KeyCorp (KEY) 2010 Q2 法說會逐字稿

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

Today's conference is being recorded.

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

Henry Meyer.

Please go ahead, sir.

Thank you Operator.

Good morning and welcome to KeyCorp's second quarter 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 Risk Officer, Chuck Hyle and our Treasurer, Joe Vayda.

If you turn to slide two, this 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 three.

This morning we announced second quarter net income from continuing operations of $56 million, or $0.06 per common share.

The improvement over the prior quarter was due to a lower provision for loan losses, higher fee income, and well controlled expenses.

Overall, the results are encouraging, and the return to profitability represents an important step forward for our Company.

Despite the challenges that our industry faces in terms of the pace of the recovery, and other environmental factors, such as regulatory reform, I am confident that we are taking the necessary actions to position the Company for better long-term performance.

I was especially pleased by the continued improvement in credit quality, which was the major contributor to our improved financial results for the second quarter.

Credit quality improved across the majority of loan portfolios, in Community Banking and National Banking, which contributed to the positive net income reported for both groups.

Net chargeoffs declined by $87 million, and nonperforming loans decreased by $362 million from the previous quarter.

This was the third consecutive quarterly decline in nonperforming loans.

Delinquency trends and the inflow of new nonperforming loans were also favorable.

Although net chargeoffs will likely remain elevated for the remainder of 2010, we expect to show further progress in the future quarters.

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

At June 30, our Tier 1 Common Equity Ratio was a strong 8.01% and our Tier 1 Risk Based Capital Ratio was 13.55%.

Both measures are up from the first quarter and the year-ago period.

At the end of the second quarter, our loan loss allowance was $2.2 billion and represented 4.16% of total loans, and 130% of nonperforming loans.

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

Being a core funded institution remains an important strategic imperative.

As Jeff Weeden will discuss in his remarks, we continue to operate from a position of strength.

Our strong capital and liquidity positions enable the Company to support the borrowing needs of our clients.

Although loan demand remains weak, the Company originated approximately $12.9 billion in new or renewed lending commitments to consumers and businesses during the first half of the year.

The final item on our strategic update slide, investing in our core relationship businesses, has been a consistent theme for Key.

Having a strong balance sheet as a solid foundation, we're continuing to position the Company to take advantage of the gradually improving economy.

In the Community Bank, our largest investment is in our 14-state branch network.

We opened 18 new branches in the first half of 2010.

And expect to open an additional 22 branches during the remainder of the year.

The deposit generation and overall profitability of our new branches have been in line with our expectations.

In addition, we continue to modernize our existing branches, and align staffing with the needs of our communities that we serve.

We have designated 225 business intensive branches which are staffed to serve our small business clients.

We are also a significant participant in the SBA Small Business Loan program.

In the first half of 2010, we also experienced good growth in Private Banking and Key Investment Services, our branch based investment group.

Both areas represent good opportunities for continued growth.

Our improved performance in National Banking is largely driven by improving credit trends and the work we have done to reduce our risk profile.

But, we have also made significant progress in sharpening our focus on targeted client segments, and investing in human capital and our noncapital intensive businesses.

During the first half of the year, KeyBank Capital Markets participated in 30 equity transactions that generated over $25 million in fees.

We have also seen improvement in the M&A Advisory business since the third quarter of 2009, as more liquidity has returned to the market.

And we continue to emphasize areas that have synergy with client segments in the Community Bank such as equipment leasing and certain products offered by the KeyBank Capital Markets.

Our second quarter results were an important step forward for us.

We should continue to benefit from the hard work that has been done to improve our risk profile, and reposition the Company.

I remain confident in Key's future and our ability to serve our clients and make progress towards our long term targets.

Now I will turn the call over to Jeff for review of our financial results, Jeff?

Thank you Henry.

Slide four provides a summary of the Company's second 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 second quarter, the Company earned a net profit of $0.06 per common share.

This was a result of lower provision for loan losses, as both net chargeoffs and nonperforming loans decreased from the first quarter levels.

In addition, the Company showed improved pre-provision net revenue as a result of higher noninterest revenue, and well controlled expenses.

The second quarter profit compares to a net loss of $0.68 per share for the same period one year ago and an $0.11 loss per common share for the first quarter of this year.

While not noted on this slide, the Company's intangible book value increased during the second quarter to $9.19, and $8.10 per share respectively.

Turning to slide five.

For the second quarter of 2010, the Company's taxable equivalent net interest income was $623 million compared to $632 million for the first quarter of 2010.

And $591 million for the same period one year ago.

The net interest margin contracted two basis points to 3.17% for the second quarter, compared to the first quarter of 2010.

However, it is up 40 basis points from the same period one year ago.

The benefit from repricing maturing CDs was more heavily weighted to the last half of the second quarter and will provide us with some improvement to the net interest margin in the third quarter of this year.

In addition, during the third quarter, we have approximately $2.8 billion in CDs maturing at an average cost of 4.51% which were originated prior to 2009.

On the other side of the balance sheet, we experienced continued runoff of loan balances which led to higher levels of short-term liquidity on average for the second quarter.

These funds have been redeployed into the investment portfolio, which will benefit net interest income for the third quarter.

With respect to the third quarter, we look for the net interest margin to expand to the mid 3.20% range.

Turning to slide six.

During the second quarter, the Company experienced a $2.6 billion decrease in average total loan balances compared to the first quarter of 2010.

The decline in average balances continues to reflect soft loan demand, for credit, as consumers and businesses continue to deleverage and wait for more clarity on the underlying strength of the economic expansion and employment.

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

We do not anticipate loan demand to improve until we see greater confidence on the part of consumers, and businesses, regarding the overall strength of the economy and an improved employment outlook.

While conditions are better than what they were last year at this time, average loan balances in our nonexit portfolios are expected to continue to decline until business lending demand picks up.

Turning to slide seven.

We experienced an increase of $1.3 billion in the combined average balances of demand deposit, now money market deposit accounts, and regular savings accounts during the second quarter when compared to the first quarter of 2010.

And these balances are up $4.5 billion from the same period one year ago.

As we have been discussing for the past few quarters, we continue to experience runoff in our CD book, which declined $2.3 billion, as higher yielding certificates of deposits mature and clients look for other alternatives for investing in the current low rate environment.

As I mentioned in the margin discussion, we experienced heavy maturities of CDs in the second half of the second quarter.

Many of these CDs were originally booked prior to 2009 when liquidity was much tighter than it is today.

The third quarter will be the last of the heavy maturity quarters remaining with respect to the CDs originated prior to 2009.

During the third quarter, we have approximately $2.8 billion of these higher yielding rate CDs maturing.

These maturities will drop off to approximately $800 million of higher rate CDs in the fourth quarter of this year.

In total, average deposits declined $1 billion during the second quarter compared to the first quarter of 2010.

However, the mix of our deposits improved which we believe will benefit the net interest margin in the second half of the year.

Slide eight shows the strong liquidity position of the Company.

With loan demand remaining weak we have increased the size of the investment portfolio, and reduced our wholesale funding position over the past year.

For the second quarter of 2010, the loan-to-deposit ratio stood at 93%, consistent with the first quarter of 2010, and an improvement from one year ago when it was 107%.

In this loan-to-deposit ratio we have also included our discontinued operations balances not funded with securitization trusts.

These securitization trusts gross up the balance sheet but do not have an impact on the liquidity of the Company.

Turning to slide nine.

Net chargeoffs for the second quarter were $435 million and represented 3.18% of average total loans compared to $522 million, or 3.67%, of average total loans in the first quarter of 2010.

Net chargeoffs continued to decline in the second quarter as we experienced improvement in most of our loan portfolios, when compared to the prior quarters.

This improvement, along with lower levels of nonperforming loans and lower total loans outstanding, resulted in a reduction in the reserve for loan losses of $207 million during the second quarter.

At June 30, 2010, the reserve for loan losses stood at $2.2 billion, or 4.16%, of total loans.

Our current expectation is that we will continue to experience elevated but lower levels of net chargeoffs in coming quarters.

And along with anticipated lower levels of nonperforming loans, we may continue to see further reductions in the level of the loan loss reserve for the balance of the year.

As in our prior quarter comment, should the economic conditions materially weaken, this could change our outlook for net chargeoffs, nonperforming loans and reserve balance.

Turning to slide 10.

Our nonperforming loans stood at $1.7 billion, or 3.19%, of total loans at June 30, 2010; down $362 million from March 31 of this year, and down $587 million from their peak at September 30, 2009.

Nonperforming assets were also down $342 million to $2.1 billion as of June 30, 2010 and are down over $700 million from their peak in the third quarter of last year.

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

We also saw an increase in loan sales and payments, as liquidity improved in the second quarter.

As shown on page 24 of the earnings release, both 90 day or more past due and 30 to 89 day past due loan categories experienced decreases in the second quarter when compared to the prior quarter.

Our coverage ratio of loan loss reserves to nonperforming loans improved to 130% at June 30, 2010.

And when we combine our reserve for unfunded commitments to our loan loss reserve, our total allowance for credit losses represented 137% coverage of nonperforming loans, at June 30, 2010.

In addition, nonperforming loans are carried at approximately 69% of their original face values, and other real estate owned and other nonperforming assets are carried at approximately 56% of their origin face values, at June 30, 2010.

Turning to slide 11.

All of our capital ratios improved at June 30, 2010 compared to the prior quarter.

At June 30, our Tangible Common Equity to Tangible Asset Ratio was 7.65%.

Our Tier 1 Common Ratio was 8.01%, and our Tier 1 Risk-based Capital Ratio was 13.55%.

As a result of returning to profitability in the second quarter and the reduction in the reserve for loan losses, the Company's disallowed net deferred tax asset for regulatory capital purposes decreased to $405 million at June 30, 2010 from $651 million at March 31, 2010.

For regulatory capital purposes, the $405 million of net deferred tax assets disallowed at June 30, 2010 reduced our regulatory capital ratios by approximately 45 basis points.

We believe that the Company's strong capital ratios and the return to profitability will improve our prospects for the eventual repayment of the TARP Preferred Capital in the future.

And finally, turning to slide 12, we want to close by updating you on our long-term targets we introduced last quarter.

We continued to achieve our core funding and noninterest income to total revenue objectives.

We made additional progress on our net chargeoffs, Keyvolution cost saves and ROA objective during the second quarter.

As mentioned earlier, the net interest margin was down two basis points in the second quarter.

However, our outlook for the third quarter is for an improvement in this measure.

Before leaving this slide, I want to comment on the status of our progress with regard to having clients opt in to overdraft protection.

Last quarter, we commented that we estimated that the Company could potentially lose up to $50 million in deposit service charges, on an annualized basis, once Regulation E was fully in effect.

Based on the responses that we have received so far, we now estimate that the cost should be closer to $40 million, and we will continue to look for ways to help offset this impact.

As you may have seen yesterday, we announced the introduction of a new checking account that not only incorporates overdraft protection for a monthly fee but also provides identity theft protection.

We believe this new service will be well received by clients, as they continue to look for convenience and certainty when managing their money.

Also, there has been considerable amount of discussion regarding the new Financial Regulation Act, which the President signed into law yesterday.

Many of the provisions of this Act, will require studies, and new regulations, to be completed before they take effect.

One area that has received considerable discussion is the potential impact on interchange revenues.

In total, on an annualized basis, Key derives approximately $75 million in revenue from debit interchange.

Until the regulations are proposed, we won't know the ultimate impact on this revenue stream.

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.

(Operator Instructions) We will go first to Brian Foran at Goldman Sachs.

Hi good morning.

I guess I have a couple of questions all related to the same thing, so I will throw them out at once and tell me which is most important.

As we think about net interest income is there enough liability in CD repricing specifically left to get you eventually to your [3.50] target?

And if not, which is more important?

Is it rising rates?

Or is it loan growth?

Or is it a little bit of both to get there?

Then on the other side of the balance sheet, how should we think about what a normal level of securities portfolio is?

And assuming the current levels elevated, is it a stop-gap until rates go up, or is it a stop-gap until loan growth reemerges or is it ultimately going to be replaced by acquisitions?

How are you thinking about potentially exiting that trade over time?

Brian, this is Jeff Weeden.

With respect to the margin, we still have some additional runway that will help us here into the third quarter, obviously, because of the repricing that happened in the second quarter of the CD book.

Most of that benefit doesn't hit until the third quarter.

And of the $2.8 billion that I mentioned is repricing in the third quarter, the majority of that benefit will not hit until the fourth quarter of this year.

So, while not giving specifics on the question with respect to the [3.50] margin, we will see improvement and we expect to see improvement here in the third quarter, and again in the fourth quarter.

But, to get much expansion beyond and on up significantly, will require an additional change in the overall rate environment.

Currently, with the Company's position, we're approximately 4% asset sensitive.

So, as we look out into the future, we're positioned for higher rates, but not in the foreseeable future.

As a result we added to the investment portfolio in the second quarter.

You can see the average balance for the quarter was $17.3 billion and the ending balance for the quarter was closer to $19.8 billion on the investment portfolio.

We are keeping the investment portfolio relatively short, in buying securities, basically, in the two and a half year duration and we stay also for quality, Fannie, Freddie and Ginnie CMO packs or sequentials.

So I think before we're going to see expansion in the margin above that [3.50] range we are going to have to see some loan demand coming back into play.

We are working very hard, in the field, to garner that business, at this particular point in time and I am sure that Beth and Chris will comment on that later.

The investment portfolio, though, is something that is there to serve as a reservoir, if you will, for when the loan demand does come back.

So it is very difficult for me to tell you the exact level of the investment portfolio.

But, we will maintain higher levels in the investment portfolio than we historically have in the past, just because the environment has, in fact, changed.

Maybe one follow-up on debit -- I know it is too early to tell, but what offsets are available to banks in terms of thinking about changing the way that product works?

How easy and realistic is it to implement or has the US banking consumer just become so used to free checking and free debit that it might be hard to bring back things, the different fee type things.

Brian, this is Beth.

And obviously the industry is in the process of reviewing what clients value, what constitutes profitable account activity, and using analytics and insights to make sure that as we think about how we potentially reposition products, introduce new products or try and enhance certain kinds of activities and behaviors that are desirable to our client base and services that they want.

We're obviously in the process of doing that.

I believe that the industry -- I know we're actively researching those various elements to look at potentially launching a -- as we did this week, the announced the new Key Coverage account.

We're also looking at substitutes to free checking but again based on a value proposition that clients would want and need.

Then how do we take certain programs and expand our client services so that we can garner deeper and fuller relationships through usage of certain kinds of services.

I think it will be something that will evolve over time and I'm sure all of us are looking at what is the right value for the client proposition, that also helps us maximize our revenue potential.

Thank you.

We will go next to Craig Siegenthaler with Credit Suisse.

Thanks, good morning everyone.

Just a question on loan growth.

If you look at your commercial bucket of loan growth, the deterioration there is actually pretty high and it is almost sequentially as high as your exit portfolio which actually is positively surprising us in terms of how slow it is running off.

Can you just talk about what you're seeing in terms of new loan demand in the commercial bucket and also, how shall we expect or how long should we expect for this exit portfolio to run off here?

Yes, Craig, this is Chris Gorman.

What we're seeing from a utilization perspective in the C&I book is it is basically flat.

Vis-a-vis the first quarter.

It is down very slightly from sort of the -- down slightly from the first quarter of 2008 before the financial crisis, and down actually rather significantly from the peak of the financial crisis in the fourth quarter of 2008.

We don't see anything in the near term that is going to cause those utilization rates to go up.

If you think about it there is not a lot of upward pressure on commodities which forces people to pre-buy.

Additionally people are able to garner whatever they need to keep their operations running on relatively short notice.

So, we're projecting that the utilization rates are going to remain relatively flat as they were from the first quarter to the second.

Then the -- on the runoff on the exit portfolio, just trending really slow here.

Just talk about maybe how slowly that should fall off here.

Craig this is Jeff Weeden.

We have talked about the fact that the portfolio will probably go down about $500 million a quarter.

It was actually $600 million in the second quarter.

We have got various buckets here.

There are two buckets that are a longer duration, within the commercial lease finance, there is about $2.4 billion.

There is $1.1 billion of that are the LILO/SILOS.

Those will go out for 10 years.

That is a very slow piece of that and the other part of the equation that is a little bit slower is also the marine.

Now marine typically picks up in the second quarter and the third quarter, each year, with the improvement in the weather and people get out boating, et cetera, but that's also a much longer duration portfolio.

So, the other books, continue I think to pay down, the residential properties was down $90 million approximately, in the second quarter.

And so, that is really where we're going to see paydowns are going to continue to probably at about a $500 million, a quarter, plus or minus a little bit.

And so this -- until we get down to those last two big portfolios that are there.

Then given those trend versus what you're seeing on the deposit side you think we could really reach, 80% loan-to-deposits, well below your range over the next year?

I know that's not where you want to be but just given the macro environment?

It is always possible because we're seeing high levels of deposits and liquidity.

And I think one of the things, too, as Chris was kind of talking about the availability of people being able to buy and get whatever resources they need, they are able to do that with a lot of their cash.

I think in terms of what was announced by the -- or a report I think that came out from the Fed a week ago, the amount of cash that businesses have right now is extremely high.

We see that in our deposit accounts.

Whether we get to an 80% loan-to-deposit ratio or not, I can't predict that at this particular point in time.

I think what we are doing is continuing to reprice our deposits and basically our inventory, and continue to be on the outlook for signs of an uptick in loan demand, here in the future.

Great.

Thank you for taking my questions.

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

Thank you, this is actually Jessica -- for Paul.

I was wondering if you could give us a little color on your OREO book.

Looks like loan sales were up slightly, but we're still seeing some valuation adjustments on that portfolio.

I was just wondering if you could talk a little bit about pricing.

What parts of the portfolio you are having to further adjust downward and just where the overall book is marked to today.

This is Jeff Weeden.

Chuck Hyle will comment on the OREO book in just a minute but I can tell you that there is a slide in the earnings release I believe it is on page 25 of the press release that provides the activities that go through OREO during the course of the quarter.

So we did have some marks that we took in the quarter.

Valuation adjustments of approximately $24 million.

But we were also able to sell some of the property, during the quarter that we realized, an overall gain on some of the properties that sold, so, we think we have a mark fairly close to value.

Some properties were selling at a profit.

Some of the others were continuing to mark until we can clear the market and keep those properties moved.

We have a tendency to try to move as much ORE during the course of the time period that we can, and a lot more of it of course that is coming in now, is less of the residential side, and more on the income side of the equation.

But I think that is a good summary that is provided on page 25.

And in my comments I commented about in total, all of our other nonperforming assets, whether it is ORE or other nonperforming loans or loans held for sale that are in the nonperforming category are carried at approximately 56% of their original face values.

Anything else you want to add?

This is Chuck Hyle.

Jeff gave a great summary there.

I would just want to emphasize the fact that in the Held For Sale book which would -- we have seen I think better values.

And we have been with the liquidity, improving a bit in the second quarter, we have been able to realize a few gains out of the Held For Sale portfolio.

The marks on the OREO side as Jeff indicated is primarily on the residential side and a few other assets that have been in for a long time whether it was slightly higher loss content but I think the general color I would put on it is, we felt better during the course of the quarter, on both the OREO book and the Held For Sale book.

Thank you very much.

(Operator Instructions) We will go next to Terry McEvoy with Oppenheimer.

Thanks, good morning.

I was just wondering if there was any, call it bright spots across your franchise, where you're seeing some decent lending opportunities.

Then looking ahead when there is more confidence in the economic recovery, is it safe to say maybe the Rocky Mountain region and the Pacific Northwest would be the first areas where KeyCorp would start to show some loan growth?

Yes, Terry this is Chris.

A few places where we're starting to see activity.

One is in our leasing business which we think is an early cycle business both in the bank channel which works very closely with the Community Bank we have seen upward trend there and also in our vendor business.

Our vendor business, as you might know, is focused on technology equipment.

And we have seen a lot of lift there.

From an asset perspective, we have seen it in those areas, also, on the transaction side.

We have been fortunate enough to be involved in several transactions and are involved in several acquisition financings and we have seen an uptick there.

Those are a couple of areas where we have seen a bright spot.

And Terry this is Beth Mooney.

I will give you a little color as well and would say that while new business volume obviously hasn't gotten to the point where it exceeds runoff we have seen some general increases in our loan pipelines over the last couple quarters and have had actually, months where we see fairly robust activity, and then the next month will lag back.

So it is an indicator to me that loan is still -- demand is still relatively soft.

It can be more episodic than trending at this point.

As you can see, companies still continue to delever and have a fair amount of liquidity.

But with that said if I look at it regionally, the Pacific Northwest and the Rocky Mountains to your question, about where in the cycle, and demand, actually went into the slowdown, of the latest of the markets, and we actually see them coming out the slowest at this point.

And in our Northeastern Great Lakes region, we see some general growth in the economies as manufacturing starts to expand.

And so, we see actually some regional differences with the Pacific Northwest and the Rockies lagging at this time.

That's helpful.

I just want to get some clarity on your credit outlook.

Chargeoffs remaining elevated in the next couple of quarters.

I'm reading into that levels being somewhat consistent with the second quarter and then in terms of the reserve release we saw in the second quarter, is it safe to assume, based on what we know today, that that would continue, and it would be to the same degree that was potentially reported in Q2?

Terry, this is Jeff Weeden.

The level of -- we made the comment, we actually expect net chargeoffs and nonperformers to continue to trend down.

When we say they remain elevated, they remain elevated from a historical perspective.

But we are seeing improvement.

Credit improved overall and the trends in credit we believe are going to continue to show improvement even though we put in a caveat in there, unless there is a substantial reduction or turn-around in the overall economic activities.

So, we do expect it will improve, we do expect that chargeoffs will exceed provision levels for the balance of this year also.

Okay thank you very much.

We will go next to Jeff Davis at Guggenheim Partners.

Thank you but Terry covered my question.

Thank you.

We will go next to Gerard Cassidy with RBC Capital Markets.

Thank you, good morning.

Jeff when you talked about the investment portfolio, I think you said that you are putting on securities with a duration of about two and a half years.

What kind of yield are you guys seeing, or getting for that type of investment?

Well, Gerard, this -- we put the investment securities on, going back to the -- May, and then more in June time period.

And so, when we were putting on securities at that time, basically they are going to average about 2.8% to 2.9%.

Somewhere in that particular range for the quarter.

Okay.

Are you continuing with that program?

In the second half of this year, do you expect to purchase as many securities as you have done so far in the first half, or will it slow down or accelerate?

Well, it is going to be dependent upon, cash flows.

So to the extent we have loans that continue to pay down, and we have good deposit flows, we're going to make investment decisions on that cash.

So, we're much better off to have it invested in high quality securities particularly with the outlook that rates will remain low here for an extended time period.

Gerard this is Henry.

We also went into the earlier part of this year with a much larger liquidity cushion, in terms of Fed Funds Sold or Fed Funds at the Federal Reserve.

We have reduced that to a level now that we think continues to put us in a sold position, but a much smaller cushion, and we sopped up if that is the right term, that excess liquidity, instead of earning 25 basis points we have gone into these shorter maturity investments.

So, we won't have that pick up again in terms of the investment portfolio.

It will then fall back to as Jeff said, the liquidity that we get through the deposit side, or loss on the asset side in loans.

Okay.

Thanks.

Another question, you guys have had some success, with managing your operating expenses.

When we look at your balance sheet, and if we, for the moment, take the securities out of the balance sheet, your balance sheet last year, without the securities, which totaled $12 billion, probably came in around $86 billion, by taking out the $20 billion from securities this year, the balance sheet drops to about $74 billion.

We look at PNC's numbers today, US Bank Corp yesterday, PNC's efficiency ratio today came in at 51%.

You have US Bank Corps in the high 40s, yours is around -- hovers around 70%.

Do you guys need to do another -- I know Keyvolution is underway and is toward the end of it.

Is there another expense savings program that you might have to undertake if this loan growth -- if the loans continue to diminish and you're just using securities to hold you over.

Gerard, this is Jeff Weeden.

I think in terms of our Keyvolution initiatives are on going and we still have a number of things that are taking place there.

Part of our objective is to become more variable in nature in some of our costs so we adjust faster to the change in the underlying loan demand and changes in market conditions as a whole.

We're still focused on expenses and we have to remain focused on expenses.

And I think you pointed out our efficiency ratio is high.

What we have to do is also grow the revenue side of the equation, we need to see some additional margin expansion, and we have to continue to go out and attack the market also for noninterest revenue.

On the expense side, I think, if we have loans remaining very soft, and trending down, we're going to have to look at what other measures that we can do on the expenses, but it is not something -- it is all part and parcel to our Keyvolution initiatives that are taking place so it is not like a "new program" that would be introduced.

I would also say -- this is Henry -- that we're at about $200 million in run rate saves for Keyvolution, on our way to $300 million to $375 million.

So past the 50% range but still with a significant opportunity ahead of us.

We have identified those.

This isn't a wish list.

It is a matter of getting in the position to realize those savings.

So there is a lot of opportunity ahead of us, and as we have said earlier, it really isn't until early 2012, that we're targeted to get that full $300 million plus run-rate from Keyvolution.

So, it isn't like we have stalled.

We're still on track, and we have got a good runway in terms of identified and yet to be implemented efficiencies.

We're not shooting for a high 40, low 50, our business mix, has some businesses that are just inherently less efficient, in terms of how the costs flow through our P&L.

One final question.

I know in this environment it is very easy for everybody to harp on the lack of loan growth and none of us can see when it is going to come back, but maybe Henry, in talking to your customers and with your experience of past cycles, does this one seem different than -- is the United States actually going through a delevering, whether it is the consumer or the commercial borrower that we could see for the industry?

Not just KeyCorp but for the industry that loan demand is indefinitely impaired because there is this change that we need to delever?

Well, I am with you 100% except for indefinitely impaired.

My crystal ball isn't that good but I have been involved with Beth in some meetings with our clients, a whole series of meetings, and while they're optimistic and really, recently we saw more optimism about their profitability but when asked the question are you going to add employees, there was no pause, the answer was no.

They are using some temps.

But they are really going to wait until there isn't the uncertainty in the economy.

And when we ask them about borrowing, in terms of, property plan, equipment and expansion, the answer was - we have a lot capacity we're more productive than we have ever been, and we're going to continue to use that leverage as opposed to adding more debt.

So I think it is going to take a lot more confidence, which we will be able to see through various metrics before companies and individuals are going to borrow the way they did, as we built into the -- as we built up to the financial crisis.

So I think it is going to be longer Gerard.

I don't know whether it's permanent, but I think some companies clearly are thinking differently about their liquidity and about their leverage.

Okay, thank you.

Just one final question on credit maybe Chuck can answer this.

You're criticized loans or your watch list.

Did you guys see a similar decline in those levels like you did in your nonperforming assets in the quarter?

Gerard, we did, and the trends there have been I think extremely good.

And I think the other positive I would mention is that it accelerated actually during the quarter.

So June was a very good month in that respect.

And it is really a combination of some improvement and migration, not just the inflows but some upward migration.

But also, paydowns.

So we're seeing paydowns in criticized classified assets as well.

So the trends, all of our credit metrics virtually across the board were positive and improving during the second quarter.

Thank you.

(Operator Instructions) We will pause just a moment.

Mr.

Meyer at this time there are no further questions.

I will turn the conference back over to you.

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