KeyCorp (KEY) 2013 Q3 法說會逐字稿

Good morning and welcome to KeyCorp's third quarter 2013 earnings conference call.

Today's call is being recorded.

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

Please go ahead.

Thank you operator.

Good morning and welcome to KeyCorp's third quarter 2013 earnings conference call.

Joining me for today's presentation is Don Kimble, 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.

Turning to slide 3, our results reflect another quarter of improved performance as we had positive trends in core revenue and expenses and our credit quality improved to levels we have not seen since 2007.

We also continued to execute on our capital priorities.

Revenue benefited from solid loan growth driven by an 11% increase from the prior year in commercial, financial and agricultural loans as well as improved trends in several of our fee-based businesses.

Importantly, we continue to have success in acquiring and expanding relationships.

For example, in our corporate investment banking and real estate areas we have generated 21% more revenue from new clients year to date versus the same period in 2012.

Reflecting our more targeted approach and the benefits of our distinctive business model.

As you have seen over the past several quarters this model has allowed us to capitalize on revenue opportunities, whether through execution in the capital markets when conditions are favorable or by offering on balance sheet alternatives.

Our commitment remains the same to do what is right for our clients.

We also continue to invest in our businesses as well as address areas that do not fit our relationship strategy.

In this quarter we have examples of both.

As announced we completed our commercial real estate servicing acquisition.

This brought in over $1 billion in low-cost escrow deposits and further leverages our existing platform.

We are now the third largest servicer of commercial and multifamily loans, and the fifth largest special servicer of CMBS in the United States.

The sale of Victory Capital Management was also completed on July 31 resulting in an after tax gain of $92 million.

Additional gain may be realized as the process of receiving client consent continues through January of 2014.

We also made good progress on expenses this quarter.

Importantly, we met our announced expense target that we set in June of 2012 to achieve annualized savings of $200 million.

This reflects the dedication and hard work of our entire team to make some difficult choices to reduce costs and make us a more efficient Company.

As a result, non interest expense, excluding efficiency related charges, was down 4% from the prior year.

And as Don will discuss, our adjusted cash efficiency ratio was 64% this quarter, at the upper end of our near-term goal of 60% to 65%.

Although this is an important milestone for us, it is not an end point.

This is now part of our culture and we are already working to improve efficiency and productivity by identifying new opportunities to grow revenue and reduce and variablize our expenses.

I will finish with a couple of comments on capital.

During the third quarter, we repurchased $198 million in common shares as we continued to execute on our current repurchase authorization.

And our Tier 1 common ratio remained above 11%.

We will remain disciplined in the way we manage our strong capital position and stay consistent with our stated priorities of supporting organic growth, dividends, share repurchase, and opportunistic growth.

Overall, it was a very good quarter for Key and it positions us well through the end of the year and as we move into 2014.

We are optimistic that progress is being made in Washington, and we continue to encourage our leaders to work together to find a solution that is in the best interest of our country.

It would be regrettable to reverse the progress we have made in the recovery as well as the progress we have made to regain clients, investor, and global confidence in our financial system.

However, at Key our focus remains the same, and that is to execute on our business model, drive and invest for growth, become more efficient and productive and to be disciplined in the way we manage our capital.

Let me turn the presentation over to Don for some details on our third-quarter results.

Don?

Thank you Beth.

Slide 5 provides highlights from the Company's third-quarter 2013 results.

This morning we reported net income from continuing operations of $0.25 per common share for the third quarter compared to $0.21 for the second quarter of 2013 and $0.22 for the third quarter of 2012.

I will cover many of these results in my remarks later so let's turn to slide 6.

Third quarter results include a number of significant items, which have been detailed for you on this slide.

First results reflect the impact of early termination of leverage leases.

These transactions reduced net interest income by $8 million and increased non-interest income by $23 million resulting in a net gain of $15 million or $0.02 per share.

As with the prior lease terminations, the gains associated with these transactions were not taxable.

The total tax impact of leverage lease terminations was $13 million or an incremental $0.01 per common share.

This lowered our tax rate by about 4% this quarter.

I would expect our tax rate to return to a more normal level next year in the range of 26% to 28% on a GAAP basis.

Next, we incurred $41 million or $0.03 per share of costs associated with our efficiency initiative including pension settlements this quarter.

The pension settlement of $25 million was recorded as lump-sum distributions exceeded a threshold that triggered the recognition of a curtailment loss.

While we could have additional settlement losses in the fourth quarter, it is not expected to repeat in 2014.

Within discontinued operations we also realized a pretax gain of $146 million from the sale of Victory.

After tax, this gain equated to $92 million with the cash portion totaling $72 million.

Importantly, this represents the amount of the gain we have realized to date, and as Beth pointed out, an additional gain may be realized resulting from client consents received through January of 2014.

Also included in discontinued operations we recorded an after tax charge of $48 million related to the fair value of loans and securities in Key's 10 education loan securitization trust.

This charge resulted from additional market information about projected trends for default and recovery rates that became available during the quarter.

Based on this information and Key's internal analysis certain assumptions related to value in the loans and these securitization trusts were adjusted.

Turning on to slide 7, average total loans for the third quarter were up $575 million, or an annualized 4% compared to the second quarter of 2013 and up $2.6 billion or 5% compared to the year ago quarter.

Loan growth continues to benefit from Key's focus on targeted segments and the capabilities we are able to provide commercial clients.

Our loan growth outpaced industry measures in the third quarter, and the quality of our loan originations continues to be high and consistent with our moderate risk profile.

While clients remain cautious, our outlook for loan growth remains consistent with our prior guidance of mid-single digit year-over-year growth driven by CF&A lending.

Continuing on to slide 8, on the liability side of the balance sheet, average deposits, excluding foreign branch balances, were up $494 million from the second quarter and up $3.4 billion from one year ago.

Deposit growth from both the prior quarter and year ago quarter was primarily due to an increase in demand and interest-bearing commercial deposits and higher escrow balances from Key's recent commercial real estate servicing acquisition.

Over the past year, our mix of deposits have significantly changed with CDs declining and low-cost transaction accounts increasing 10%.

As a result, year over year deposit costs declined from 38 to 22 basis points.

Turning to slide 9, our taxable equivalent net interest income was $584 million for the third quarter compared to $586 million for the second quarter and $578 million for the third quarter one year ago.

Results in both the third quarter of 2013 and the prior year reflect the impact of early termination of leverage leases.

These transactions reduced net interest income by $8 million in the third quarter of this year and by $13 million in the third quarter of 2012.

Excluding the impact of leverage lease terminations, net interest income in the third quarter of this year would be slightly higher than a year ago period and 4% higher than the second quarter on an annualized basis.

For the third quarter, the Company's net interest margin was 3.11% or 3.15% when adjusted for the four basis point negative impact of the leverage lease terminations.

This compares to 3.13% for the second quarter.

As you can see on this slide, the net interest margin this quarter was negatively impacted by lower earning asset yields offset by lower funding costs.

Over the next couple of quarters we expect the net interest margin to be relatively stable to the reported third quarter level with potential downward pressure dependent on levels of liquidity.

We also maintained our modest asset sensitive position.

Importantly, the use of interest rate swaps provides us with the flexibility to manage and quickly adjust our rate risk position.

While Key along with other asset sensitive banks generally benefit from a rise in both short-term and long-term rates, the duration and characteristics of Key's loan and investment portfolios position us to realize more benefit from a rise in the shorter end of the yield curve.

We anticipate for the next few quarters loan growth will exceed deposit growth which should result in a relatively stable net interest income.

Slide 10 shows a summary of non-interest income which accounts for approximately 44% of our total revenues.

Non-interest income in the third quarter was $459 million, up from $429 million in the second quarter, but below the $518 million in the third quarter of last year.

Importantly, the third quarter of 2012 included gains of $54 million associated with the redemption of trust preferred securities.

As I mentioned previously, we have leverage lease terminations in both the third quarter of 2013 and the prior year which led to gains of $23 million in the third quarter of this year and $39 million in the prior year.

Adjusting for gains from the trust-preferred securities and the leverage lease terminations, non-interest income in the third quarter was up 3% from the prior year and up 7% annualized from the prior quarter.

Many of our core fee income categories have shown strength through the third quarter.

Investment banking and debt placement fees continue to grow and are up 29% on a rolling four-quarter average basis as we continue to do more business with our commercial clients and win market share.

Corporate services have also performed well, up 13% from the prior year.

This includes fees from letters of credit, foreign exchange and derivative training among others.

And cards and payments income is up 16% compared to the same period one year ago reflecting our investment in and our focus on payment products, including our reentry into credit cards during the third quarter of last year.

Turning to slide 11, our non-interest expense for the third quarter was $716 million including $41 million in charges related to the efficiency initiatives and pension settlement.

As discussed earlier, the $25 million pension settlement was triggered by high levels of lump sum distributions from the plan.

While we may have additional settlement losses in the fourth quarter, we do not expect this to repeat in 2014.

Adjusting for these charges, expenses were down 4% from the prior year and up slightly from the prior quarter as we increased marketing expenses related to our client acquisition and borrowing campaigns.

During the quarter, we closed eight more branches and continue with other efficiency initiative implementation plans.

As Beth commented earlier, we achieved our target by capturing $207 million in annual expense savings.

We plan to provide a final count of our cost savings associated with our efficiency initiatives when we announce our full-year results in January.

Going forward from that point, the savings from our continuous improvement efforts will be embedded within our expense run rate and will help drive our efficiency ratio lower.

We have made a lot of progress over the last five to six quarters but there still is a lot more we can do to improve our overall productivity.

Turning to slide 12, our net charge-offs declined to $37 million or 28 basis points of average loans in the third quarter.

This continues to be below our target range and is the lowest level since the first quarter of 2007.

You may recall that in the third quarter of 2012, Key, along with other banks, received updated regulatory guidance on consumer loans which is what lead to elevated charge-offs in the year ago quarter.

Adjusting for this guidance, net charge-offs were still down by 42% from the prior-year.

Total commercial loan net charge-offs this quarter remained low at five basis points of average loans.

Recoveries were up $12 million or 41% from the prior quarter.

The breakdown of asset quality by loan portfolio is shown on slide 19 in the appendix.

At September 30, 2013 our reserve for loan losses represented 1.62% of period end loans and 160% coverage of our nonperforming loans.

We anticipate that net charge-offs will remain at or below the lower end of our targeted range for the next few quarters and for provision expense to be near the same level.

Turning to slide 13 our tangible common equity ratio and estimated Tier 1 common equity ratio both remain strong at September 30 at 9.93%, and 11.11%, respectively.

Earlier in the quarter regulators approved the final rule for implementing the Basel III regulatory capital standards.

The mandatory compliance date for Key begins in January of 2015 with transitional provisions extending to January of 2019.

Our current estimates of Tier 1 common equity as calculated under the final rule was 10.6% which exceeds the fully phased in minimum requirement.

As Beth mentioned, during the third quarter we also repurchased $198 million of shares of our common stock.

This amount includes repurchases related to the cash portion of the net after tax gains in the sale of Victory.

Moving onto slide 14, this is a summary of our near-term outlook and expectations which are generally consistent with our prior guidance and assume an orderly and timely resolution of current issues in Washington.

As I stated earlier we expect average loans to continue to grow year over year in the mid single digit range and our net interest margin to remain relatively stable with our reported level this quarter.

Our net interest margin may be impacted further by liquidity levels and competitive and/or economic environment.

Revenue trends over time should also benefit from continued growth in our fee-based businesses.

We continue to anticipate expenses in the range of $680 million to $700 million in the fourth quarter and remain committed to achieving a cash efficiency ratio of 60% to 65%.

While we have reached our $200 million expense savings target we will continue to identify additional savings opportunities and it is important to keep in mind that there is variability in our expense levels related to items such as incentive payouts tied to production, reserves for unfunded loan commitments and seasonal factors.

Credit quality should remain a good story with net charge-offs at or below our targeted range of 40 to 60 basis points and we expect our loan loss provision to be near the same level of net charge-offs.

And finally, capital management will remain a priority, including continuing to execute on our remaining share repurchase authorization of $187 million.

With that, I'll close and turn the call back over to the operator for instructions for the Q&A portion of our call.

Operator?

Thank you.

(Operator Instructions) Steven Alexopoulos with JPMorgan.

Good morning everyone.

In terms of the efficiency initiative with you guys now being above the $200 million and you're now in your targeted range, moving forward, how much do you think is left to drive additional improvements in the efficiency ratio?

Could there be another $50 million?

$100 million?

Or is it too aggressive given what you have already realized.

This is Don, I will go ahead and take the first crack at that.

As far as the additional expense savings that we will continue to target areas of opportunity, we are going to be much more focused on driving positive operating leverage which will drive us to the lower end of that near-term target of 60% to 65%.

We think that's appropriate for now that we clearly will identify specific areas, but right now would not plan on having any named initiatives or named programs that would target a specific dollar amount.

Okay.

Maybe just one follow up, Don.

You guys had good C&I loan growth in the quarter, where other banks are seeing declines, or talking about borrowers being very cautious.

What are you seeing on the pipeline and do you expect strong C&I to continue through year end?

Thanks.

Steve, good morning, it is Chris Gorman here.

Our pipelines look pretty good.

As we look forward both on the fee side and on the loan side and we compare where we are year-over-year, where we were this time last year, we feel good about it and we think it's a direct result of being pretty focused about, and disciplined about who we are targeting doing business with.

As you know, we are not necessarily focused necessarily on growing loans.

What we are focused on is growing clients and expanding relationships and as we look at the pipelines that come out of that, we feel pretty good about it.

Steve, this is Bill.

On the commercial side I would say something similar.

We have seen continued moderate improvement in the consumer, which has helped us over the past few quarters as our consumer loan volumes continue to improve.

Okay, thanks for all the color.

Thank you.

Steve Scinicariello with UBS.

Good morning everyone.

Wanted to get some color on some of the productivity enhancements that you guys are going to try to start working on, and have been working on, but especially as we look into 2014 and what that might mean in terms of revenue growth initiatives as well.

Steve, this is Beth Mooney.

I will go ahead and give a couple thoughts in that regard.

We have been definitely thinking about, and as we've talked about, balancing our ability to become more efficient and productive with our ability to invest and support revenue growth, which is incredibly important that we do both.

As we look into 2014 we see opportunities, as Don outlined, to continue to become more cost effective and work at additional efficiency.

But we also look at opportunities to invest in additional client-facing people and relationship managers as we see success in our businesses as we are growing CF&A loans.

So we continue to think we can invest to acquire and deeepen relationships.

We've talked about technology as an enabler and making sure that we remain competitive within mobile and digital supported by further branch rationalization and continuing to make sure our consumer segments are more efficient.

We also see opportunities to look at potentially adding and expanding to our product capabilities such as credit card and payments and you have seen us do a number of things this year.

Both through the commercial real estate servicing, as well as the exit of Victory that shows that we're very much trying to keep within our business model of a relationship strategy that we believe is differentiated and pulls both levers of investing and creating more productivity for revenue as well as becoming a more efficient and cost productive company.

That is perfect.

If you could, as you look forward into 2014 what might some of your priorities be to accomplish by the end of that year?

Priorities to accomplish by the end of the year I would tell you is I think as we have talked about is the continuing efficiency and productivity both of our income statement as well as our balance sheet.

We have talked about the mix of assets and opportunities within our cost of liabilities.

We also think we can become more efficient within our operations and we also want to make sure we invest in our businesses for growth and remain very disciplined in capital.

We think that we have had a good opportunity this year to return capital to our shareholders as well as at the margin have a few opportunities to utilize capital and enhance our capabilities and products.

Perfect.

Thank you so much.

Ken Zerbe with Morgan Stanley.

Great thanks.

Just trying to clarify, on the termination of the leverage leases, slide 6 you have the impact of $15 million after-tax, but in the footnote, and I think you referenced this, Don.

The $13 million to tax benefit, should we be adding those numbers up to think about the total impacts of $28 million of technically one-time gain related to the leverage leases?

That is an accurate description, Ken, yes.

The $13 million is incremental, not necessarily just specific to that transaction, but as a result of it, so you are right.

Okay, got it.

Then just a follow-up question.

In terms of your excess liquidity, I was a little surprised when you're talking about the NIM or the downward pressure due to excess liquidity, I'm curious what your expectations or your outlook is for your liquidity position.

Do you expect to get much more?

Is there something that we don't know about that would drive up your excess?

Ken, that's a great question.

I think in this environment we are not exactly sure what might happen as far as changes that could impact that.

Right now our guidance is based on our loan growth slightly exceeding our deposit growth.

But there are a couple of things that could impact that.

If the economy slows, we could see less loan growth.

We could also see greater inflows to Key.

And one thing to keep in mind too that as part of our commercial real estate servicing business that while we have a very stable base of deposits there, there might be temporary flows that could result in increases to overall liquidity position which could impact our net interest margin percentage, but not have a significant impact on the overall net interest income.

Okay.

Great, thank you.

Thank you.

Bob Ramsey with FBR.

Hey, good morning guys.

This may be a silly question but could you explain to me what it is that triggers the early termination of leverage leases?

Is this basically like a loan prepayment with prepayment penalty income or what is it exactly?

This is customer driven and will allow similar to what you said as far as an early prepayment.

But it's not necessarily a penalty that is triggered there, it is just the way that the revenues are recognized and by the early termination.

There are certain things that are accelerated as far as the recognition.

Okay.

And I guess the question about tax benefit there was answered, but even when I adjust that $13 million out, looks like you're tax rate was 24%, 25%, kind of below what you are expecting for next year.

I'm curious what the other factors are there this quarter for tax rate and then how you're thinking about the tax rate in the fourth quarter.

As far as next year, you are right, we are providing guidance of 26% to 28%.

That's about where we were on a GAAP basis through the second quarter.

We said that this transaction had an impact of about four percentage points and this was a primary adjustment that occurred, but the remaining adjustments occurred from essentially recognition of additional tax credits that were taken in the third quarter.

We do believe the core rate is 26% to 28% and the fourth quarter should be slightly higher than the third quarter, but in line with the full-year expectation.

Okay, great, thank you.

Erika Najarian with Bank of America Merrill Lynch.

Good morning.

Good morning and congratulations.

Thank you.

My first question is on your comment and your ability to flex your interest-rate risk position through the use of swaps.

Is there any way that you can help us think about the puts and takes of the swap income that you could potentially give up in exchange for X percent more of asset sensitivity?

Great question, Erika.

As far as the swaps, we note that we have about $14 billion worth of swaps, about $9 billion of which we use to manage our overall rate risk position.

If we increase or decrease that, we tend to have a fairly short average life of those swaps, in the two to three-year time period, so the average spread there is about 70 basis points.

For every $1 billion of swaps you would be giving up 70 basis points of future income associated with that swap on a near-term basis but it does help reduce our -- increase our overall asset sensitivity.

And, Joe it is about a half a point for every $1 billion?

What is the impact there?

That sounds about right.

Erika, the way to think about it is simply take the current swap curve and roughly the two to three-year maturity off of short-term LIBOR and that differential in spread times whatever volume you want to use is a good proxy for an income differential.

I see.

Okay, thank you for that.

And just my second follow-up question is, clearly you are well in excess of all the regulatory capital hurdles that you need to adhere to.

As you prepare for the CCAR next year, do you expect a back up in long rates to be included in the severely adverse case?

Have you modeled your capital return and capital return potential asks for more stringent interest-rate risk tests on the bond portfolio?

Last year as part of the CCAR process one of the stress scenarios did assume a rate increase to see what the impact would be on your bond portfolio from that.

One of the benefits we have of being a CCAR bank but not being a [GSIP] is the ability to go ahead and opt in or out associated with the OCI impact to capital.

So even though it could have an impact on TCE we have the flexibility up through the first quarter of 2015 to make the determination as to whether or not we want to include or exclude that impact.

And I think that provides us with a little bit more a cushion than many of the larger banks might have to deal with.

Got it.

I would just add Erika too, that we have talked in the past that our portfolio is also intentionally very short; average duration of around 3.6 years.

And so when you look at our mix of investments that are in a portfolio we have what I would call less risk and less extension risk than many other portfolios.

Okay, thank you so much.

Thank you.

Ken Usdin with Jefferies.

Good morning, this is actually Bryan Batory from Ken's team.

My first question is on the other fee line.

So, that was down $2 million quarter-over-quarter, which looked a little bit light considering the commercial servicing deal closed at the end of 2Q.

Can you just comment on if there was anything non-core that ran through that line this quarter and what the pickup from the commercial servicing deal was in the third quarter?

We have not provided a lot of detail as far as the fee income impact from the commercial servicing deal.

There are increased fees that we do receive but part of the real benefit really is coming from the $1 billion in additional core deposits we are getting from that relationship.

As far as the other income category there really aren't any other significant large unusual items going through this quarter, that we did have some small incremental gains last quarter, but I would suggest that this is more of an ongoing level at the current quarter amount.

Okay, and my next question is for Chris.

You mentioned that pipelines both for commercial fees and loans were in pretty good shape.

I am just wondering if you have seen any change in customer appetite to draw down lines or what not over the past couple weeks just in light of what is going on in DC.

Bryan, what we've seen over the last couple of weeks has been fairly consistent.

I think most of our clients have been very cautious.

I think there's been a lot of uncertainty.

We have seen a willingness interestingly enough to look at strategic alternatives, but not really a willingness to invest in people or property, plant and equipment, and I would say that is unchanged over the last couple of weeks.

The only new data point I have for you recently is I know a couple of our clients that wanted to rollover CP -- 30 day CP and this is specifically yesterday, they could've rolled 45 but they couldn't roll 30 day.

I am not seeing our clients really adjust yet to some of the uncertainty that has been generated in Washington.

Okay, thanks for taking my questions.

Thank you.

Keith Murray with ISI Financial.

Thanks, good morning.

Just on the fourth quarter expenses, the core number for the third quarter looked like around $675 million.

You mentioned that marketing was up in the quarter.

When we think about the guidance for the fourth quarter that you gave us, what is the right core number?

I know there will be noise in there related to efficiency et cetera, but what is the right way to think about the core?

Consistent with our guidance last quarter that $680 million to $700 million does include one-time transition or severance type of costs and so we had estimated that somewhere in the $15 million to $20 million range, so that would be included in that $680 million to $700 million.

Okay thanks.

And then just conceptually, you look at your ROA target this quarter you guys are right in the middle of the range, the 100 to 125.

Think about the ROE, if you annualize $0.26 or so that you earned this quarter.

It's around a 9% or so ROE.

You think about the future and if you get up to the 125 basis point target let's say from an ROE point of view, how much upside do you see?

Do you feel like you have to grow the overall balance sheet to increase leverage to get the ROE to a more meaningful target range?

I know it's tough given the CCAR, you probably will not be able to return over 100% of net income, so capital will grow.

Just trying to get a framework of how you guys think about the ROE?

You hit on some of the challenges there and I don't know that we want to speculate as to what kind of additional leverage we can get off the balance sheet.

We do believe that our balance sheet can become more efficient than it is today.

That our loan to deposit ratio is in the low 80% type of range, and it's 82% or 83% and our target there is 90% to 100%.

So by making the balance sheet more efficient it should drive a stronger margin for us.

Combine that with the benefits from increased interest rates, we think that 1.25% type of ROA range should increase reflecting the impact of interest rates and allow us to get a stronger return on equity.

Okay.

Thank you.

Terry McEvoy with Oppenheimer.

Thanks, good morning.

The strength in the investment banking and debt placement fees.

Could you talk about what industry verticals those have been coming from and would those be in similar targeted segments as the commercial bank?

What I'm getting at is are you continuing to see a better link between both those parts of Key and generating both loans and now a nice fee income as well?

Terry, it is Chris.

Clearly, the growth that we have enjoyed has come specifically from our targeting of certain industries, and you look at things like real estate or industrial business.

Our growing healthcare business.

We have actually had a lot of lift in our consumer and our energy business.

It is really very focused in the areas that we are in.

And that is where our pipelines are as well.

As it relates to our coordination with the community bank, there similarly we are focusing where we are really strong in those industry groups.

Those trends we look to continue as well.

Just as a follow-up, part of the third quarter loan growth or strength in loan growth was home equity, which is somewhat seasonal.

I think you hinted at that in the press release.

Would you expect to see some slowing in Q4 if home equity does not replicate the growth they had in Q3?

Terry, this is Bill.

We would see home equity slowing down a little bit into the fourth quarter.

We have seen -- we're pleased that our home equity loan origination extended into the summer longer than it has in the past.

And we think that is a good indication that as I said earlier, the consumer is getting stronger.

And we think that is good for the business and the economy long-term but fourth quarter is always slower.

Okay, thank you.

Thank you.

You're welcome.

Gerard Cassidy with RBC.

Thank you, good morning.

The question I have is regarding the capital ratios.

Obviously your Basel III, Tier 1 common ration is very strong or the estimate.

Some of the banks J.P. Morgan and Citibank in particular have given us their level that they expect to manage that, which in their cases will be 10%, 10.5%.

Do you guys have a level where you want to carry that Basel III Tier 1 common ratio that you want to manage, that you could give to us?

This is Don and I would like to add to that that we are one step further as far as being able to define what we believe is the appropriate capital level with the release of the final rules that we think a more appropriate time period for us to get more specific as far as our operating range would be after this next year's CCAR process.

And making sure that we have a full appreciation for what to expect prospectively on the impact and the capital requirements.

That unlike the large banks that you had referenced, it is not as clear to us as far as what kind of capital buffer would be required for an organization that is in the lower end of the CCAR buckets.

And we want to make sure that we can fully assess the impact of the stress testing and base the capital requirements with the results from that this next year.

Once you have confidence in what the numbers that you are going to be expected to carry, all the regional banks, not just you guys, you guys will disclose to us at some point in the future where you are comfortable relative to those requirements?

It would be our expectation to disclose that at some point down the road and I wouldn't suggest that being in January of next year but I think it would be appropriate for us to establish a target there, yes.

Okay, thank you.

And on the loan growth, you guys had obviously a nice year-over-year loan growth, double-digit.

But the sequential annualized number as you pointed out has slowed down.

Has there been a slowdown with your customers in loan demand?

What has caused the slowdown on an annualized basis relative to that year-over-year basis number that you gave us?

Gerard, this is Bill.

We have had -- the comments that were made earlier by Chris about our clients being a little more cautious, and watching the developments in Washington, looking for more visibility with respect to tax and healthcare policy, all those things contribute to an environment where our clients are less comfortable investing, especially in people.

We have seen that and I would say that has contributed to some of the slowing down in the sequential growth.

Thank you.

Gerard, I would just add that I think it's a little bit in some ways a tale of two cities that if you look at it by segment in terms of size of the Company I think the smaller businesses to midsize businesses, which would be typically in our community bank have been more cautious than what we have seen in some of our targeted client sets in the corporate bank.

Thank you.

Mike Mayo with CLSA.

This is Tom Hennessy in for Mike.

My first question is related to just generally on loans, I may have missed this.

Did you see any utilization rate changes on the commercial side and then on the CRE side, incremental commentary that competition has picked up there.

What are you seeing and what are you targeting?

Tom, it is Chris Gorman.

A couple things, first of all, with respect to utilization, utilization ticked up slightly quarter-over-quarter, but in general, there has not been any market change in utilization for some time.

Ex-some activity that occurred late last year that was tax driven.

That is point one.

With respect to what is going on in the real estate market, we feel like we have a pretty good eye on what is going on in real estate, we have generated -- we have actually generated fundings of about $30.5 billion this year and only about 13% actually did we put on our balance sheet.

Our business model is such that we see both the syndication market, we see what is going on in the equity market, the debt market and of course, the commercial mortgage banking business.

There is no question that as it is across the board, competition has increased and we have seen some compression of spreads both in the real estate business and frankly across all businesses, but for us and our approach where we are really focused on owners of real estate and we are focused on mid-cap REITs.

We see plenty of opportunity as we look forward.

Excellent, that helps a lot and then just as my follow-up, a little more technical of a question.

Generally share buybacks has been on a good trend.

Your basic share count declined by about 11 million, 12 million this quarter, but I noticed a $10 million increase actually on the diluted side.

Is there anything that triggered that out of the ordinary?

I'm just used to this spread being a little tighter on those two.

As the price fluctuates you're going to see changes in the impact of stock options and other diluted shares so that is really what is driving it and beyond that, it is just the timing of the actual share repurchases and when they occurred.

Okay, excellent, thank you.

Thank you.

(Operator Instructions)

Craig Siegenthaler with Credit Suisse.

Good morning, this is actually Nick Karzon for Craig.

First, on the $41 million of efficiency charges I thought I saw $25 million on the pension settlement and $6 million in severance.

Can you help us think about which buckets the remaining $10 million were in?

They really are spread in a number of categories including occupancy cost, professional fees and other.

And much of it relates to the cost associated with the additional branch closures and also some contract renegotiations.

Okay, thanks.

As a follow-up, I think you mentioned $15 million to $20 million of one-time charges are included in the fourth quarter guidance.

Is that just including efficiency initiative charges or does that also include some portion of pension settlement as well?

That's primarily the efficiency initiative charges.

Not sure how much we would have associated with pension since we did trigger that recognition threshold that any lump-sum distributions that would occur in the fourth quarter would also trigger an additional loss.

We think it would be much smaller than the year to date catch-up that we had for $25 million in the current quarter.

Thanks Don.

Marty Mosby with Guggenheim.

Good morning and thanks for taking the call.

Beth, I was wanting to ask a little bit about the capital ratios.

As you have been able to deploy a good portion of your earnings, your capital ratios have actually been able to drift lower.

Do you still think you will be able to continue to push at that level, 90% to 100% of your earnings and total payout going into the foreseeable future?

Marty, this is Beth, as you asked for, and that would be reflective of trying to have a point of view on what 2014 CCAR guidance and rules and opportunities will be.

We have been pleased this year that we were able to on an analyst average have an 80% payout as well as the opportunity to return the net after-tax gain of Victory.

You are right, we have had a good year in our ability to return capital to shareholders and that is one of our capital priorities, but I think it is too soon to have a view of what the 2014 CCAR landscape will be.

But it is incredibly important to us to continue to look at our dividend and share repurchase and return of capital to our shareholders.

Just a follow-up to that, is there any recomposition in the sense that you were a little bit conservative on the dividend and pushed the share repurchase as your stock price was below tangible book value.

As that has flipped going into next year, would you redistribute your priorities between dividends and share repurchase?

Again at this point in time we have not gotten the 2014 CCAR guidance nor started working and formulating our response in terms of what will be the mix that we request for the return to our shareholders.

So again, premature but something obviously that we will look at as we submit our application in January.

Thanks and then just lastly, we have accomplished the efficiency initiatives that we started off talking about over a year ago.

And now, are there follow-through projects that are coming out?

What is the focus to start pushing efficiencies, initiatives to still get some benefit out of that?

As we've said, we did realize our $200 million targeted goal, and Don mentioned in his comments, many of those will be fully realized in our run rate in 2014.

We do have some initial projects that we are working on and we have also introduced a very robust Lean Six Sigma process into our Company to look at end-to-end processes as well as client experience.

We look at a lot of those opportunities in middle [office], opportunities in terms of how certain transactions and processes are done, as well as we continue to look at organizationally how we do things in various areas of the bank that could possibly be done in more efficient ways.

As well as continuing to say what in terms of both our staffing, our distribution, and how we are aligned and organized can we do to be more effective and efficient.

Marty it is Chris.

The only thing I would add to what Beth has mentioned is this is really a cultural change for us.

While we have not quantified it and there is certainly no name to the program, we will continue across all of our businesses to look for efficiencies and my guess is we will find some.

We talk every earnings day to our broader employees after we do this call and that is very much a theme that the highest performing companies, this is the way they do business.

This is culturally what they do year in and year out.

We think we have gotten a lot of discipline, we've gotten a lot of rigor, we've learned a lot in our ability to meet these objectives, and we will continue to expect this of ourselves outside of the main program, but a way to certainly support our plans for growth as well as becoming more efficient and productive.

So then the momentum you feel coming out of this culture change and initiative would make you feel at least directionally that you should see -- further improvements in efficiencies are likely.

We are requiring that of ourselves.

Right.

Thanks.

There are no other questions at this time.

I would like to turn the conference back over to Beth Mooney for closing remarks.

Thank you operator and we thank you all for taking time from your schedule today to participate in our call.

If you have any follow-up questions you can direct them to our Investor Relations team, Vern Patterson or Kelly Dylan at (216)689-3133, and that concludes our remarks for today.

Thank you.

Thank you everyone.

That does conclude today's conference.

We thank you for your participation.