of those three, as we serve these targeted middle market companies.

Okay.

And then can you comment on TARP repayment?

Is that something you'd like to try to accomplish this year?

Do you think as the economy continues to expand and your profitability improves, and the industry's profitability improves that the regulatory requirements of being -- having to raise common equity as a condition of paying back TARP could be relieved where if you'd pay them back next year you would have the raise common equity to pay it back?

Gerard, this is Henry.

I find it difficult to comment on where the regulators are going to be.

Our number one priority that we think will ensure that smooth transition to the right time to pay the TARP money back is to really be focused on sustainable profitability and obviously, our improvement from the fourth quarter to the first quarter is setting up a trend line that if things continue, will get us there sooner rather than later.

We still lost money in the first quarter.

I'm very encouraged by the trend line, but we've stayed away from predicting when we would pay TARP back.

To some degree, the better the Company does, and if that is reflected this our stock price, whatever the requirements are will be less dilutive as the Company performs better.

So we're focusing on trying to put all of those things together as we look forward.

Just finally on the securities portfolio, what is the duration of that portfolio and should the Federal Reserve start raising rates later this year?

And we're possibly seeing a Fed funds rate a year from now I'd say 1.5% long end of the curve is up at 4.5%, 5%.

How would the securities portfolio behave and would the duration change in that scenario from where it is today to a year from now?

This is Jeff Weeden.

The duration is around 3.1 years today, and certainly if we've modeled it on out rates up 100, up 200, up 300.

So it does extend the duration on out.

It would add basically, going out to what you talked about, up to about 150 basis points level.

Would add probably another year to the duration of the portfolio.

At some point in time because they are CMO packs, they do max out the duration, but it does extend the duration on out with rising rates.

Thank you.

And we'll take our next question from Terry McEvoy from Oppenheimer.

Good morning.

About 10% of your earning assets are in this exit portfolio, which I understand you've been running on for quite sometime to improve the risk profile of the Company, but it was still down roughly $3 billion.

Could you just talk about the pace at which you expect that portfolio to run off, and simply is the ultimate goal to bring those asset levels down to zero.

This is Jeff Weeden again.

The goal is to get those nonstrategic assets out of the bank.

So I think that is our goal, and I think if you look at those particular assets, some of which are longer nearly duration.

If you look at the Marine book and there are some in the leasing book which would be the leverage lease, those are longer duration assets so those will be there for some time.

I think in the fourth doctor or the first quarter we came down approximately $600 million.

I would expect that we would be somewhere in the range of a $0.5 billion going forward at this particular point in time, so the factor that in, a couple billion dollars down through the course of this year.

If the economy improves, better liquidity within the Marine book.

People want to buy new boats, et cetera, that can also accelerate amortization on that particular book.

You've invested heavily in the community banking line of business and continue to invest there.

Could you just talk about certain goals in that business and a year from now how will we know whether that investment was appropriate, and you're getting the returns, the retention of core deposits or something for us to gauge those investments by.

Terry, this is Beth Mooney.

Part of what we are doing is strategically investing in our franchise in markets where we have low share, but we see them as attractive demographic markets with high growth potential.

And we are looking to mainly our western franchise, Colorado, Seattle, Portland, where through the addition of branches to our network, we can get a broader market share, broader branch share, increase our density, and it really is a vehicle to augment our presence in those markets, and largely to help acquire new relationships, new deposits, and new attractive clients to the community bank.

And part of the synergy also is with the community banking model, and the ultimate success of not just the new retail clients, it's what we're able to do to serve the small businesses in the area, expand our private client offerings, as well as meet the needs of our middle market clients.

So it has a broader market impact in addition to increasing our retail share.

Just one last question.

Implications for Reg E, about a $50 million annualized hit, should I look at the full-year revenue that $333 million, take out $50 million?

So are we talking about a 15% decline in -- as kind of a normalized run rate based off what was reported in 2009?

In terms of the total deposit service charges, that's correct.

So it'd be off of the total.

Thank you.

And we'll take our next question from Craig Siegenthaler from Credit Suisse.

Good morning, everyone.

Good morning.

Good morning.

First.

Really in the expense interests here, kind of what's embedded in your ROA guidance, on the other side of this credit cycle, how much additional core expense, not the cyclical credit-related expense, but core expense can you reduce here and also there's probably one negative head wind coming up.

That's when you repay TARP bonuses for the upper echelon of senior management.

How much -- what could be the rate of change there?

I think in terms of first of all, the bonuses are not going to be that material of an impact on the Company.

So I think as we look at it, part of it, what we announced a year last fall, part is paid in the form of stock right now.

So the increase or the differential may be small additional amounts, but will be based on the performance of the Company.

So it's not one of those things that's fixed in nature.

I think the other areas that we continue to look at, just like we outlined on that slide 13, is how do we make more of our costs variablized within the Company?

We're really looking at those particular initiatives.

Some of the other things we're looking at, we have fewer people today, so we have other costs that we're focused on.

We're making investments in the community bank in the branch network that we have there.

Corporate space is being reduced, and so there are specific goals over next three years to bring down corporate space fairly significantly.

Those are other initiatives that are taking place, and so also deploying technology more efficiently and effectively.

How do we leverage technology within the organization?

I guess an example I would point to there is what we were able to do with Teller 21 in the organization, bringing done a lot of our courier costs and improving our service quality to our customers.

Those are things that we are continuing to focus on.

Environmental costs, I think you can look at what our costs are associated with.

Other real estate expense is still elevated within the organization.

Typically, we used to run, say, in the $5 million range in other real estate in any given quarter.

That's been as high as $50 million.

In the last quarter, $32 million.

Those particular costs will be out there and professional fees, collection-related costs, et cetera.

So we'll continue to look at all of those particular areas.

Thanks.

When you think about the timing of the ROA guidance provided this morning, the 1 to 1.2, how can we think about maybe give us a range of how many years out we should expect that?

We haven't given a specific time period on the timing here.

I think as we look at some of those goals, credit is still going tone a very significant component of that.

So with an improving economy, credit will improve over time.

It's not a quick cycle type of an expense item that corporations have, that banking institutions have.

That's going to take a period of time.

The expense initiatives that we continue to work on here, we will have implemented by 2012, that will help us in that regard.

So it's not something you should factor in for 2011.

It's beyond that time period before I think we get to that particular level.

Great.

Thanks for taking my questions.

We'll go next to Ken Usdin, Banc of America.

Thanks.

Good morning.

My question relates to the fee income connected to the balance sheet shrinking, in a lot of the commercial areas there's obviously a lot of fee income connected to it.

Would you start to expect to see when would you expect to see, also, the kind of bottoming in other fee categories separate and aside from, the consumer issues with Reg E?

Some of the items that we still have that are hitting the fee income related areas are reserves that are still going through.

So in the first quarter, we had approximately $24 million of building reserves in our customer derivative book.

Part of that was in the national bank.

You can see that in the description.

Part of the growth that we get in the fee income line items, just the lack of more negative marks.

Negative marks went down here in the first quarter because a lot of what we had in the funds management group within the real estate capital area.

Those particular investments have been written down substantially at this point in time, so there's just less to go through, but we still have other areas that are pressured.

I think perhaps Chris can comment on this, but I think it's just activities that we would expect to see from the capital markets area or customer activities.

Yes, Jeff.

The debt markets as everyone knows continue to be very vibrant.

Those are basically on pace to where they were last year, which were record years, at least for issuance, that is.

Then the equity business, while it was back-end-loaded last year, this year has been very strong in the front end.

So we are, in fact, seeing that.

The biggest driver, Jeff, is just not having some of the marks frankly, that we're running through those lines in previous years.

The core business is still intact here.

We have a number of things that are still taking place.

I think in the case of the community bank, obviously, just growing the -- what we have in our key investment specialist area continues to show growth, et cetera.

So Beth, any comments you can make on that?

Yes, Ken.

I would say other than service charges, which I think there is a behavioral change within the consumer base.

Many of our fee income categories are showing double digit year-over-year growth, which show a return of Key Investment Services, for example, which is our platform-based annuity sales product, is up 20% year-over-year.

We're seeing ATM debits start to recover.

Obviously our investment management fees, our trust fees.

So we see trends where the business has bottomed, stabilized then starting to grow from where we were a year ago.

Great.

If I can ask one more.

As you let some of these noncore deposits and long-term debt roll off, and with having the loan book shrinkage and you mention that you will probably have a bigger security portfolio versus history, how are you positioning the securities portfolio now especially with rates on the rise in terms of just preparing for the eventual rise and also just compositionally as far as what you are investing in, thanks.

Good morning.

This is Joe Vayda.

I'll take that question.

The portfolio, as Jeff mentioned earlier, has a relatively short duration and new purchases recently have been in the 2.5 to 3-year duration range.

Answering the question for positioning for rate risk, it's a bigger question beyond the investment portfolio.

Portfolio's only one component of the balance sheet and overall, our rate risk position is -- has continued to be moderately asset sensitive.

So we would expect a benefit to the margin of net interest income as interest rates rise.

We'll go next to Paul Miller, FBR Capital Markets.

Hi this is Jessica in for Paul Miller.

Can you talk a little bit about asset sales and I guess, looks like asset sales are almost half the size as last quarter.

Is that due to seasonality?

How does the pricing trends that you are seeing on the asset sales compare to recent quarters?

Jessica, this is Chuck Hyle.

I'm not sure that I would necessarily call it seasonality, but clearly, the quarter started more slowly in January and early February, and there was a real crescendo through March in terms of sales activity.

So whether that's -- I would say there's probably a little bit of seasonality in that.

More importantly, we started seeing some material liquidity coming back into the market and the second half of the first quarter.

And that's not seasonal.

That is real, and it is, I think, reflective of recognition that number one, there's a lot of money that's been looking for somewhat better trends in commercial real estate in particular and beginning to see it.

So we're seeing a great improvement.

Not all of that has been reflected in the first quarter.

I think the carryover in the second quarter and momentum we saw in March is very much carrying over into the second quarter.

Therefore, I think we're considerably more encouraged by that trend.

So I think the first quarter's not necessarily reflective of what's happening in the market.

Thank you.

And we'll take a follow-up question from Brian Foran with Goldman Sachs.

On the credit improvement, historically the first quarter is a good one for the industry just in terms of the quarter over quarter improvements in chargeoffs.

Is there any seasonality we should take into account in this quarter's results or do the 30 to 89-day delinquency trends and stuff like that give you confidence that this is more than -- it's obviously more than seasonality.

Is there any seasonal adjustment we need to make?

Brian it's Chuck.

I think the seasonality aspect is pretty minimal.

We saw a little bit of improvement in the Marine portfolio, but that's pretty tiny in the great scheme of things.

Again, I think this is much more of a secular trend and certainly almost all of our credit statistics have shown good improvement and good momentum.

Particularly, our early stage delinquencies have come down quite dramatically, and even the one that Jeff mentioned earlier that looks like it might be moving slightly in the other direction, 90 plus delinquency that was almost fully accounted for by maturity delinquency, not underlying performance delinquency.

In other words, we have several assets that continue to perform, but the maturity came, and we're in the process of either restructuring or in a couple of cases have the takeouts that just happened to fall a little bit after the end of the quarter.

So I think even that statistic is moving in the right direction.

So I would call it considerably more than seasonality.

If I could ask one follow-up to my follow-up.

The principal investing line item, can you remind us what the underlying portfolio looks like?

And I guess is it driven by the outlook for middle market private equity or commercial real estate recoveries, or what drives the outlook here?

Brian, this is Jeff Weeden.

The portfolio is basically -- half the portfolio are in funds, and half are direct investments.

The total portfolio is approximately $1 billion, so you have about $0.5 billion in direct investments and half in fund investments, and the fund investments would be in other venture-type related activities.

So I think when we look at it, the direct investments half in are in a wide variety of various different companies.

I think the prospect for the outlook as the economy continues to improve and as the market conditions continue to improve and as we heard today, there were more IPOs in the second half of the quarter in that time period, at least I heard that on Bloomberg this morning.

If we see those particular type of activities show improvement, I think it bodes very well for additional liquidity in that prospects of a future profitability from that particular book.

Thanks.

And we'll take a follow-up question from Gerard Cassidy, RBC Capital Markets.

Thank you.

I wanted to come back to slide 13 that you guys pointed out that you think you can get to a target ROA of 100 basis points, 125 basis points.

What type of ratio are you guys thinking you'll have at that time?

Efficiency ratios are the result of two items.

One income and one expense control.

I think as we start to look at, we have not given a specific target for that.

But I think it is fair to say that it would be approximately in the 60 basis point range.

Okay.

Is there any way you guys can give us comfort?

When we look at what's gone on at KeyCorp over the last few years, like many banks, the credit problems were severe and you looked like you have your arms around them which of course is positive.

Have we traded off, and it's not just KeyCorp, but a lot of banks.

Have we traded off credit risk for interest rate risk?

Because you look at your securities portfolio now from a year ago.

It's doubled in size.

It seems likely that if this economy remains healthy and strong, rates will go higher.

No one knows for sure how high, but what if we had a 5% loan rate next spring, or PIMCO is looking for something even more dramatic?

Do we run the risk of having to deal with interest rate problems to the bond portfolio a year from now, so we've traded off credit risk for interest rate risk?

Can you relieve our fears of that somehow?

Gerard this is Jeff Weeden.

Joe may have some follow-up comments on this.

I think as we look at it, if rates end up moving on up as you've outlined to 5%, it should be a much stronger overall economy, which would also bode well for then improved loan demand and pricing.

So we look at that in totality as being not a negative, but actually a positive for us.

We are asset sensitive.

We've had a number of AL swaps that have matured.

We've got more that will mature, that receive fixed pay variables.

Those are things that continue to make us more asset sensitive as we look into the future.

Again, we stayed on our bond portfolio to Fannie, Freddie and Jenny in the CMO area.

So we stayed with high quality.

We tried to target as Joe was talking about 2.5 to 3-year duration is what we're putting on.

Yes, those will extend out if the rates go up dramatically.

They will go on out to 4, 4.5 years.

I think they cap out up another 300 basis points at around 5 years in total.

So we take all of that into account.

We model it on out.

We do not believe that we are, in fact, making that quote unquote tradeoff that you're talking about.

Yet, all of us in the financial services have to look at how we're going to deploy the liquidity that we have at this particular point in time, without doing anything ridiculous.

I would just add that again, you can't look at the investment portfolio in isolation.

Yes, we've seen growth there.

If you look at our full ban sheet, rate risk position, recognize our interest rate swap book, and this is a received fixed rate, which is another tool, imagine the Company's overall rate risk, has declined over the same time period.

Net-net if you look at the duration of the balance sheet holistically it is shorter today than it was a year ago.

Thank you.

And Mr.

Meyer, we have no other questions remaining at this time.

I'll turn the conference back over to you for any additional or closing remarks.

Thank you, operator.

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

If you have any follow-up questions, you can direct them to our investor relations team at 216-689-4221.

That concludes our remarks, and again, thank you all.

Again that does conclude today's conference call.

Thank you for your participation.