KeyCorp (KEY) 2013 Q1 法說會逐字稿

Good morning and welcome to Key Corp's first-quarter 2013 earnings conference call.

This call is being recorded.

At this time, I would like to turn the call over to Ms. Beth Mooney, Chairman and CEO.

Please go ahead.

Thank you, Operator, and good morning.

And let me add my welcome to Key Corp's first-quarter 2013 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, Bill Hartmann, and our Treasurer, Joe Vayda.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures.

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

Slide 3 shows some of the highlights of our first-quarter results.

There are three important takeaways this quarter.

First, our business model is producing results and positions us well in the current environment and beyond.

Second, we are becoming a more efficient company and our expense initiative continues to show traction and gain momentum.

And, third, our shareholders are benefiting from our disciplined approach to capital management.

Let me start with our business model.

In the current environment of economic uncertainty and excess liquidity, we are seeing more competition for lending opportunities.

In some cases, this is leading to more aggressive behavior from competitors, be it on price, terms, or other structural considerations.

At Key, we have remained disciplined and we are relying on our value added relationship-based approach to win new business, expand relationships with existing clients, and generate robust fee income to go with our strong C&I performance.

We are confident that we are well positioned to grow and take share in our targeted markets.

In the first quarter, average loan balances were up 6% from the same quarter last year.

And within that, the exit portfolio continued to run off and average C&I loans grew 16%.

While our loan growth has been a positive story, we did see clients remain cautious in regards to the overall strength of the economy, particularly towards the end of the quarter.

Second, on efficiency, we continue to deliver on our commitment to reduce expenses and move our efficiency ratio to the 60% to 65% range.

Through the first quarter, we have realized annualized run rate savings of $105 million against our targeted goal of $200 million in expense savings.

It is our expectation that we will continue to incur costs related to our initiative, especially in the first half of the year, and we would expect this to impact our second quarter expense levels.

Overall, our plans to deliver these savings are right on track.

And by the first quarter of next year, we expect to be within our targeted efficiency range.

And it's important to note that this is not an end point but an important milestone for Key.

We are already working hard to identify new revenue and expense opportunities that can improve our efficiency ratio even further and deliver positive operating leverage.

And, third, as we have said before, how we deploy our capital will be one of the most important decisions we make.

As part of our disciplined approach to capital management, we have continued to actively manage our businesses to focus on our best growth opportunities.

We also identified businesses that do not fit our relationship-based strategy and would not be the best place to continue to make ongoing investments.

And as an example, in the first quarter, we announced the sale of Victory Capital Management and we are requesting a no objection from our regulators to return the net after tax gain to our shareholders through share repurchase.

In addition to actively managing our business portfolio, we repurchased $65 million in common shares in the first quarter.

And over the next four quarters, we expect to return a significant portion of our net income to shareholders through the capital actions we announced last month at the conclusion of the CCAR process.

Our plan, which received no objection from the Federal Reserve, included a stock repurchase program of up to $426 million, which our Board has approved, and a 10% increase in the quarterly common stock dividend, which the Board will consider at its regular May meeting.

Slide 4 highlights our 2013 priorities, which have been consistent areas of focus.

They include continuing to leverage our business model; taking advantage of our competitive position in the market; improving our efficiency; and remaining disciplined in the way we manage our capital.

We believe that by executing on these priorities, we can continue to grow, take share, and deliver long-term value to our shareholders.

Now, let me turn the presentation over to Jeff for some details on our first quarter results.

Jeff?

Thank you, Beth.

Slide 6 provides a summary of the Company's first-quarter 2013 results from continuing operations.

During the first quarter, and for all periods presented, we moved Victory Capital Management to discontinued operations due to the pending sale, which is scheduled for the third quarter.

As we reported this morning, the Company earned a net profit from continuing operations of $0.21 per common share for the first quarter, compared to $0.20 for both the fourth quarter and the first quarters of 2012.

Before moving to the more detailed discussions surrounding the quarterly results on the following slides, I would note that seasonality does comes into play when looking at our first quarter versus our fourth quarter.

And as a result, we will also make reference when appropriate to the same period last year for comparison purposes.

Now turning to Slide 7, average total loans for the first quarter were up $767 million, or 1.5% unannualized, compared to the fourth quarter of 2012.

And compared to the first quarter of 2012, average total loans were up $3.2 billion or 6.5%.

During the first quarter of 2013, commercial clients were somewhat cautious following a very strong demand we experienced in the fourth quarter of last year.

We also saw normal seasonal activity, with respect to consumer lending in the first quarter, as consumers paid down their debt they drew on last year, along with normal amortization of loans in our exit portfolios.

As Chris Gorman and Bill Koehler can comment on later, our commercial loan pipeline still remains solid and we are fully engaged in our spring borrowing campaign on the consumer side.

Last quarter we provided an outlook of average total loan growth for 2013, in the mid- to upper-single digit area.

And today, we still anticipate average total loan growth for the year in the mid-single digit area led by strong commercial lending.

Continuing to Slide 8, on the liability side of the balance sheet, average deposits, excluding foreign branch balances, were up $120 million from the fourth quarter, and up $4.3 billion from one year ago.

During the first quarter, we believe we experienced the same trends as the industry with deposits declining in January and then coming back in the later part of the quarter.

Over the past year, our mix of deposits has significantly changed with CDs declining and lower cost transaction accounts increasing over 14% from one year ago.

As a result, our deposit costs declined to 29 basis points for the first quarter of 2013.

Turning to Slide 9, for the first quarter of 2013, the Company's net interest margin was 3.24%, compared to 3.37% for the fourth quarter, and 3.16% for the first quarter of 2012.

The net interest margin declined more than expected during the first quarter compared to the fourth quarter of 2012.

Back in January, during our fourth quarter earnings call, we anticipated the margin declining to the 3.30% area for the first quarter, as a result of approximately 4 basis points of one-time benefits in our fourth quarter numbers and normal downward repricing pressure on assets.

Our actual margin declined to 3.24% as a result of not only these anticipated items, but also from higher than expected levels of short-term investment securities resulting from softer loan demand than anticipated, higher levels of deposits, and a change in mix of funding.

We deployed some of this excess liquidity in the form of added investment securities late in the quarter, which should benefit net interest income next quarter.

But this will continue to place some degree of pressure on the net interest margin.

Taxable equivalent net interest income was $589 million for the first quarter, compared to $607 million for the fourth quarter, and $559 million for the first quarter one year ago.

Compared to the first quarter of last year, net interest income increased $30 million, or 5.4%, due to both growth in average earning assets and improvement in the net interest margin as funding costs declined.

Compared to the fourth quarter, net interest income declined $18 million due to two fewer accrual days and a decline in the net interest margin from asset repricing and higher levels of short-term investments more than offsetting the overall increase in average earning assets.

Our current expectation, given the outlook for little change in interest rates, is for the net interest margin to trend lower from the first quarter level throughout 2013.

We anticipate the net interest margin to decline by approximately 4 to 7 basis points in the second quarter, and continue with modest pressure in the 1 to 3 basis point area per quarter in the second half of the year.

We do have $750 million of debt maturing in May, with some additional benefit coming from CD repricing.

However, we also recognize that asset yields remain under pressure, and we have higher levels of liquidity as clients remain cautious in committing their capital.

We anticipate average earning assets for the balance of 2013 to be in the range of $74 billion to $76 billion.

Non-interest income in the first quarter was $425 million, down from $439 million in the fourth quarter of 2012, and $442 million in the first quarter of last year.

The first quarter is typically down from the fourth quarter due to seasonal factors as well as the strong performance we experienced in the fourth quarter of last year.

Compared to the first quarter of 2012, investment banking and debt placement fees are up 30% as we continue to do more business with our commercial clients and win market share.

Cards and payments income is up 28% compared to the same period one year ago, reflecting our re-entry into credit cards during the third quarter of last year.

I would also note, last year's first quarter there were higher gains from principal investing, as well as we benefited from the early termination of a leveraged lease, which resulted in the recognition of a $20 million gain.

Turning to Slide 10, non-interest expense for the first quarter of 2013 decreased to $681 million, an improvement of $53 million from the fourth quarter, and better than our expectations.

Compared to the same period last year, expenses increased $2 million.

And included in the current period expense was an $11 million increase in amortization expense plus other costs associated with our acquisitions completed in the third quarter of last year.

Overall, we are seeing the benefits from our expense initiative come through to the bottom line.

As Beth commented on earlier, we have captured approximately $105 million in annualized savings as of March 31, 2013.

We expect expenses to be higher in the second quarter, as close thirty-three more branches and continue with our other expense initiatives.

In the first quarter, we incurred approximately $15 million of expenses associated with Fit for Growth.

In the second quarter, we expect these costs to increase to the $34 million to $38 million range, as we move forward aggressively with our implementation plans.

In addition, we expect to incur additional expenses for marketing associated with our spring borrowing campaign and also for contract programming, as we continue to implement new technologies.

In total, we anticipate expenses for the second quarter of 2013 to be in the range of $720 million to $730 million, and then decline to the $680 million to $700 million range by the fourth quarter of 2013.

Included in this forecast are charges related to Fit for Growth.

However, at a much lower level than those anticipated in the second quarter.

Turning to Slide 11, our net charge-offs declined to $49 million or 38 basis points of average total loans in the first quarter of 2013.

Total commercial net charge-offs were $5 million or 6 basis points of gross charge-offs, as gross charge-offs declined and recoveries remained strong.

The breakdown of asset quality by loan portfolio is shown on Slide 16 in the appendix.

We anticipate that net charge-offs will remain at or below the lower end of our targeted range of 40 basis points to 60 basis points for the balance of the current year and for provision expense to be near this same level.

At March 31, 2013, our reserve for loan losses represented 1.70% of period-end loans, and 137% coverage of non-performing loans.

And turning to Slide 12, our tangible common equity ratio and estimated tier 1 common equity ratio both remain strong at March 31, 2013, at 10.24% and 11.39%, respectively.

We have also updated our estimated Basel III tier 1 common equity ratio, based on the Fed's NPR on a fully implemented basis at March 31, 2013, to be 10.28%.

During the first quarter, we repurchased 6.8 million shares of our common stock at an average cost of $9.56 per share, and reissued 3.6 million shares for employee benefit plans.

These actions completed our 2012 CCAR activities.

As Beth mentioned, our 2013 capital plan includes an increase in our common share repurchase authorization for the next four quarters to $426 million.

In addition, our plan includes a 10% increase in our common dividend to $0.055 per share beginning in the second quarter, which Management will recommend to the Board next month at their regular scheduled meeting.

And we are working with our regulators to obtain a non objection to the use of the estimated $145 million to $155 million net gain from the pending sale of Victory Capital Management to repurchase additional common shares in the open market.

The determination of the gain and the closing are subject to certain terms and conditions of the sales contract.

The process remains on track for a third quarter closing.

That concludes our remarks.

And now we'll turn the call back over to the Operator to provide instructions for the Q&A segment of our call.

Operator?

(Operator Instructions).

Let's begin with Matt O'Connor with Deutsche Bank.

Within the net interest margin, as we look as some of the moving pieces, the commercial loan yields actually seem to be holding up quite well versus some pressure elsewhere.

I'm just wondering if you can elaborate on that in terms of what you're seeing in the marketplace and how they are relatively stable or even up a basis point quarter to quarter.

Matt, this is Jeff.

I'll comment a little bit about some of the geography in the margin, and then Chris and Bill can comment more fully on what they are seeing in the overall marketplace.

In the first quarter, we redirected some of the interest rate swaps, and so that had a positive benefit on the commercial C&I loan yields.

That added approximately 11 basis points to that particular yield.

I think where you see it come out of, is really down on the other consumer loans.

That particular yield dropped.

I think a better way to look at it, looking at it from the overall yield perspective on total loans; total loans were down about 11 basis points for the current quarter.

Bill and Chris, do you want to talk on that?

Sure.

Matt, it's Chris.

You are correct.

Our spreads, we have been very pleased that our spreads have really held in nicely.

But make no mistake, as Beth mentioned in her initial remarks, there is a fair amount of pressure out there from a structural perspective and from a pricing perspective.

What's really going on is there's really an imbalance in kind of the supply/demand.

If you look at -- the loan market has had record inflows of new money.

There's been more CLO issuance in the first quarter than all year in 2012.

There's been three mid-market CLOs that have been raised.

So, it's something we are watching very closely.

We have been pleased that our relationship strategy has enabled us to continue to gain clients.

And our strategy is going to be going forward, what it's been.

We will continue to do what we need to do to take share.

Keep in mind a lot of our business, half of our business is non-interest income.

So we have some other levers that we can pull.

And on that front, if we choose to, we can act as agent instead of principal which we think gives us a fair amount of flexibility.

The other thing we are focused on a lot here at Key on this -- very focused who we want to do business with in terms of garnering new clients, but doing more with our existing clients.

We feel like we've faired pretty well to date.

But make no mistake; there is a supply/demand imbalance out there.

Matt, this is Bill.

The only thing I would add to that is where we see the most competition are some of the strongest credits that are likely to be fully funded.

So, people who are looking to put their excess deposits to work, again, where we have can find opportunities like that, but within the context of a broader relationship strategy, we will compete as well as anyone.

At the same time, if it's just an asset play, that's not the strategy we're trying to employ.

Okay.

Just separately quickly, Jeff, the timing of when you would expect to hear back regarding the buy backs of the Victory related gain?

The timing kind-of remains open at this particular point in time.

We may not hear back until the actual closing of the transaction, which is scheduled you know for the third quarter.

As soon as we hear something, Matt, we'll be sure to communicate that.

Okay.

Thank you, very much.

Thank you.

We'll take our next question from Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Good morning.

So, last quarter you were looking for $150 million to $200 million in cost saves for this year with most of that realized in the second half of the year.

And now we're a quarter later and you have taken the range to the upper end and half the cost saves are already in the run rate.

Can you help us think about what's driving this incremental cost save opportunity to the upper end so quickly?

And the timing seems to be coming in a bit faster than expected?

This is Beth.

I will go ahead and answer that.

What I will tell you is we did, as we came into the quarter, firm up our expectations that we would reach the higher end of our range at $200 million and announce that within the quarter that we had gone to the high end of the range.

That was a combination of as we announced at the end of the year, that we had realized $60 million worth of run rate savings and had a conscious effort to try and accelerate the timing of the benefits for improved performance.

And within the first quarter, we garnered an additional $45 million worth of run rate savings.

We did get ourselves halfway to the goal as it were through the first quarter.

A variety of things happened; one was just concerted effort to accelerate timing.

We have had success in our vendor and spend management areas both within contract re-negotiations as well as just generally recasting how we use them.

I will tell you that we have gone heavily after process improvement and looking at more efficiently how we can support our growing business demands.

We've talked about variable-izing our expense base and other things.

And then I would tell you that as in all things just focused attention brings improvement across a multiple of areas.

As we go through the balance of the year, we have in the second quarter accelerated for our branch closures will be heavy in the second quarter and several other big saving moves.

So, these are opportunities that we have realized and gave us more confidence on the upper end of our range and continue to position us for the 60% to 65% commitment by Q1 2014.

That's helpful.

Beth, if I could ask a follow-up.

Was the sale of Victory part of a broad based sale evaluation of all the business lines?

Or is that just a one off situation?

I would describe it as a asset within our Company that we have questioned its strategic fit with our relationship strategy over the last several years.

And as we looked at its client base, which is largely mandated institutional investors, it did not really fit with our client base.

And there was not a lot of linkage to what we are doing in terms of assets under management in our private bank.

So we determined that we were not the best owner for that asset and not the best owner to continue to invest in that asset for its own growth.

We made a strategic decision as we look at our mix of businesses that Victory was a good one to sell.

And we were successful in announcing that and then that, as we said, created an opportunity to request an additional return of that net after tax gain to our shareholders.

Okay.

Thanks for the color.

We'll take our next question from Keith Murray with Nomura.

Hi.

How are you doing?

Can you just talk on the revenue opportunity side?

You guys have plenty of capital.

You're making progress on expenses.

It just seems like to get the returns in the place that you need them, are there revenue opportunities that we are not seeing?

Yes, Keith.

This is Chris.

We are seeing a lot of revenue opportunities actually.

You know, our business, as Beth pointed out, very, very relationship focused.

And whereas Victory, we couldn't leverage the relationships because consultants controlled it or our clients no longer had defined pension plans.

There are a lot of adjacencies that we've frankly been looking at.

And there's a fair amount of deal flow externally right now that we've been looking at.

That is sort of to augment our whole relationship strategy.

The other areas where we have been investing heavily with a fair amount of success is people.

We feel like we have a unique business model that's under leveraged.

We have been hiring senior level people that can help us leverage our platform.

And we've hired 85 or so such people since the beginning of 2010.

We do a lot of metrics around here.

Those have been very accretive.

The other two areas where we've been investing and will continue to invest, one is in our payments business, what we call enterprise commercial payments.

As you know, that's a very sticky business.

That's a business that enables us to talk to our clients all the time.

Mid-market companies are very much looking for, not just the ability to execute, but information about their working capital.

We've made some significant investments in that area.

And then lastly is health care.

One of the things that we're really proud of is we've put together along with the Community Bank, really a bank-wide industry group focused on facilities-based health care.

And we've invested a lot.

Right now we already have a lot of clients.

We've rationalized those clients and we've invested in some more talent and some specific product offerings around facilities-based health care.

Keith, this is Bill.

I would add a couple other items.

You know from our past calls and comments about our investment in credit card.

That's a new and emerging opportunity that we are really excited about.

Client penetration is improving, new account growth is improving.

We have opportunity to focus on utilization and activation of those cards as we move forward.

We see a lot of opportunity to improve our penetration over time in the client base.

And then we are very pleased with the momentum we're building in our private banking business.

As we see our value proposition in working very actively with middle market companies, not only within the Community Bank but also privately held and publicly held companies in the corporate bank, we think there is an opportunity to cross sell that product in a very impactful way.

Our clients are telling us they like the combination of the ability to talk to them about their commercial needs as well as their personal investment needs, quote, at the same time.

We think that's very relevant and very impactful.

That's what our clients are telling us.

Okay.

And then just switching gears to the stress test process.

One, was there any surprises in the process this year as you went through it?

And then, two, can you guys see a period where you can feel comfortable asking for more than 100% of net income as a capital return given your high starting point?

Well, I think.

Keith, this is Jeff.

I think in terms of the overall process, that both sides are learning.

And I think we are getting better at our stress testing and our modeling capabilities and being able to really fully understand the balance sheet, the flows of the balance sheet, et cetera under various stressed environments.

From the perspective, I wouldn't say there were any major surprises on our part, as we went through 2013's stress test process.

I think the other part of your question, the future is still something that we'll have to see play out over time.

And I don't think we can make a representation at this point in time about future capital actions.

That's something that we will discuss obviously with our Board of Directors, and go through also with our regulators.

Keith, this is Beth.

I would just add that we were satisfied with our outcome of the submission of our CCAR this year.

We have the opportunity to increase our dividends 10%.

Share repurchase by 24%.

We are making the request for the gain on Victory Capital.

So, it continues to be a priority of ours to manage our capital in a way that includes a return to our shareholders.

Thank you.

As a reminder, please limit yourself to one question.

(Operator Instructions).

We'll take our next question from Greg Siegenthaler from Credit Suisse.

This is Nick Karzon standing in for Craig this morning.

Hi, Nick.

The first question on the non-interest bearing deposits, it looked like there was an 8% decline quarter over quarter.

And I was wondering if there was some seasonal volatility there?

Or if tag or something else was at play?

There's definite seasonal volatility that's in that particular line item.

We had both clients that borrowed in the fourth quarter and left deposits with us, and then deployed those deposits in the first quarter.

So, there is some of that particular activity that is in that.

Both the spot balance can go up, but also in the average balances in the course of the quarter.

People were raising capital and then deploying that capital.

As a follow up just a quick question.

On the average total loan growth guidance, Ii guess the previous guidance was mid-to-upper single digit.

Is that coming down to mid-single digit if I heard correctly?

Or is it still mid-to-upper single digit?

Mid-single-digit is what we commented on this morning.

Okay.

Thank you.

We'll take our next question from Scott Siefers with Sandler O'Neill.

Just want to make sure I understand the expense commentary correctly.

It sounds like -- if I heard you correctly it sounds like the range toward the end of the year is $680 million to $720 million a quarter so.

I think that the first quarter then, once you remove the Fit for Growth costs, it sounds like that is going to be the low water mark for the year?

And even though things will be pretty well contained, the cost base will be -- kind of be higher than here on a run rate basis going forward?

Does that mean all the future savings are going to be reinvested elsewhere?

Are there some additional opportunities to bring down that run rate cost base as we go forward?

How are you guys thinking about that dynamic?

Well, Scott, I think in terms of looking at the expenses and how they progress, the fourth quarter still has Fit for Growth charges in it.

So we still have other initiatives that are decked out for the fourth quarter.

So, the range we gave of $680 million to $700 million, that includes Fit for Growth charges that are in there.

I think the other thing that we always have to look at, is there is seasonality associated with our overall activity.

And generally, we have increased business activity, particularly on the commercial side in the fourth quarter, and that will drive additional activities.

I think Chris talked about the other investments.

We talk about investing, we are talking about people that we are investing in too to drive more revenue growth for the Company on a go forward basis.

We won't really get to our full what I'd call run rate benefits until we get into the first quarter of 2014.

So, we are being very aggressive on moving through 2013 with getting our initiatives in place.

There's a lot that's going to happen in the second quarter.

If you recall, we announced this at the end of the second quarter of last year.

These initiatives do take time to go through and plan and we have been doing that aggressively.

I think we are in a good place right now with all those particular things that are decked up to go.

Okay.

That sounds good.

I appreciate that color.

Then, separately, Beth, you gave some good color on just sort of the way some of your customers are feeling on the commercial side.

I wonder if Chris or Bill, if you might give some additional thoughts on what you guys are seeing either geographically or kind of by client size, where you see things particularly strong or weak if there are any distinctions.

Scott, this is Bill.

I would say on the commercial side, we are seeing some leasing strength in the northeast in our pipelines.

Now, the fourth quarter was a little slower for them.

We've seen consistent activity in the Great Lakes at nice healthy levels for a number of quarters now.

The west has been a little softer, but still at pretty good levels relative to a year or two ago.

That's on the commercial side.

I would say on the consumer side, it's a continually improving tone.

But I still think there's in the overall context, some work to be done in terms of consumer confidence still.

Our home equity pipeline continues to build.

Spring borrowing early days and the pipeline is building around what we expected.

And I think that is a function of improving home values and general improving confidence.

But I think it's at a moderate pace, is the way I would describe it.

Scott, this is Chris.

I would say, you know, so Bill covered it from a geographic perspective.

As you know our business is by industry sector, all domestic, I might add.

So here's what we are seeing.

I don't think there is a lot of consistency.

I think it's spotty.

I think the people that are doing well, most of the positive activity is domestic when you look at some of the factors out there.

I think there's still a lot of excess capacity in the system.

I don't see a lot of people out there hiring.

What we do see is an extension of overtime.

We see that fairly regularly.

And I think the biggest challenge out there from a business perspective is there's no huge impetus to go long so to speak.

Commodity prices are under pressure, throughout the entire supply chain there is availability.

So, while our clients are in great shape from a financial perspective.

The profitability is there.

They'd like to do something strategic, I just think that there is not a huge impetus to do so based on the economic environment that we are operating in.

Okay.

That's great.

I appreciate the additional thoughts.

Thanks a lot.

We'll take our next question from Ken Usdin with Jefferies.

Good morning.

Just a couple quick questions on fees if you don't mind.

First of all, if you could just give us some context of your overall outlook from here?

And within that, I just wondered what the investment banking and debt pipeline looks like?

And if there was anything in the other category to note?

So, Ken, it's Chris.

Let me speak a little bit to our investment and debt placement pipeline.

We had a record first quarter.

On a trailing 12 basis, it's at a record $339 million.

The pipeline is -- on a year over year basis is stronger than it was.

So, as we look into the pipeline really across the board, whether it's on balance sheet, off balance sheet, it's stronger.

I would put the caveat out there though based on the discussion we just had, as you well know, it's subject to not only the economy but also to market conditions.

But we feel good about the forward momentum of the business.

And, Jeff, on the overall outlook just for fee growth and whether there was anything to note in the other line this quarter?

Well I think overall on the fee growth, we typically have momentum that we go through the course of the year.

So we would typically see second, third, fourth quarters that -- first quarter is typically the softest quarter that we have.

And then we usually build from that point on.

In the other category, it really is a number of just items that -- more or less that were positive this quarter versus they were negative in the prior quarters.

So if you look at it from a perspective, the miscellaneous items may have been $5 million positive this quarter on a couple of items, where they were actually negative revenue in previous quarters.

So that's a lot of the overall change that's there.

I would expect that that number will be somewhere in that other other category, somewhere between $20 million and $30 million on a go forward basis.

Okay.

Great.

Just last little one on the expenses.

I get all the commentary just around reinvesting and that the run rate goes higher from here.

But just against that backdrop of what you had originally been saying for the fourth quarter of this year, and the fact that you've just achieved so much better in a positive way this quarter, I hear that you are saying you feel more confident about getting into that $60 million to $65 million zone but why on an absolute level wouldn't we be ending the year better than you originally indicated?

This is Beth.

There's a couple of things.

I think as Jeff outlined when he talked about some of his thoughts on the fourth quarter, it does still include a level of Fit for Growth charges.

So $680 million to $700 million would include that.

And then as you look at seasonality of expenses, there are a couple of things in the fourth quarter that will elevate historically in terms of professional fees and various kinds of expenses.

And we frankly in the first quarter had relatively low marketing expenses.

If you kind of sort through some of that, that still means that there is a continued improvement in our run rate as you go through the year.

And the second thing I would observe is, as we currently sit here, we do have plans to invest in our business.

That's something we have talked about is that we have plans to grow our businesses, to grow our revenues.

Those will be subject to our estimate of the business plan, the economic conditions, the business case, our capability, our resources.

But as we go through the year, we do want to continue to support what we see as the momentum and growth of our businesses as well.

As we go through each quarter, I think our goal is to give you good clarity and transparency about how that works.

Thanks for that, Beth.

Appreciate it.

Next question from Mike Mayo with CLSA.

Hi.

My question is on efficiency, I guess both capital and expense.

But on the capital efficiency, why would you request to increase the dividend with your stock trading below tangible book?

How aggressive might you be in repurchasing shares?

I mean shares are down 0.5% in the first quarter, but your stock is at $9.49 and tangible book is $9.78.

So, how aggressive will you be and what's the time frame?

Mike, this is Jeff.

We have just a modest increase in the overall dividend.

It's going up $0.005 per quarter.

It represents a 10% increase for the next four quarters.

I think in terms of the overall return of capital, I believe that our numbers will rank at one of the higher of the CCAR related banks that went through the overall process.

And we still have to go through a process.

So, it's not like you can go and buy back stock at any given point in time just because you have a desire to do so.

It is a process that you have to work through each and every year with your Board and with the regulators.

I think we are returning capital.

And we agree with your comment as to where we trade and with the desire to return capital.

The dividend itself, in terms of the overall dollars, is not a significant dollar amount.

And then on the operating efficiency, I know you've had several questions on this.

But it looks like you have $95 million of savings, and these extra expenses this year could be potentially close to that number.

So, I'm not sure how to think about that?

If you take in the extra potentially $50 million more in the second quarter, and maybe it's going to be $30 million more after that, it could be $20 million after that.

You literally could be an extra $95 million of expenses above your first quarter level in a year when you're getting $95 million of savings.

So I guess the question is how much of these savings are really going to be sustainable?

I guess one question is what is the extent in the first quarter of 2014, not so we have that specific number, but just so we know how you are thinking about things?

I think in terms of the first quarter of 2014, the fourth quarter we have Fit for Growth charges in there.

We already know certain things that are related to real estate, et cetera, that will happen towards the end of the year.

Those particular charges will hit in 2013 and we'll get a benefit into 2014.

The range that we provided has and I'll just say it in approximate terms, because this can change, but it's about $20 million worth of Fit for Growth charges that are embedded in that $680 million to $700 million number that we provided in our guidance for the fourth quarter of this year.

So, I think we have to look at it in the sense of as we roll into 2014, we will be within our targeted range and we'll continue to work on other initiatives.

So, this isn't something that, what I'd call an initiative that if we get this out of the way and we go on our merry path.

What it really relates to is a cultural change within the overall organization of striving for continuous improvement, identifying ways that we can do better on end to end processes throughout the Company, and deliver positive operating leverage to our shareholders on a go forward basis.

Mike, I would just add that a number of the initiatives that we are undertaking this year will also create benefits in 2014.

I think Jeff said that earlier that we are doing a number of things for which the value will also be fully realized in 2014.

So I think it's important to note that they are sustainable and that we everyday think about the interplay of investing in revenue, becoming a more efficient company, and believe we need to do both.

In 2014 I think you'll see more clarity and we will be within that targeted range of 60% to 65% as we start the year.

Thank you.

We'll go next to Ken Zerbe with Morgan Stanley.

Thanks.

Just a quick question on credit, actually.

Was there anything unusual in terms of credit that led to the reserve build this quarter?

I guess I'm just trying to figure out if the 1.7% reserve ratio is a stable number from here?

And if I missed it, if you can repeat your guidance for provision and charge-offs, that would be great?

Ken, this is Jeff.

Bill Hartmann can also provide some additional context to this, too.

We go through and look at our methodology all the time and look at how we are reserving.

And so, as we go through that process there are refinements that are made.

I think in terms of how we want to look at the reserve and charge-offs and provisioning going forward, we provided guidance that we expect to be at or below the lower end of our range.

So our targeted range is 40 to 60 basis points.

We expect to be actually below that for the course of 2013.

And that provision expense will probably be fairly close to net charge-offs.

So this quarter it was $6 million.

I can't tell you exactly where it'll be for the next few quarters.

But it won't be far off from where net charge-offs are.

The 1.7% ratio is probably a stable number going forward?

It could be.

Aside from loan growth of course.

It could be 1.65%.

It could be 1.75%.

I can't tell you specifically because you really do have to look at the credits each and every quarter as we build up the reserve.

Understood.

Thank you.

As a reminder, please limit yourself to one question.

The next question from Paul Miller with FBR.

It's Jessica Ribner for Paul.

We just had one question about your branch network and what you're thought process might be surrounding it, especially as peoples habits change vis-a-vis branches.

Jessica, this is Bill.

We think about that a lot.

I think we start from a fundamental belief that the branch will remain meaningful to many of our clients going forward.

We, clients across -- in all our segments transact in some way with the branch in the Community Bank, so middle market companies, small businesses, and consumers.

What we also recognize is consumer behavior is changing and is changing as technology changes.

We have to find the right way to invest in our branch network in a way that complements the physical presence with a virtual presence in the context of our relationship strategy.

And what we've done in the more recent period is pulled down the investment in our branch network over the last few years, with now a focus on rationalizing and optimizing.

And we've begun to layer in investments in the virtual space with some of our mobile applications and online banking and things of that nature.

And as we move forward, that's where the primary focus of our investments will be.

Thanks, very much.

We'll go next to Josh Levin with Citi.

Good morning.

You talked about the competitive environment and how lenders are competing on price and then term and now structure.

You say that Key is remaining disciplined, and I by no means am picking on Key with this question, but every bank says the environment is competitive but they are remaining disciplined but their competitors aren't.

So who is making these loans?

Is it smaller banks?

Is it larger banks?

Who is the marginal lender who lacks discipline in this environment?

So, Josh, this is Bill.

I would just say this, we're seeing competition in a number of places.

Our focus has to be identifying those clients who value our relationship strategy and the broad capabilities we can bring to bear, be it our payments capabilities, our local expertise, our decision making, the capabilities that Chris and his team have in the corporate bank around industry expertise and capital markets.

That's where we are focused.

To the extent in an environment like this, where we are going to stretch, so to speak, we're going to do it and we are doing it in the context of a relationship strategy and the ability to manage our risk appropriately and our returns, because we can bring real value to the equation.

And we have really good access to management teams.

We know what they are doing, we understand their business, and we can bring value to the equation.

Josh, it's Chris.

I would say the competition is across the board.

As you look at the really high-quality middle market companies, there is just a supply-demand imbalance.

There is a few headline transactions that you read about.

Those clearly aren't middle market companies.

There is just not a lot of activity.

You really see just a whole bunch of competitors chasing the same companies.

The other thing, as I mentioned earlier, is there's a lot of fund activity and with the cost of equity in these funds, they are able to refinance a lot of transactions.

But I would say where I see it as most pronounced are transactions that maybe only take one provider of capital.

Whereas in our syndicated finance business, we lead about 70% of all the deals we're in, so we get a pretty good insight.

There is probably a better market discipline in syndicated finance than there is for these quality transactions that one source of financing can fund.

That would be my observation.

Okay.

And you talk quite a bit about your relationship approach.

So, when you're thinking about, you know, you might make a loan to a client at a certain price and that client also might park deposits with you or generate fee income, what metric or key metrics are you looking at to evaluate what that -- the true economic value of that client relationship is worth to your bank?

The first thing we look at, Josh, is each and every relationship that we have, we have relationship reviews.

We talk about what our penetration is, what their share of wallet is, what we're getting out of that share of wallet, and we have a relationship ROE target of 22%.

So, that's as a start.

Then the other thing we spend a lot of time doing is really evaluating what we call expanded relationships.

What we call an expanded relationship is someone we've done more than $100,000 with on a year-to-date basis than we did in the trailing 12 period into 12/31.

For example, we have 56 such relationships that have generated about $28 million in the corporate bank this year.

And when they're expanded, they are not expanded by $100,000 or so, they're expanded based on those numbers by say $500,000 or so.

We spend spend a lot of time looking at metrics, a lot of time looking at market share, making sure we're targeting the right clients and prospects.

Thank you very much.

We'll take our next question from Erika Penala with Bank of America-Merrill Lynch.

Most of my questions have been asked and answered, except just one follow-up question to Keith's on capital.

Jeff, according to your guidance on average loan growth and average earning assets, it seems like you'll keep your securities to earning assets ratio relatively the same for the balance of the year.

I guess, given that you are such a capital return story, have you thought about how to think about the portfolio size going into next year's CCAR as it seems like the Fed is more interested in starting to test for interest rate risk for future years?

Yes, Erika.

In terms of our investment portfolio, we've stayed very disciplined with keeping the weighted average life of that particular portfolio.

It's 2.8 years at the end of the first quarter.

So it is something that we look at, we test, we shock.

We look at it all the time.

I think in terms of the overall size of the portfolio, we said about the minimal size of that portfolio is going to be around $16 billion.

And, of course, it will grow depending on the amount of liquidity that we have.

Or we'll make other determinations just like we may have more short term liquidity or do other things in terms of managing our overall interest rate risk as a Company.

We were asset sensitive at the end of the first quarter.

We were asset sensitive at the end of last year.

That asset sensitivity is about 1.4% to 1.5% to a 200 basis point movement in rates over the course of the next 12 months.

Okay.

Thank you.

Next question from Steve Scinicariello with UBS.

Good morning, everyone.

Good morning.

Just a big picture strategy question for you guys.

Just given the many levers you guys have to pull, whether it's expense leverage, capital leverage, credit leverage, franchise leverage, market share opportunities, and revenue unproven opportunities as well, how do you go about kind of prioritizing each of those areas when you look at them?

And, then, secondly, which of those do you feel provide you with the biggest near term bang for the buck and the biggest longer term bang for the buck?

This is Beth.

I'll go ahead and tell you that we are in an environment where you have got three really strong levers in terms of revenue, expense and capital.

We grade each of our priorities against what it will do to enhance our revenue and grow our relationship clients, what it will do to make us, how do we manage our cost base to be more variable, as well as more efficient.

And then third, is it going to be good for our shareholders and our capital return as well as return on capital over time.

So, I would tell you that in an environment like we are in, those are the things we look at every single day.

And then within those we prioritize which will be most impactful, which are most accretive to our strategies, and which will with our current resources and capabilities provide the most benefit in our ability to execute.

That is the length with which we have those discussions.

Great.

Then, just kind of getting a little more color about that, do you feel like 2013 we are going to see more in terms of expense saves?

And then 2014 is more about revenue improvement?

Or can we see kind of a mix of all of these things even this year in this tough environment?

I think the mix is going to be also subject to what the environment does produce.

But obviously we are focused on growing loans.

We are focused on the ability to bring in quality relationships, and as Chris talked about, expanding relationships.

We have invested in new product capabilities.

We still have some incremental liability repricing, management expenses -- managing our expenses, investing where appropriate.

So I think all of those when you think of them as levers could produce outcomes against all those, both the ability to be more profitable to grow revenue as well as grow clients.

Great.

Thanks, very much.

We'll take our next question from Gerard Cassidy with RBC.

Thank you.

Good morning.

Beth, coming back to something you said about the Victory Asset Management sale.

You indicated that it wasn't a strong fit with the client-facing strategy that you have.

Are there other businesses that fit that category, that potentially could be sold in the future?

Gerard, as we looked at our portfolio of businesses as we made the decision to market Victory, it was unique in that regard in terms of how we had repositioned it after the financial downturn to be really an institutional money manager.

And then the other businesses we have discussed we've worked very hard and very purposefully at making sure they do fit within our relationship strategy, that we bring our Corporate and Community Bank closer together as well as the integration of those businesses.

So our focus with our current business mix is to build them around that relationship strategy and our go to market point of view.

So, is it fair to say from our expectation standpoint, we should not anticipate further sales of businesses in the next 18 months or so?

I would say that Victory is, we are looking forward to completing that transaction and developing and growing the businesses we have.

Okay.

Thank you.

We'll take our next question from Mike Turner with Compass Point.

Hi.

Good morning.

As far as your NII or NIM guidance, what level of competition does that assume, meaning are you assuming pricing will kind of remain where it is?

Or additional pressures will come out?

Mike, this is Jeff Weeden.

We are assuming that we're going to have continued pricing challenges out there in the marketplace.

But I don't think it's going to be any greater than what it has been for the last few quarters.

We have actually seen relatively stability with respect to the spreads.

Now where we're seeing the pricing come down, or the yields pressure come down, really relates more to the fact that we have some of what I'd call term loans that we've had in the past are repricing down.

And those are repricing down at much lower rates as they mature.

LIBOR based, we've been seeing basically between LIBOR plus 200 to 275.

Now that may be down 25 basis points from a year ago but it is still hanging in there.

And I think this relationship strategy in staying to targeted clients is where that pays off and benefits us.

Thanks.

And, Chris, I don't know if you could comment on it.

I don't know how many levered loans you guys do, but have you seen any impact or do you expect any impact from the recent guidance that came out?

And then also maybe not necessarily related to leverage loans, but do you have a defined risk parameter in lending where if competition gets too much, you'll just back off?

Or is that something that is more dynamic?

Mike, this is Bill Hartmann.

When we looked at a detailed analysis of the guidance that was provided, interagency guidance that was provided, we think that our business actually stacks up pretty fine to that guidance.

There are some other people that are in the market that we see that have been on the more aggressive end, who may potentially be impacted by that.

But we think our business model stacks up pretty well.

And when the market turns overly aggressive in the past, we have always held true to our convictions and let the market go where it has to go.

Mike, this is Chris, just to augment with some of the detail Bill just mentioned, our leverage loan book here, first of all, we look at our leverage loan book throughout the entire Company, which is part of the guidance.

That's how we do it.

If you think about it, our leverage loans are maybe, say, 3% of our total loans.

So it's not a huge part of our business.

The other thing is, we have not grown that book of business since the end of 2011.

We've been just recycling the capital.

So, I agree with Bill.

I think we are in pretty good stead under the new regs as we currently understand them.

Thanks.

That's great color.

We'll take our next question from Terry McEvoy with Oppenheimer.

Thanks.

Good morning.

Keith talked a lot about growing the payments and technology and it's right here on page 3. Could you just talk a little bit about the investments that have been made, the expenses?

Are you starting to break even?

And then maybe more importantly, where will we see the results?

If I look at the cards and payment numbers, 90% is out of the Community Bank and will over time we start to see that in other lines of business at Key?

Go ahead.

This is Jeff.

I think in terms of where the revenue is coming through you'll see it -- in the cards and payment side of the equation, you're right, a lot of that is going to be over in the Community Bank.

But it's also a growing presence over in the Corporate Bank, too.

And so it is across both of our major lines of business.

It goes, it's one of those businesses that the reason it's called enterprise commercial payments within the Company, is that it encompasses the entire enterprise.

I think what you've seen are some of the investments that we've made were with respect to cards that we made last year.

And I think that particular business is approximately breakeven.

Approximately breakeven because you are still seeing some reserve build that's out there.

Ex that reserve build that you saw in the first quarter here, in that particular line, it would have had a profitability that would have been quite acceptable.

Plus it has amortization expense associated with the purchase credit card receivable.

I think the other area where we have made investments, of course it's early in this particular process, is really in the merchant side of the equation, and Chris will talk about that for just a second.

Sure, so on the merchant side, having control of the merchant card is very important.

Very, very critical for a lot of business banking clients.

Very important going forward in health care.

Because it's going to be part and parcel of that whole information loop between the provider, the insurance company, and the patient.

And we brought that back in house.

We had used an outside provider.

And we brought it back in house so that we could control the client experience.

We could control the pricing.

And, so, that sales force has just hit the ground running.

The other two areas where we're going to continue to invest are both on the prepaid side and the purchase card.

And particularly within our public sector business, the prepaid card is very, very important as we go forward.

It will show up in a few revenue pools kind of across the enterprise.

I would say merchant would be really skewed to small business and business banking.

And the prepaid investments that we're making, we think can give us a real lift on our public sector business.

This is Bill.

The other area that I wouldn't want us to lose sight of is debit processing.

We about 18 months ago in the face of Durbin undertook a project to enter into a partnership with MasterCard around debit processing.

And we completed our full conversion in February, which dramatically reduces our cost of processing as we move forward.

Very helpful.

Thank you.

We will take the last question from John Moran with Macquarie Capital.

Thanks for taking my question.

Just, we're a couple quarters away -- removed now from sort of the HSBC branch transaction in upstate.

Obviously that was kind of an opportunity on the funding side probably more so than anything else.

Just wondering if you could provide a quick update on asset generation opportunities in that market?

There's a lot of disruption and maybe spend a second outlining the strategy up there.

Sure.

This is Bill.

We feel very good about the success we've had in integrating that business --- or the branches with our business there.

Our client retention has been very good, especially relative to plans.

The employer retention very good relative to plans.

And the tone in the market has been very positive for us.

One of the things we did like about the capabilities that we acquired was a focus on the mass affluent client.

There are some things we can learn from that team that we are building into our product offerings around investments, in particular, where we thought that we had an opportunity to up tier some of our capabilities by leveraging some of their capabilities.

And we are working on that as we go.

So, it's folded into our business very well and we like the momentum we have.

Sounds good.

Thanks very much.

Certainly.

Thank you.

That concludes our question-and-answer session.

I would like to turn the call back over to Ms. Beth Mooney for any additional or closing remarks.

Thank you, Operator.

And we thank you all for 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, Vern Patterson or Kelly Dillon, at 216-689-3133.

That concludes our remarks.

This does conclude today's conference.

Thank you for your participation.