KeyCorp (KEY) 2011 Q4 法說會逐字稿

Good morning, and welcome to the KeyCorp 2011 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, Ms.

Beth Mooney.

Ms.

Mooney, please go ahead, ma'am.

Thank you, operator.

Good morning, and welcome to KeyCorp's fourth quarter 2011 earnings conference call.

Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer, and available for the Q&A portion of the call are the leaders of Key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler.

Also joining us for the Q&A discussion are our Chief Risk Officer, Chuck Hyle and our Treasurer, Joe Vayda.

Slide 2 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 3.

This morning, we announced fourth quarter net income from continuing operations attributable to common shareholders of $201 million, or $0.21 per common share.

Our fourth quarter results reflect continued improvement in credit quality, solid loan growth and further evidence that we are gaining traction in leveraging the alignment of our franchise across business lines to support the needs of our clients.

There were also some unusual items in the quarter that impacted our revenue and expense levels that Jeff will cover in his remarks.

Key's dramatic improvement in credit quality this year continued in the fourth quarter, with net charge-offs declining for the eighth consecutive quarter to 86 basis points of average loans.

Nonperforming assets and the level of criticized loans also continued to show meaningful improvement.

Our progress reflects the actions taken to improve our risk profile and strengthen our credit culture, which can be seen in our credit metrics as well as in the quality of our new loan originations.

We were also encouraged by the second consecutive quarter of period-end loan growth with average balances increasing for the first time since the fourth quarter of 2008.

Driving the loan growth was a 5.4% increase in average commercial, financial, and agricultural loans marking the third consecutive quarter of growth for this portfolio.

This confirmed our belief that we've reached an inflection point in loan balances in the third quarter of 2011 and that we have created a business model that is distinctive and positions us to win in the marketplace.

Before Jeff discusses our quarterly results, I want to step back and review the progress we made in 2011 and share some thoughts on our priorities for 2012.

In 2011, we benefited from the actions taken to strengthen our balance sheet, reduce risk, reposition our business and rebuild capital.

As you can see in our full year results, we have returned to solid and sustainable profitability, reached an inflection point in our loan portfolio and established peer-leading capital levels.

For the full year 2011, net income from continuing operations attributable to common shareholders was $857 million, or $0.92 per common share, which was a significant increase from the $413 million, or $0.47 per common share in the prior year.

The year-over-year increase was largely driven by the dramatic improvement in credit quality, good expense control and our success in growing our business.

In 2011, we also continued to focus on customer service.

I was pleased with the recognition we received over the course of the year that affirms our relationship strategy and validates our customers' belief they receive value from Key's products and services.

Recent recognition includes a survey by American Customer Satisfaction Index showing that Key is one of only two large banks that improved its overall customer satisfaction score for two consecutive years.

Key's score is significantly more positive than the banking industry overall.

Additionally, Key ranked fifth nationwide in overall customer satisfaction in the J.D.

Power and Associates 2011 Small Business Banking Satisfaction Survey and achieved the highest score in the industry for in-person account activities.

The final item on this slide focuses on maintaining a strong balance sheet and remaining disciplined in our approach to capital management.

Our strong capital position provides us with the flexibility to support our clients and our business needs and evaluate other appropriate capital deployment opportunities.

One exciting opportunity was our recent announcement that we have signed an agreement to acquire 37 retail branches in Buffalo and Rochester, New York.

The acquisition will strengthen our upstate New York franchise and benefit our local communities, clients and shareholders.

Finally, earlier this month, we completed our 2012 CCAR submission and look forward to working with our regulators and Board to evaluate appropriate opportunities to deploy capital, which could include an increase to our common stock dividend and potential share repurchases.

Until the process is completed and we receive a response back from the Federal Reserve, we will not be able to comment further.

Turning now to slide 4, this shows the progress that we've made towards our long-term goal.

2011 was clearly an inflection point for our Company, and I want to recognize the dedication and hard work of our employees that contributed to our success.

As we look to 2012, we remain confident that despite industry headwinds, we've positioned Key to win in the marketplace and continue to make progress on its financial goals.

With the foundation of a strong balance sheet and our relationship strategy in place, our outlook for 2012 is built on solid loan growth, driven by CF&A lending.

I would point out that our growth will continue to be a result of higher quality, relationship-based loan origination and not purchased loans; a net interest margin that is stable to improving; capitalizing on opportunities to leverage our relationship model with our market sensitive businesses to grow fee income; remaining focused on expense management; continued improvement in credit quality; and while the pace of the improvement will slow, we expect continued progress towards our goals.

Finally, one of the most important decisions that we will make over the next several years relates to the way we manage our capital.

Making sure we remain disciplined and opportunistic in making decisions that enhance shareholder value.

Now I'll turn the call over to Jeff, who will review our fourth quarter results and provide more detail on our expectations for 2012.

Jeff?

Thank you, Beth.

Slide 6 provides a summary of the Company's fourth quarter 2011 results from continuing operations.

As Beth commented on earlier, for the fourth quarter, the Company earned a net profit of $0.21 per common share compared to $0.24 for the third quarter of 2011 and $0.33 for the fourth quarter of 2010.

The fourth quarter contained a number of moving parts, including a charge of $24 million related to our obligation under a total return swap on the Visa Class B shares we sold in 2009, and a $10 million loss on the redemption of certain capital securities.

I'll touch more on these items along with expenses and credit quality in a few minutes.

Turning to slide 7, average total loans increased $656 million during the fourth quarter compared to the third quarter of 2011.

This represented a 1.4% unannualized increase from the third quarter, and is the first time we have grown through the runoff portfolio since the fourth quarter of 2008.

As can be seen on this slide, average balances of commercial, financial and agricultural loans increased from $17.4 billion to $18.3 billion, or approximately 5.4% unannualized.

Our utilization rate of CF&A loans improved from 44.4% in the third quarter to 46.3% in the fourth quarter of 2011.

During the Q&A segment, Chris Gorman, Bill Koehler and Chuck Hyle will be able to provide additional color on the quality of the credits and the spreads we were achieving.

However, in a brief comment, we were pleased with the overall quality and the fact that spreads held or expanded during the fourth quarter as compared to the third quarter.

Moving to slide 8, on the deposit side of the balance sheet, our trend of improving mix of deposits continued during the fourth quarter where we experienced a $1.6 billion, or 3.5% unannualized increase in non-time deposits.

As noted on this slide, average balances of time deposits declined approximately $900 million during the fourth quarter, and at quarter-end, we had approximately $10.4 billion in time deposits outstanding.

We have identified under the highlights section of this slide the scheduled maturities of our CD book and the rates that apply to these balances.

Approximately $6.8 billion of our CDs outstanding at December 31, 2011 mature over the next four quarters.

Included in these totals are approximately $2.5 billion of higher costing CDs originated prior to 2009.

To provide some additional detail on these higher costing CDs, $238 million at a 4.95% cost mature in the first quarter, $688 million at a 4.57% cost mature in the second quarter, $1.025 billion at a 5.06% cost mature in the third quarter, and $529 million at a 4.88% cost mature in the fourth quarter.

These repricing opportunities will benefit our net interest margin.

Turning to slide 9, we continue to experience an improvement in our asset quality statistics again this quarter.

Net charge-offs declined to $105 million, or 86 basis points of average loan balances for the fourth quarter.

In addition, our nonperforming loans declined to 1.47% of period-end loans at December 31, 2011.

Our reserve for loan losses stood at $1 billion, or 2.03% of period-end loans and represented 138% coverage of nonperforming loans at December 31, 2011.

As we have identified on page 21 in the Appendix of today's materials, criticized loans outstanding declined for the tenth consecutive quarter at December 31, 2011.

Looking to 2012, we anticipate continued improvement in asset quality with lower levels of nonperforming assets and net charge-offs for the year.

Specifically with respect to net charge-offs, we anticipate the amount to be comparable to the second half of 2011 for the next couple of quarters.

Regarding provision and reserves, we anticipate the amount provided to be less than net charge-offs in 2012.

However, we would anticipate as loan growth continues, we would migrate during the course of the year for provisions to be closer to the level of net charge-offs.

There are a number of variables to consider of course, including the composition of the loan portfolio at each quarter-end throughout the year.

Turning to slide 10, for the fourth quarter of 2011, the Company's taxable equivalent net interest income was $563 million and the net interest margin was 3.13%, up from $555 million and 3.09% for the third quarter of 2011.

Average earning assets were relatively stable for the fourth quarter compared to the third quarter.

An improvement in asset and funding mix aided both the net spread and net interest margin for the quarter.

Our expectation for 2012 is for the net interest margin to show modest improvement and for average earning assets to remain in the range of $71 billion to $73 billion.

Helping to offset some of the headwind on the margin from the continuation of the low rate environment is our ability to reprice maturing CDs throughout the year as well as scheduled debt maturities.

As a result of the announcement on January 12 that we will be acquiring 37 branches in Western New York this year, approximately -- with approximately $2.4 billion in deposits and $400 million in loans, we will use this excess liquidity to simply retire debt and fund loan growth.

During the first six months of this year, we have approximately $2 billion of debt maturities with approximately $1.4 billion occurring in the second quarter.

The all in cost of the second quarter maturities is approximately one month LIBOR plus 200 basis points.

Our noninterest income was down for the fourth quarter compared to the third quarter, primarily for the following factors.

First, we recorded a charge to our dealer trading and derivatives income line of $24 million related to our estimated costs associated with the total return swap we entered into in 2009 when we sold our Class B shares of Visa to a third party.

On December 23 of last year, Visa announced that they would be funding more of their escrow account for litigation and canceling Class B shares.

This action created a charge for us under the total return swap.

Next, in the fourth quarter, we incurred a charge of $10 million, compared to a gain of $13 million realized in the third quarter when we redeemed certain capital securities.

Retirement of the capital securities will benefit our future net interest margin.

Also, during the fourth quarter, Principal Investing incurred a loss of $8 million compared to a gain of $34 million during the third quarter.

Finally, we had the impact of the new government pricing controls on debit card interchange, which reduced our debit card income by $15 million compared to the third quarter of 2011.

Turning to slide 11, expenses increased during the fourth quarter of 2011 compared to the third quarter, by $25 million to $717 million.

During the fourth quarter, we incurred additional expense for professional fees, marketing, personnel, other real estate owned and various other miscellaneous items which were partially offset by a credit to the reserve for unfunded commitments.

Some of these additional costs incurred are typically higher in the fourth quarter and should subside as we get into 2012.

In 2012, we will continue to focus on cost control efforts as we invest in client facing positions and technology, continue to optimize our non-client facing positions and occupancy costs, expand -- expend from marketing where we can deepen client relationships to improve future revenue, and implement other efficiency initiatives.

Slide 12 shows our pretax pre-provision net revenue and return on average assets.

Pre-provision net revenue at $260 million for the fourth quarter was negatively impacted by the $24 million charge for Visa, the $10 million charge for the redemption of certain capital securities and the $8 million loss from Principal Investing.

By contrast, the third quarter benefited from a $13 million gain on the redemption of capital securities, and $34 million in gains from Principal Investing.

As we look at pre-provision net revenue for 2012, we anticipate PPNR to be in a range of around $280 million to $330 million per quarter.

Finally, turning to slide 13, our tangible common equity ratio and estimated Tier 1 common ratio both remained strong at December 31, 2011, at 9.88% and 11.28%, respectively; placing us in the top quartile of our peer group on these ratios.

As Beth commented on, with respect to the capital management, our priorities include reviewing the dividend for possible increase and seeking authority around potential share repurchases.

However, until the Fed completes their review under the CCAR process, we are not able to comment further at this time.

That concludes our remarks.

Now, we'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 go first to Todd Hagerman with Sterne Agee.

Good morning, everybody.

Beth, I was just wondering if you could just give us a little bit more color just in terms of the HSB acquisition.

The question is, you guys certainly don't need any more capital, you're flush with liquidity, and as Jeff mentioned, you're paying off some debt.

But I just want to explore a little bit further just in terms of how you're thinking about that excess capital, the excess liquidity.

And again, given the franchise, your execution strategies and so forth, is this another way in terms of how you're looking to redeploy again, that kind of excess capital?

I'm just trying to better understand the acquisition relative to your excess liquidity, excess capital position and how you guys are thinking about your capital management over the next couple of years?

Yes, Todd.

I would be delighted to take that question.

I think the primary driver of the acquisition of the 38 -- 37 branches in Western New York is to strengthen our franchise in the markets of Buffalo and Rochester.

We have talked about how share density and increasing our presence in markets over time helps us acquire clients, increase our revenue and enhance our business operations.

So we viewed this first and foremost as an opportunity to strengthen our franchise in two important markets to Key.

Relative to liquidity and capital, on the liquidity front as Jeff mentioned, those deposits of $2.4 billion that will close in the second quarter are paired around upcoming debt maturities.

So our first use for that will be to simply pay off those maturing debts.

And as it relates to capital, we have said we will opportunistically look at acquisitions that enhance our franchise that could potentially use some capital.

And given the size of this particular transaction, the amount of capital that it uses is really minimal.

Okay.

And so to the bigger question then, again, most of the companies have been receiving the question this quarter.

Just in terms of if you think about capital, certainly you mentioned kind of the dividend preference certainly.

But again, has the priorities shifted at all just in terms of as you think about capital return and the deployment of capital between dividends, buybacks, selective acquisitions or opportunistic acquisitions?

Todd, we have -- our priorities around capital have not changed, and I will just reiterate them to kind of set clarity around that because it wasn't included in our remarks.

Our primary use of our capital is investing in our businesses and supporting our clients and our loan growth.

Second would be our common stock dividend.

Third, we would look to the return of capital in the form of share repurchase to our shareholders.

And then fourth, our capital position allows us to be disciplined and opportunistic about ways that we can invest in our franchise to include selectively acquisitions over time.

Thanks very much.

I appreciate it.

The next question comes from Erika Penala, Bank of America-Merrill Lynch.

I just wanted to dive in a little bit more on the components of your PPNR guidance for $280 million to $330 million.

Jeff, correct me if I'm wrong, but if I add back some of the extraneous items in the fourth quarter, it seems like the PPNR level is 294, appreciative of the NIM expansion and continued loan growth could get you to the higher-end of your range.

Could you give us a sense of what a core run rate of expense that is sort of embedded in that PPNR guidance?

And also what you're expecting for fee income trends, specifically for Durbin mitigation?

Well with respect to the expenses it would be very similar to our guidance that we gave last year in the first quarter.

Last year, we gave a guidance of around $700 million to $725 million.

I would say that it would probably be right around the $700 million level is where we're looking at for expenses.

I think on Durbin, the mitigation plans really won't be in full swing as far as fully implemented until we get into later this year and into 2013.

So that's one quote/unquote, one area.

But we also are seeing very good activity I think with regard to our loan syndication activities.

You've seen where we've had good loan origination related activity here in the third and the fourth quarter, and syndication, our loan related fees have been held up quite strongly.

I think with respect to the other items you were talking about too, the net interest margin, we are guiding for a stronger margin in 2012.

And certainly with I think the levers that we have on the CD and on the debt side, that will be something that will be achievable for us.

Okay.

Thank you.

And the second question I had was just some clarity on your guidance with regards to the reserves.

I guess is it -- what guidepost should we look at?

I understand that you mentioned that it's really dependent upon the portfolio mix at the end of the quarter.

But as we're thinking about the timing of provision matching charge-offs, are we looking at your coverage to NPLs?

Are we looking at allowance versus loans?

What's sort of a guidepost for us to look at in terms of not looking at credit leverage as a support for EPS in 2012?

Well, there are a multiple of factors that we go through.

I think in terms of whether you're looking at non-performers, coverage of non-performers is certainly one that we look at.

We also look at what are the forward loss expectations are too.

So when you look at the portfolio, we build it up each and every quarter.

It's based on probability of default of credits, and then loss given defaults of individual credits.

So those are all factored into it.

Individual benchmarks to look at, you can use certain things on the consumer side.

It's usually about 12 months forward look plus one standard deviation, is kind of our view on the consumer side.

But commercial credit is much more unique and looking at the individual underlying credits and the quality of the credit.

Chuck, anything you'd want to add to that?

Yes.

It's a little hard to predict these things.

It really does all boil down to commercial portfolio composition.

And as Jeff and Beth indicated in their comments, I think our criticized classified numbers continue to come down at a pretty good pace.

I think they were down 14% in the fourth quarter.

And I think another important factor is that the new origination for the quarter continues to improve the overall quality of our commercial portfolio.

In other words, the credits that we're underwriting and taking on the book are of even better quality.

So all those things help move things in the direction that we've seen over the last number of quarters.

The countervailing force of course is an increase in volume and that's what we're beginning to predict, and we'll see how that plays out over the next couple of quarters.

Could you let us know what you are providing in terms of the new CSAs, or C&I growth?

How much you're providing for new C&I growth?

You mean in terms of the reserve?

We don't disclose it -- we don't really look at it that way.

We look at the total portfolio, we look at what's in the portfolio, we look at correlations within the portfolio and we do an individual bottoms up approach.

What we do track is the probabilities of default of the new business that we do, and directionally, that is as I said earlier, improving the overall tone of the portfolio.

Very helpful.

Thank you.

Next up with Nomura, we have Brian Foran.

I guess to start just to clarify the NIM, the modest improvement, is that from where we are today, or is that from a full-year level?

Brian, that's from where we are today.

So we could expect to see improvement as we go throughout the year.

And then on capital, I know you already addressed it, but one question I get over and over again, so I figured I'd ask you, is -- with the capital ratio so high, and with the stock value below tangible book, I definitely understand the strategic rationale for improving density in your markets.

I definitely understand the attraction of certain shareholders to recurring dividends.

But does the thought process around buybacks change based on the stock price?

I guess a lot of people look at that ability to buy back stock below tangible book as almost like a free money trade.

Brian, this is Jeff again.

I think what we all have to be conscious of is the fact that it's not really something that the Board and management has directly within their control anymore.

So what all of us have to do is go through this process of submitting our plans to the regulators and then it's reviewed.

So our priorities I think were laid out as to how we want to employ our capital.

We don't disagree with you, that having the opportunity to do some share repurchases at these particular levels would certainly be accretive and attractive to us.

But everything has to be balanced in the approach in how we are viewing our overall capital plan going forward.

Brian, I would just add -- this is Beth -- that in our comments about our 2012 CCAR submission, we said we contemplated both potential increase in our common stock dividend as well as the potential for share repurchase.

And we like the other banks that participate in the CCAR process will get further guidance from the Federal Reserve in the middle of March.

Just one other clarification one, the interest earning assets guidance, that includes the HSBC branches, or that excludes them?

That would include those particular branches because we have debt maturities that are coming up so it's a little bit of a liability driven approach here.

We have plenty of liquidity.

So we'll improve our mix of our assets as we have loan growth.

We'll have cash flows coming off of our investment portfolio that will be reinvested into loans.

And then as we get into the second part of 2012, we have the opportunity with the deposits coming back on and continued loan growth to show overall growth in the average earning assets.

Thank you very much.

We now have Ken Usdin with Jefferies & Company.

To follow-up on that last point.

I was just wondering if you can walk us through again that trajectory of earning assets.

We understood the $71 billion to $73 billion type of number you're thinking about for full year.

So I'm assuming that that includes the acquired branches.

At what point do you see that balancing act starting to level out in terms of earning assets bottoming?

And within that how close are we to seeing the exit and the continued ops portfolios getting to a bottom as well?

Thanks.

Okay.

So with respect to the average earning assets, we basically have been holding right around the $72 billion mark here the last two quarters, and so we are getting towards that bottoming part of that process.

I think as we look at the first quarter and the second quarter, we have those debt maturities.

I think that would be where we have kind of that low part of that particular range.

And then as we get into the third and the fourth quarter, we'll be building at that particular point in time.

So that's how I would try to look at it from an asset -- average asset perspective.

Okay.

And within it, are you changing -- because you're going to be focusing on letting some of those long-term maturities roll off, can you talk to us about any different change in your deposit strategy here?

Because obviously the core deposits, you've been letting the higher cost CDs run off.

We haven't seen a lot of core deposit growth in the last few quarters.

Can you talk about any changes you're making there and also how much leeway you have to continue to pull down pricing aside from the obvious CD rollover?

Yes.

I'll ask Bill to comment in just a second on the overall deposit strategy.

But I think in terms as you look at CDs rolling off, that's certainly beneficial to us.

We have sufficient liquidity, and I think the market right now overall has been very, very strong.

I would point out the fact that what we have seen is over a $4 billion increase in deposits in terms of the non-interest-bearing deposits year over year.

So we have seen very strong flows on our non-interest-bearing deposits.

And of course, clients are using those deposits at this point in time to offset certain deposit service charges on the annualized accounts that we have out there.

But overall, it hasn't made sense for us or others in the industry to bid up for deposits at a time when loan demand has been relatively soft throughout 2011.

And we did see some improvement here as we got into the latter half, and we expect that to continue into 2012.

One point I would make on those exit portfolios, because you asked that question too, those are running down much more slowly at this particular point in time.

And so becoming much more programmatic as you look at the amortization of those and they'll probably be in that $200 million to maybe $250 million, going forward.

We were able to grow through those not only on an endpoint basis -- ending balance basis, but also on an average balance basis during the fourth quarter.

Bill, do you want to comment?

Sure.

The one thing I would say on deposits as we look at our rate shops, of course, every market is different, but we think we're sort of at the midpoint maybe on the lower end of the midpoint, within our markets on any given day.

And our deposits still continue to grow.

We think that's an indication of our relationship strategy, and reintermediation that's happening in the market and the flight to quality.

So we feel good about that aspect of the growth in our deposits.

We'll now go to Mike Turner with Compass Point.

On the Principal Investing losses in the quarter, I know that's a very volatile line item.

You've kind of averaged around $20 million a quarter up through the third quarter.

Can you maybe talk about what those losses were comprised of and how you think about that business, going forward?

Well, certainly under Dodd Frank, we think about that business going away going forward, because a number of the individuals that used to be part of the Company were basically spun off here, left the Company in the second quarter of this year and are still managing those particular funds, but they've got their own operation at this point in time.

Most of the overall balances that we have in Principal Investing which is approximately $700 million, $500 million of which are funds and $200 million of which are direct investments and they both continue to pay down.

So we saw realization of sales in the fourth quarter of this year.

Now, some of the -- as we look at this, it is choppy and volatile.

I would expect that we would see that to continue going forward.

It's very difficult for me to predict exactly where it's going to come out on any given quarter, because of the underlying investments and how they may or may not perform.

Next up with Morgan Stanley, we have Ken Zerbe.

Just going back to the reserve a little bit, obviously we heard your comments about provisioning matching charge-offs a little bit later in the year.

Have you, or can you share any kind of discussions with the regulators, or the FCC, or anyone who cares about your reserve ratio in terms of what level is appropriate?

Because you're still at 2% reserves, seems very high.

But we've been releasing it, or you've been releasing it but your commentary would suggest that the pace of reserve release excluding loan growth of course, is going to slow, if not kind of stop.

So we're trying to wonder how much of your reserve ratio depends on your model factors versus sort of external regulator factors?

Well the one comment, this is Jeff and then Chuck will comment also on this.

But I think you have to look at the fact that we have reserves set up for specific individual loans.

To the extent those loans get resolved, those reserves are no longer necessary.

And so that's what we're seeing.

Some of that particular action is nonperforming loans continue to go down.

There were specific reserves assigned to them and those particular reserves get released.

I think the overall positive migration of the book.

And it's difficult to tell you how long that will continue before it just becomes a stabilization and then you start getting into more of a factor involving just normal loan growth.

Even if it's at the same existing credit quality will require additional reserves to be taken at that particular point in time for that particular production.

But I think what I wanted to convey in the initial comments were that we still expect to see the reserve come down during the course of 2012.

However, with the pace with which it came down in 2011, which resulted in an overall credit to the provision expense for the year, we do not expect that in 2012 at this particular point in time.

And in fact, as we migrate towards the year, we expect to see provision expense increase, but it still may not be -- I can't tell you specifically if it will equal net charge-offs at that particular point in time.

Ken, this is Chuck Hyle.

I would just add one or two comments to Jeff's.

And one is that, as we said before, this process is a bottoms up commercial loan by commercial loan analysis that we do every quarter.

It's quite rigorous and it's quite detailed.

And that's basically every quarter, we do this.

And that's what drives ultimately drives the allowance.

While we look at a multiple of factors, that is the core of the analysis that we do.

I would say the commercial book, we've seen terrific progress on the commercial book over the last two years.

And as we've said over the last quarter or so, I think that progress, the reduction in bad loans and so forth is reaching a more normalized state.

But on the consumer side, while we've seen some progress, it hasn't been dramatic progress.

And I think that we will not see incremental progress on the consumer side of the book until we see better underlying economic news, particularly the unemployment rate.

And while our consumer book never deteriorated very dramatically during the cycle, the improvement -- I think, the pace of that improvement has been slow.

So I think there are slightly different stories in those two books.

We'll see how they play out during the quarter.

And again, as we said earlier, the volume that we create over the next couple of quarters will have an impact on the reserve as well.

But it's a very rigorous, very mathematical process that we go through as we establish our reserves.

Next up we have Chris Mutascio with Stifel Nicolaus.

I wanted to kind of go over the guidance a little bit if I could.

Your pretax pre-provision range, the high end of that range is essentially what you did in all of 2011, at that $1.3 billion.

And then you mentioned that your provision expense, you've been talking about pretty much has nowhere to go but up.

If we can extrapolate that out from an operating perspective, in other words your pretax pre-provision income, then taking out the provision expense, it seems to me that your operating income, or your pretax income, has a fair amount of degradation to happen -- to occur in 2012.

What is the offset to that?

Will your tax rate stay fairly low?

Is it share buybacks?

Or do you expect the EPS to actually flatten out and turn down because the provision impact in 2012?

This is Jeff Weeden again.

I think if you look at the consensus out there in the street, you would see that the estimates for 2012 would actually be below the 2011 earnings of the Company.

I think you summarized it in the sense that with a negative provision in 2011, having a positive provision in 2012 would automatically create some degree of headwinds there.

I think where we overcome it over time is really with continued loan growth and margin expansion.

And also, being able to offset some of the other headwinds that we have with respect to the debit card fee income of related items.

So it is from the perspective as you described it.

I think we've given pretty specific guidance on the range of pre-provision profitability.

We've given pretty specific guidance even with respect to charge-offs for the next couple of quarters and provision expense remaining below that.

But I can't tell you exactly how much below it we'll be until we actually go through the end of each and every quarter.

Tax rates will remain relatively comparable.

So I think in tax terms, the tax rates can change depending upon the income in any given quarter.

But factor in a normal tax rate, and then we apply tax credits against that that we originate on an ongoing basis.

And that has a reduction, a natural reduction to the overall effective tax rate.

Next up we'll go to Matt Burnell with Wells Fargo Securities.

Just a question in terms of the balance sheet.

And you noted that the securities portfolio available for sale was down about 8%, but the securities that you're holding to maturity are actually up by a similar amount of the AFS securities going down.

Could you just give us a little more color as to what your longer-term thinking is for those two line items?

And I notice that the securities that you're holding to maturity have somewhat lower yields on those.

If you could just add some color on that as well, that would be helpful.

I'll take the lower yield right away because those are where our new originations are going into.

So the new coupons are just of a lower than the overall portfolio, just given the nature of the market today.

With respect to the overall size of the portfolio, it will in all likelihood come down as we have loans that we're funding as part of the change in the overall asset mix.

We've had a higher level of investment securities during the last couple of years, as we have basically had this part liquidity.

And so as liabilities have been repricing that's been coming out of that particular area, now that we've reached kind of a floor on some of the liability side of the equation on the deposits, we still have some debt that's maturing.

But as we look at it, we're using the cash flows coming off the investment portfolio, we'll fund new loan growth for the overall Company, and that will just be an improvement in the asset mix itself and benefit the margin.

Next with Deutsch Bank, we go to Matthew O'Connor.

Most of my questions have been answered at this point here.

But I guess just as we think about the rating agencies and what they're looking to see from you guys to get an upgrade, any thoughts on that?

I think you still have some deposits in the commercial mortgage services business that could come back, if you catch an upgrade and obviously that can help on the funding mix even more so.

Yes.

Matt, I would just say overall, obviously as S&P did their review of the regional banks last year, they saw to move Key to a positive outlook, which we were pleased to see.

And obviously Moody's has looked at the bank arena.

And Jeff can comment more specifically on some of the components.

But I think there is an overall perception within Moody's related to the earnings power of our industry in this particular economic, regulatory and interest-rate environment.

So we continue to look to the strength of our balance sheet, the strength of our capital ratios and the things that we have done to basically position our Company.

And I think the rating agencies will continue to monitor that for Key as well as the industry over time.

And I would let Jeff comment more fully on Moody's.

I think in terms of capital reserves, asset quality, we're all -- the Company is in very good shape.

I think what it really is looking at is just continuing to show an improvement here in the future on pre-provision profitability of the Company.

So we feel good about the direction that we're headed, as a Company.

But I cannot predict when any particular rating action may take place.

So if it does, it is positive for us.

But even at our current ratings, we are in I think relatively good shape.

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

I've got a multi-part question for Jeff and Beth.

The first is, how do you guys, or what is your cost of capital?

What kind of number have you guys come up with for that number?

Second, if you look at the new Basel III Tier 1 common ratios that everybody will be managing to and if we assume your SIFI buffer will be 50 basis points because you're a national SIFI and the Fed seems to be saying that there is going to be a modest SIFI buffer for the national SIFIs, where are you guys comfortable carrying your Tier 1 common ratio?

I assume it's going to be something above that?

And then finally, Beth, philosophically, if you guys have capital that stays above 10% or so.

And again I know the regulators are very influential on this, but this is more a philosophical question.

Would you be comfortable in giving back to shareholders more than 100% of your earnings, not necessarily this year of course?

But philosophically, with that excess capital, if there's really no real great growth opportunities, would you guys give it back in the forms of dividends and stock buybacks in excess of any year's current earnings?

Thank you.

Okay.

Gerard, on the cost of capital, I think you can go out and you can look at any number of different players that are out there and compute the cost of capital given the current rate environment and the betas out there, whether it's around 10%, or something along those particular lines.

With respect to Tier 1 common and Basel III, I think in this regard, we do have to wait to see specifically what comes out on the SIFI buffers, if any, and the requirements of those rules.

I guess we were hopeful that they would have been out by now to begin to see that and formulate it.

But we expect those out in the not-too-distant future.

With respect to how we'll manage capital, we will take that all into account.

Does that mean -- I think as you look at the capital composition has changed also, so we have to not only look at Tier 1 common, but you have to look at Tier 1 and total capital, what those requirements are.

And so with that in mind, more does it end up being a Tier 1 common level that's closer to a 9%, 9.5%, 10%?

We don't really know yet at this point in time.

Where we are right now at the end of the year on a Basel I basis was a Tier 1 common of around 11.28%, 11.3%.

We're in very good shape on that.

So, Beth, do you want to comment on the --?

Yes, Gerard.

I would say that clearly on the philosophical point of view, our parties are driven by the view of what creates the most value for our shareholders.

And we've talked about obviously having capital support our organic growth, as well as the growth that's required for our clients, dividends, share repurchase and then excess capital available under the right circumstances and in a disciplined way, for other opportunities that could include acquisition.

Embedded in that is our philosophy.

Clearly at any point in time, you're right.

How we utilize capital is being governed by the CCAR process in conjunction with the Federal Reserve.

And at current share prices, share repurchase, would be important, would be attractive to shareholders because that return of capital would be enhancing to their value.

So in conjunction with our board and our regulators we will look at that each and every year.

And in my comments, I used the word -- some of the most important decisions we will make as a board and management team in conjunction with our regulators in the coming years is how do we use that capital in a disciplined way that creates franchise and shareholder value?

So clearly, continuing to look at those four priorities and in each and every year against those opportunities, against what's the right thing to do to make sure we're taking care of our shareholders is top of mind for the management in conjunction with our regulators.

Next up we have [Stemi Calavera] with UBS Securities.

I just want to follow-up on the additional opportunities that you might see similar to the HSBC branches and as it relates to optimizing your franchise.

That was such a great move, and I'm just curious as to how many other types of opportunities you might see across the franchise?

And even if you're not seeing them, what other areas maybe across your geographic franchise would you like to do those kinds of deals?

Steve, this is Beth.

I would say that additional opportunities are hard to predict because these tend to come along for reasons that aren't necessarily something that you can plan or anticipate has to do with the circumstances of an organization that would be in a position to look to sell something or sell a whole bank.

We have said in the past that we believe we can create value in a disciplined way by looking at the breadth of our geographic markets and where appropriate, if opportunities were to come along that would allow us to do a fill-in acquisition that would enhance our market presence, would strengthen our ability to leverage our business model, acquire clients, and utilize the capabilities of our corporate and Community Bank.

That again with the word discipline being operative in that sentence, we would look at those.

Across our franchise there could be a variety of areas and opportunities in that regard.

So I appreciate your comment about our recent announcement as being attractive.

I think that is indicative of the kind of things that we are trying to think about to strengthen and enhance our franchise.

And with that I know Bill Koehler, our President of our Community Bank, might have some additional thoughts about how he looks at our various geographies.

I would make two comments.

The first is we have benefited from balance and diversification across all our geographies, so we want to take advantage of that and recognize it as so.

The other point I would make relating to our branch network is we can't wait for those opportunities.

We have opportunities to rationalize and optimize our existing branch network, and we're looking at those, whereas in 2011, we built 39 or 40 branches this year.

We will build more like half that many.

And we will shift the focus as well toward relocations and consolidations in order to reposition as best we can our branch footprint to more attractive trade areas so we can find other opportunities to gain efficiencies and productivity.

Next up with JPMorgan, we have Steven Alexopoulos.

I wanted to start, looking at the $1.5 billion of C&I loan growth.

Were you guys active in buying loans during the quarter potentially from Euro banks?

Steve, it's Chris Gorman speaking.

Just a couple quick comments.

The answer is, no.

We were active in originating deals and in fact distributing them.

But we -- all of it is really organic growth.

And we've gone about the business of really targeting who we want to do business with.

For example, in our KeyBanc Capital Markets group, we grew our customer base by 10%.

But that 10% had twice as much in terms of fee income.

And as Chuck Hyle mentioned earlier, the weighted average probability of default was significantly below that which resides in the portfolio.

So it was truly targeted organic growth that we experienced and we expect to continue to experience as we go forward.

Steve, this is Beth.

One of the things I underscored in our opening remarks, when I've shared some of the priorities and thoughts around 2012, was critical to our success as well as our business plan is continued growth in acquisition and deepening of relationships in our commercial, industrial and agricultural loan book.

And that, that will be through the execution of our relationship strategy and not for just loans.

Next up we have Jeff Davis with Guggenheim Partners.

Not a big thing and you may have commented on it or you may have put it in the release and I've completely missed it.

But let me ask the question.

OCI was down about $171 million linked quarter.

I think 10 year was flat, Sept.

30 to December 31.

What drove that change?

Primarily two things.

One, we have a smaller held to -- or available for sale portfolio.

And the second item is the change in the pension value, pension asset values.

Next up with Raymond James, we have David Long.

Thinking about the loan growth, obviously your expectations are for continued loan growth here.

But relative to the fourth quarter, obviously it was quite strong.

Is there any seasonality we need to think about here in the fourth quarter?

Also were there any accelerated depreciation tax advantages some of your clients may have taken here at the end of the year that would have ran that fourth quarter number a bit higher?

David, it's Chris.

A couple things.

We always on a seasonal basis particularly in our leasing business do in fact have an increase in the fourth quarter.

So there is some seasonality to it.

In addition to that, there were some specific things in the fourth quarter, for example, where we were bridging transactions, where we are doing the takeout.

In one case, the Fannie and Freddie.

In another, two consortium of insurance companies are going to do a private placement.

A, there is some seasonality to it.

B, on top of the seasonality there was some transaction-specific activity in the fourth quarter that will not duplicate itself as we roll forward into 2012.

And David, I would just add that pipelines across our businesses continue to be strong.

Levels of new business volume originations are increasing.

But as in all things, there is seasonality, and there are timing cadences.

So as we think about 2012, we feel good about continued loan growth.

But in any given quarter, the level of growth such as we had in the fourth quarter is often influenced by other factors.

We'll take Paul Miller from FBR Capital Markets.

This is Kevin Barker filling in for Paul Miller.

I just had a quick question and follow-up on the commercial loan growth.

Do you find that a lot of the loan growth coming from that side is being invited into more syndications with the Euro banks exiting a lot of the market?

So, Kevin, it's Chris again.

Couple things.

There is no question that the exiting of the European banks has had an impact on the entire market.

So we are clearly seeing that.

And you're also seeing on the supply side, if we go back for example in the real estate business, five years ago, the CMBS market was a $300 billion market.

Last year it was a $30 billion market.

This year I think it's going to be a $25 billion or $35 billion market.

And there is a wall of refinancing.

So there are some issues on the supply side that are driving our ability and other people's ability to grow loans.

Having said that, our growth was not, in fact, driven by buying into syndications and filling out where the European banks used to be.

As we said earlier, it was really lead business.

We lead -- we're focused on the middle market obviously, but we lead 70% of the deals we're involved with.

That's all the time we have for questions.

I'll turn things back over to Ms.

Mooney for any further or concluding comments.

Thank you, operator.

Again, we'd like to thank everyone for taking time from their schedule to participate in our call today.

And if you have any follow-up questions, you can direct them to our Investor Relations team, Vern Patterson or Kelly Lammers at the phone number of 216-689-3133.

And for today, that concludes our remarks.

Once again, everyone, this will conclude today's program.

We thank you for joining us.

Please enjoy the rest of your day.