KeyCorp (KEY) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the KeyCorp's first-quarter 2015 earnings conference call.

This call is being recorded.

At this time, I'd like to turn the conference over to Beth Mooney, Chairman and CEO.

Please go ahead.

Thank you, operator.

Good morning, and welcome to KeyCorp's first quarter 2015 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 is Chris Gorman, President of our Corporate Bank; EJ Burke and Dennis Devine, Co-Presidents of our Community Bank; and Bill Hartmann, our Chief Risk Officer.

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.

I'm now turning to slide 3. I'll provide some overview comments on the first quarter, and then I'll turn it over to Don to give you more detail on our financial results.

The first quarter was a solid start to the year.

We produced bottom line results consistent with our expectations, by managing expenses and growing revenue in many of our businesses, which helped offset the impacts of higher provision expense and lower revenue in investment banking and debt placement fees.

Revenue was up from the prior year, and expenses were well-managed, resulting in modest positive operating leverage for the quarter.

We had solid loan growth, with average balances up 5% from the prior year.

And as in prior quarters, continue to be driven by an increase in our commercial, financial and agricultural loans, which were up 12%.

Most fee income categories were in line with our expectations, and reflected growth from investments we have been making in areas such as Trust and Investment Services and cards and payments.

And as I indicated, investment banking and debt placement fees were lower this quarter.

The decline was due to lower revenue from loan syndications and financial advisory fees.

Although investment banking and debt placement fees can vary on a quarterly basis, we expect this business to grow in 2015 from its record level of performance in 2014.

Expenses were well controlled, up only $5 million from the same quarter last year, despite the impact of the Pacific Crest Securities acquisition.

We remain committed to continue to improve productivity and efficiency, resulting in our outlook for positive operating leverage for the year.

Additionally, we absorbed higher credit costs, with our provision up [$31] million from the year-ago period.

And in the quarter, our provision expense exceeded net charge-offs.

Our asset quality remained strong, as net charge-offs continue to be well below our targeted range.

And while the lending environment remains competitive, we are remaining disciplined on quality and structure, and staying true to our relationship strategy.

During the quarter, we also remain disciplined in managing our strong capital position.

We repurchased $208 million in common shares in the first quarter, completing our 2014 capital plan.

And we were pleased to receive no objection to our 2015 capital plan from the Federal Reserve.

We expect to return a significant amount of our net income to our shareholders over the next five quarters, including a share repurchase program of up to $725 million.

And subject to approval by our Board of Directors, an increase in the quarterly dividend of 15%.

We anticipate these actions will lead to an estimated payout ratio that is among the highest in our peer group for the third consecutive year.

Overall, it was a solid start to the year.

While the pace of economic recovery and the low interest rate environment remain challenging, we believe we are well-positioned.

Now, I'll turn the call over to Don to discuss the details of our first-quarter results.

Thanks, Beth.

I'm on slide 5. This morning, we reported net income from continuing operations of $0.26 per common share for the first quarter, compared to $0.26 for the year-ago quarter and $0.28 for the fourth quarter.

I will cover many of these items on this slide throughout my presentation, so I will now turn to slide 6.

Average total loan growth continued in the first quarter, with balances up $3 billion, or 5% compared to the year-ago quarter, and up $971 million from the fourth quarter.

Our year-over-year growth was once again driven primarily by commercial, financial and agricultural loans, and was broad-based across Key's business lending segments.

Average commercial, financial and agricultural loans were up $3 billion, or 12% compared to prior year, and were up $1 billion, or 4%, un-annualized, compared to the fourth quarter.

Continuing on to slide 7, on the liability side of the balance sheet, average deposits were up $3 billion from one year ago, and down $284 million from the fourth quarter.

Deposit growth of 5% from the prior year was driven by growth in non-interest-bearing deposits, and strength from our commercial mortgage servicing business.

Compared to the prior quarter, balances decreased slightly, primarily due to expected declines in our CD balances.

And the cost of our total deposits remained low, at 15 basis points, compared to the 20 basis points one year ago, reflecting our more favorable deposit mix.

Turning to slide 8, taxable equivalent net interest income was $577 million for the first quarter, compared to $569 million in the first quarter of 2014, and $588 million in the fourth quarter of this year.

Net interest income was up $8 million from a year ago, with a benefit from higher loan balances, offset by lower earning asset yields.

Compared to the fourth quarter, net interest income was down $11 million, primarily as a result of fewer days in the quarter.

Our net interest margin was 2.91%, which was down 3 basis points from the prior quarter, reflecting the impact from lower earning asset yields.

We expect to maintain our modest asset sensitivity, and the duration and characteristics of Key's loan and investment portfolios continue to position us to realize more benefit from a rise in the shorter end of the yield curve.

Slide 9 shows a summary of non-interest income, which accounts for 43% of our total revenue.

Non-interest income in the first quarter was $437 million, up 1% from the prior year, and down 11% from the prior quarter.

Compared to the prior year, we saw growth in several of our fee-based businesses, including trust and investment services, and cards and payments.

We also benefited from higher principle investing gains and corporate owned life insurance.

Offsetting this growth was a $16 million decline in investment banking and debt placement fees, that resulted from lower financial advisory fees, as well as the impact of the timing of closed transactions.

Additionally, operating lease income and other leasing gains declined, due to the early termination of leveraged leased in the year-ago period.

Compared to the fourth quarter, lower non-interest income results reflect seasonality in several fee categories, as well as a variability in our model I referenced earlier.

The growth we saw in the quarter was more than offset by the decline in investment banking and debt placement fees, which was primarily caused by lower revenue from loan syndication and financial advisory fees.

Turning to slide 10, non-interest expense for the first quarter was $669 million, up $5 million from the year-ago period, and down $35 million from the fourth quarter.

First-quarter expenses were 1% higher than the prior year, primarily related to the Pacific Crest acquisition and higher employee benefit costs.

Compared to the fourth quarter, expenses were down 5%, as lower incentive compensation, marketing costs, salaries and professional fees more than offset higher employee benefit costs.

This quarter, our cash efficiency ratio was 65% which reflects our hard work and improvement over the past few years.

The efficiency ratio remains an important measure for us, and we expect to continue to make progress in 2015.

We remain committed to generating cost savings through our continuous improvement efforts, which will enable us to make investments and offset normal expense growth.

Turning to slide 11, net charge-offs were $28 million, or 20 basis points of average loans, in the first quarter, which continues to be well below our targeted range.

In the first quarter, we began reporting provision for credit losses on our income statement.

This line includes provision for loan and lease losses, as well as the provision for unfunded commitments, which was moved from non-interest expense.

Prior years have been adjusted for this comparison.

In the first quarter, provision for credit losses of $35 million was $31 million higher than a year-ago period.

Additionally, this quarter, provision exceeded charge-offs.

At March 31, 2015, our reserve for loan losses represented 1.37% of period-end loans, and 182% coverage of our nonperforming loans.

Turning to slide 12, this quarter, we began reporting our common equity tier 1 ratio, which was implemented as part of the regulatory capital rules for banks like Key at the beginning of this year.

Our common equity tier 1 ratio was strong at March 31, at 10.8%.

As Beth mentioned, we repurchased $208 million in gross common shares in the first quarter, which completes our 2014 capital plan.

And we're now moving forward with our 2015 capital plan, including a new share repurchase program of up to $725 million in common shares, over the next five quarters, and an increased dividend, subject to Board approval.

Importantly, our capital plans reflect our commitment to remaining disciplined in managing our strong capital position.

Moving on to slide 13, as we look ahead for the remainder of 2015, we remain on track, and are committed to meeting the full-year outlook that we shared on our fourth-quarter call in January.

Average loans should grow in the mid single-digit range, as we benefit from the strength in our commercial businesses.

We anticipate net interest income growth in the low- to mid-single digit percentage range, compared to 2014.

This does include the benefit from higher rates, as we currently are modeling short-term rates to increase 25 basis points late in the year.

Without the benefit of higher rates, we would anticipate net interest income to be up in the low single-digit range.

Our net interest margin should remain relatively stable, and based on interest rates, may increase later in the year.

Non-interest income is expected to be up in the mid-single-digit percentage range for the year.

And full-year reported expenses should be relatively stable with 2014.

Credit quality should remain a good story, with net charge-offs below our targeted range of 40 to 60 basis points.

And we also expect provision to approximate net charge-offs.

And finally, we expect to continue to execute on our share repurchase authorization, consistent with our capital plan.

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

Operator?

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

Good morning.

Maybe I will start looking at the pullback of the investment banking and debt placement fees.

The drop was far more dramatic than what I was looking for, even expecting loan syndication and debt placement fees to fall.

Could you quantify how much of that decline actually came from those two items?

Maybe talk about how the rest of the business performed in the quarter?

And then comment on the pipeline, and where you expect this to rebound to?

Sure, Steve, it's Chris Gorman.

Good morning.

As we look at this business -- and we've always felt this way -- we really need to look at it on a trailing 12 month basis.

And as Beth mentioned in her opening comments, we still anticipate that we will grow our investment banking and debt placement fees in 2015, as we have in each of the last five years.

Now the two areas that you point out, where we had challenges, were specifically isolated on our financial advisory and our syndications business.

And those, to some extent, are related.

We do a lot of buy-side work.

And as you know, in the M&A business in general, there's a lot of variability.

And we ran into some issues; seasonality is part of it.

Timing, as it relates to specific deals, is part of it.

And the other thing is, in this kind of an environment, in some instances, our clients were not able to win the deals that we were advising them on, just based on the climate.

So those were a few of the things that impacted those specific areas.

Now the areas that -- where -- the other areas are -- from a product perspective, weren't impacted, are things like our balance sheet.

We were obviously able to grow our balance sheet well.

And we also saw strength in certain sectors, in our industrial and REIT clients.

As it relates to the backlog, the backlog is strong.

It's up about 130% of what it was last year.

One of the things that gives us a lot of comfort.

As you look at held for sale, and as you look at what we have in terms of held for sale, that's elevated 2 times what it was at year end.

And I'm looking at [331] ending numbers, and maybe 4 times what it was a year ago.

So if you look at all those things -- and I'm out with our clients a lot.

The activity, it is not for lack of activity.

A lot of activity, and a lot of good discussions.

So in general, that's why we feel pretty good as we look forward.

Chris, if you look at that trailing average that you cite, you are anywhere net $80 million to $100 million range per quarter.

Do you -- is that where you expect -- at least it will move back to here, in near-term?

We don't look at it on a per-quarter basis.

But as you think about, if we are going to grow it year over year, and last year, we did -- I don't know -- [$392 million] or so, obviously, that means, on an average, we're going to have to have some pretty significant quarters in the last three quarters of the year.

Steven, this is Don, and you are right, that that would imply an average of about $110 million a quarter for the rest of the year.

So it would be a meaningful step up from where we were in the first quarter.

Okay.

And Don, on the margin guidance was unchanged, which is really full-year guidance.

But until we get higher short-term rates, should we think about NIM pressure similar to what we saw this quarter?

We would think generally, it would be fairly stable with where it is.

But I will tell you that this past quarter, some of the impact was the issuance of debt, which cost us about a basis point.

We did have some loan fees that came through in the fourth quarter that wouldn't be recurring in nature.

And also, we've been expecting that our loan growth would exceed our deposit growth.

And as strong as our loan growth has been, our deposits year-over-year were also up 5%.

And so that efficiency of the balance sheet didn't materialize as much as we would have expected in the first quarter of this year, compared to a year ago.

So that's what helps keep that margin stable over -- through the remainder of the year, is having a little bit more efficient balance sheet.

And just one final one on the E&P portfolio.

Are you seeing any surprises thus far in the spring re-determination of borrowing basis?

Thanks.

This is Bill Hartman, Steve.

We've seen exactly what we expected to see in that portfolio.

No surprises.

Okay.

Thanks, guys.

Thank you.

Ken Usdin, Jefferies.

Hi, good morning everyone.

Don, I was wondering if you can provide a little more context, in terms of the loan growth?

It was really good, more so at period end.

And also, I saw that you moved a bunch over to held for sale.

Can you talk about the progression of growth throughout the quarter?

And then also then, just that color on the -- what's moving the held for sale, and when you expect to get rid of that?

No, you are right, as far as the loan growth.

We had a strong finish to the fourth quarter, which set up the first quarter well.

But we also saw a period-end loan growth from fourth quarter to first quarter, so we were very pleased with that.

Now, as far as the loans held for sale, those are designated at the time of origination to be placed into that category.

And so it really reflects the timing of when transactions are closed.

And that's what also gives us confidence, as Chris mentioned earlier, as far as the outlook for fee income going forward.

Okay.

And my follow-up is, Don, underneath the surface, you've had the good expense control again underneath the line.

And I'm just wondering, the $7 million of the continuous improvement -- and I think you're still on track to do around the same amount that you had indicated before the $30 million.

Are we at a good level for expenses?

Can you still expect that stable -- any drift, as this investment bank revenue potentially comes up, that we will see that naturally shift back up?

It seems to have been a -- again, a seasonally lower number, given the pullback in the investment bank, as well.

So I just wanted to understand that trajectory

No, you are right, that first quarter had some seasonal impacts.

The -- as far as the negative, the benefits costs tend to be highest in the first quarter, compared to the rest of the year.

But we also tend to have lower marketing expenses.

And in this quarter, as you highlighted, our incentive expense was lower, because of the lower investment banking and debt placement fees.

And so as those revenues pick up, that we will see an increase to the incentive line item, as well.

But it still would help us meet our positive operating leverage target for the full year, with having that type of growth.

Okay, great.

Thanks, Don.

Scott Siefers, Sandler O'Neill.

Good morning, guys.

Had a quick question on the health of, particularly, the Midwest manufacturing, basically.

You have a couple of cross-currents.

On one hand, energy is obviously a tailwind for their costs.

But by the same token, the strong dollar seemingly would be more of a headwind.

I wonder if you can just talk about what your customers are thinking and saying about health of their overall businesses?

Sure, Scott.

It's Chris.

So as you can imagine, it depends by vertical.

I would say that our manufacturers, obviously, the dollar has made it more challenging for our industrial clients.

So that is one area.

Areas that are particularly benefited in the current operating environment, our specialty chemical business, where natural gas is a feed stock.

We're doing a lot of business right now in specialty chemical.

Conversely, obviously, our oil and gas business, which we talked about earlier, the pullback, in terms of CapEx, in most of the shale plays is 30% to 40%.

And I think you'll see that trickle through in the secondary and tertiary effect.

And then lastly, one thing that really impacts the Midwest in a significant way is the automotive business.

And our analyst is looking for sales at retail this year to be 16.9 million units, up from 16.4 million units.

And there's also a positive mix shift.

Lot of SUVs and pickup trucks, which are higher margin.

And then one thing that hasn't been discussed a lot is the class 8 truck market, which is also strong.

So that's a walk-through of what's going on in the Midwest economy.

Okay.

That's perfect.

And I think most of my others were already answered, so appreciate it.

Sure.

Erika Najarian, Bank of America Merrill Lynch.

Good morning.

Good morning.

Just a quick one for me, as well.

I'm sorry, Don, if I missed this in the prepared remarks.

But could you give us an update on where you are on the LCR?

And also if your guidance for stable NIM, if the Fed doesn't move this year, contemplates any further LCR-related balance sheet actions?

As far as the LCR for the fourth quarter, we were operating on a regular basis at high 80%s.

So we're in good shape, as far as being able to achieve that 90% target for the first quarter of next year.

We've also continued to migrate our investment portfolio to more Ginnie Maes that were at about 44% of the total portfolio.

And as we have cash flows from the existing portfolio, we'll continue to reinvest those in Ginnie Maes.

And so we do not expect any significant impact on our margin going forward, from any further actions.

And believe that the guidance [doesn't] contemplate us achieving that 90% plus coverage ratio by next year.

Thanks.

Most of my questions have been answered.

Thank you.

Kevin St.

Pierre, Bernstein.

Good morning, thanks for taking my question.

You had very solid growth in commercial loans.

But the 6 basis point decline in the yield led to flattish interest revenue from the commercial portfolio.

Could you comment on how much of that is driven by the competitive environment?

Don, you mentioned some fees, which may have not come through.

Can you talk about the decline in the yield?

The decline in the yield, we had about $2 million of higher fees that came through in the fourth quarter that did not re-occur in the first quarter, and weren't present for the first quarter of last year.

And so if you take a look at the total loan yields over the last year, it would have been at an average rate of compression less than that 6 basis points that you saw -- or referenced.

So we don't think it will continue at that same type of pace.

But there still is pressure on loan yields that we are seeing new origination still come in about 25 basis points lower than where they were a year ago, and not seeing that pressure come down much at all.

Okay.

And maybe just a bigger NIM question, or a broader question.

We've seen about eight plus quarters of a steady bleed down in the NIM, and yet now, you're guiding that if rates don't move up, we'll still be sort of flattish.

What, from a big picture perspective, has changed, why -- that we wouldn't expect that continued 3 to 5 basis points bleed downward over the next few quarters?

The two components that would be driving that.

One is that our yield on our investment portfolio is now down to 2.1%, so the further reduction there should not have as much of an impact as what it has had historically.

And the second is that we still believe our loan growth will exceed deposit growth, and that will allow us to have a little bit more efficient balance sheet.

And so, even though we would expect pressure to remain on loan yields, we think the mix of the balance sheet should offset that, in allowing us to maintain a more stable margin.

Take a look at our overall cash position.

It was about $2.5 billion again this past quarter, which is above where we would typically target of around $1 billion.

And so that's continuing to put pressure on margin from that perspective, as well.

Great.

Thanks very much, Don.

Ken Zerbe, Morgan Stanley.

Thanks.

And just in terms of the expense guidance of stable, is -- how much in incremental efficiency charges is in that number this year?

We've talked about a range consistent with where we -- our operating for the first quarter, which is in the $30 million plus or minus range.

And so we had $7 million of charges in Q1, and would expect that to be in about that same range for the full year.

Got you.

And does that drop off in 2016?

Or is that just more of a stable ongoing number that we should expect?

We're going to be continued to focus on continuous improvement throughout the organization.

And so I don't know if it's going to continue at $30 million, but we will have some level continue, going forward.

Just because we believe that there is ongoing opportunities to right-size our branch distribution of 2% to 3% a year.

And we'll also have other efforts that look at end-to-end processing type of opportunities, to get more efficiencies to help fund some of the investments, going forward.

So we really look at this as more of a core component of our cost base, for now.

Understood.

Okay.

And then on -- and second question is just, in terms of loan growth, obviously, a very strong C&I growth that some of the other categories, other than construction, probably not as strong.

I know your focus has been on C&I.

But do you guys have any commentary on more of the weakness in some of the other categories?

Thanks.

As far as the weakness.

One thing that does impact is, we still have about $2 billion of exit portfolios that are mainly in other categories.

A lot in the consumer book, and also some in the commercial leasing book.

So as that continues to run down about $150 million to $200 million a quarter, that will put pressure on those portfolios.

And then you look beyond that, that we don't have the typical consumer book of business.

That it really is primarily focused on home equity and first mortgage position, and doesn't include an indirect auto portfolio, where others are seeing much stronger growth than what we would -- experienced here in the last year or so.

So I would say that it's more demand focused, as far as the weaker growth, and also reflective of that exit portfolio I mentioned.

All right.

Great.

Thank you.

John Pancari, Evercore ISI.

Good morning.

Good morning.

How much of the $6 million [link] quarter decline in comp expense was tied to the lower investment banking incentive accruals?

Yes, that -- we do provide a little bit more of a breakout on that on page 20 of the earnings press release.

You can see that our incentives were down from $105 million in the fourth quarter to $70 million in the first quarter of this year.

The comparable amount in the first quarter of 2014 would have been $72 million.

So it's a decline in both the year over year, and also link quarter information.

Okay.

So should that be the extent of the snap-back that we could see in the comp expense line, assuming we see the investment banking activity rebound?

The $35 million change is probably outside what you would see from taking the investment banking back up from the fourth quarter -- or from the first quarter of this year to the fourth quarter of last year, but that we should see some increase in incentives, when those revenues do come through at a stronger pace.

Okay, all right.

And then also related to expenses, your long-term below 60% target for the efficiency ratio, can you just help us understand.

How much, by way of higher rates, is in that assumption for the Fed funds target?

If you look at slide 16 of the deck, it does have the walk-forward of that efficiency ratio.

And you can see, based on that, that there is probably a range of that impact.

We've talked about, we would expect our efficiency ratio to be in the low 60%s, without the benefit of rates, and in the high 50%s, with the benefit of rates.

So we haven't gotten more specific than that.

Okay.

All right, good.

Thanks.

And then lastly, on the energy portfolio -- sorry if you already said this.

But did you take an energy-related loan-loss provision this quarter?

Or did you reallocate incremental reserves from unallocated to allocated for energy this quarter?

As we talked about last quarter, we did set aside a portion of our judgmental reserve for the oil and gas portfolio.

And we did see the portfolio move in line with our expectations.

And so we did not have any adjustment or increase to our overall allowance, this past quarter, for the -- that migration.

Could not quantify what your energy specific reserve is, as of this time?

We have not.

No.

Okay.

All right.

Thank you.

Thank you.

Matt Burnell, Wells Fargo.

Hi, good morning, it's Jason Harbes, actually, from Matt's team.

Good morning.

Good morning.

Nice strength in the trust and investment services line this quarter from, I guess, Pacific Crest.

So just curious as to get your take on how sustainable you think that is this year?

And just to get a sense for your appetite to do additional acquisitions along those lines?

Jason, it's Chris.

As it relates to Pacific Crest, we feel really good about where the business is positioned.

We think we will continue to be able to generate revenues in trust and investment services.

Just this Monday, we actually combined the two broker-dealers.

So now Pacific Crest is a fully integrated vertical, a technology vertical, within our corporate and investment bank.

As it relates to other acquisitions, there are clearly businesses out there that are very niche-y, very focused, and that we think could fit into the platform that we have built.

So just as we, a couple years ago, grew by adding things in our third-party commercial loan servicing business, and last year grew by acquiring Pacific Crest, there other opportunities out there.

But in the ordinary course, we're always out looking.

Okay, thanks.

And just as a follow-up, maybe switching over to credit.

The credit cost came in a little higher.

And it looks like the NPAs on the commercial side ticked up, as well.

Was that a function of anything in particular, perhaps energy?

Or just want to get your take on what's driving the credit costs higher?

And to get maybe your outlook for credit costs, going forward?

Jason, this is Bill Hartmann.

If we look back over the last several quarters, what we've seen is a very strong asset quality being pretty consistent from quarter to quarter.

So we think that we've actually normalized at this level.

And we have also indicated that because it's -- the statistics are so low at this point, any one or two smaller items could actually move the numbers around a little bit.

And so we will expect to see some modest variation from quarter to quarter.

Okay.

Thanks, guys.

Thank you.

Sameer Gokhale, Janney Montgomery Scott.

Thank you.

Good morning.

Good morning.

I had a few question.

But firstly, I was curious if you could talk a little bit about C&I loan growth?

You have been asked a few questions about that.

But one of the things I've been puzzling over is, what has been keeping C&I growth so high for so long?

And it would be helpful to get your perspective on what you think is continuing to drive that?

Simply because, at one point, it was inventory builds.

Then, we heard about companies that were spending on infrastructure, especially technology infrastructure.

But you continue to see C&I loan growth chugging along at pretty attractive rates, and your results show the same thing.

So at this point, when you look at the drivers of C&I loan growth, what would you attribute those to?

Sameer, it's Chris.

It's obviously situational, company by company.

But as we step back and look at it, it is not an increase in utilization.

Our utilization rates have been flat for the last 4 quarters.

In certain instances, we do see people investing in property plant and equipment to make their businesses more efficient.

We don't see a lot of our clients hiring a lot of people.

We do see some transactional activity, which obviously helps grow it.

And in our instance, we believe we've been able, with our unique model, to take some share.

We've added 142 clients in the first quarter, and we think that's a factor, as well.

Okay.

It's just interesting, within the context of the Fed data showing 10% growth in C&I loans for everybody across the industry.

So -- and it seems like everybody is doing similar things, and generating growth, which led me to think maybe there was some more underlying fundamentals driving that.

But your perspective is helpful.

The other thing I was curious about is, if you could just talk again, or remind us about your go-to-market strategy in your investment banking business?

And the reason I ask that is because, for quite some time now, we been hearing about the large cap banks.

And how, from an investment banking standpoint, it used to be the case where they could more easily use their balance sheets to help their capital markets businesses.

Doing investment banking, and them promising loans, and packaging those as deals.

And they've had a very difficult time, from what we're hearing, in doing that for quite some time now.

So I was wondering, from where you sit, and as you manage that business, in your -- do you go to market using your balance sheet more readily, perhaps, to help support your investment banking business?

Or is that something that's affected you, as well?

So your perspective there would also be helpful.

Our approach is a very focused relationship approach.

And we're very targeted in that we focus on certain sectors, and specifically middle-market companies within those sectors.

As it would happen, as our business has continued to evolve, often, we start a relationship with an advisory, or a transformative transaction.

But we do think there is huge value, and we see it resonate with our clients, to have an integrated corporate and investment bank where we can use our balance sheet, or we can -- as principal, or we can act as agent helping our clients access the markets and grow their business.

Okay, and then just a couple of other quick ones.

GE Capital that's selling a bunch of different businesses and assets.

Have you expressed an interest in acquiring any of those businesses or portfolios?

Sameer, this is Beth.

As you would expect, we don't typically comment on any specific transactions that might or might not be in the market.

And as a historical precedent, we haven't bought portfolios, per se, just to supplement our balance sheet.

But where we would see, perhaps, client opportunities, or a fit with our business model and risk profile, I think as you've seen some of the puts and takes that we have done over the last couple years, we have reviewed those types of opportunities in the past.

GE, I would say, has been a strong competitor in the market.

We see them in many of our businesses, and we think these kinds of situations offer great opportunities for our team, as markets get disrupted.

Okay, thanks Beth.

And this is my last one, is on the tax rate.

It would seem to be a little below where you've been trending over the last few quarters.

Anything unusual going on there this quarter?

We did have a few credits come through this quarter that we have talked about, for the future quarters, that you could see a effective tax rate in the 26% to 28% range for those future quarters.

So there was a slight benefit this quarter.

Okay.

Thank you.

Thank you.

Gerard Cassidy, RBC.

Thank you.

Good morning, everyone.

Don, can you share with us, on your buyback, are you permitted, if you wanted to do more of it in the first or second quarters of the period, which starts, of course, second quarter of this year, for the [C-CAR] fiscal year?

Can you do -- does that spread out evenly over al four or five quarters?

Or can you front-load it, if you wanted to?

Great question.

And as we submit our capital plans, the instructions are that we need to keep our capital actions consistent with our overall plan, which doesn't necessarily allow for a front-end loading of those share buybacks.

The other thing that we do have is that when we issue shares for employee benefit-related plans, that we're able to buy those back.

And those tend to happen in the first quarter of each calendar year.

And that's why you saw a higher level of share buybacks here in the first quarter of this year, compared to what you've seen in the previous three quarters.

Thank you.

And on your slide 15, where you guys give us the progress on targets for success, some of them have obviously been met, and you exceed some of them.

What kind of interest rate environment would you envision to have your net interest margin get to that target of 3.5%, from where you are today, at 2.91%?

We would have to see a much more normal rate environment, which would be up to about 300 basis points from where it is today, before we could start to get to that [3.5%] margin.

So it's something that would be very difficult, if not impossible, for our balance sheet to achieve, until we start to see that rate environment change.

Sure.

And coming back to your comments about the efficiency of the balance sheet, and seeing that deposit growth.

Are there any plans -- I know your CDs have been coming down, and the higher cost deposits.

Are there any other plans you could put in place to reduce some of the higher cost deposits quicker, to make that balance sheet more efficient?

One area that we been focused on is making sure that where we have collateralized deposits, that we encourage those to be full relationships for us to support that kind of a deposit to be on our balance sheet.

And so we've seen some of those balances leave, and we would expect to see several more leave between now and the end of the year.

But as we look at our deposit mix, we have been very aggressive, as far as managing rates and making sure that we are focused on supporting more of the relationship in total.

And so we're trying to make sure that we match up our higher rates with our best overall customers.

And then just finally -- I want to make sure I heard you correctly.

You guys talked about that the loan growth at the end of the fourth quarter accelerated for the fourth-quarter results.

Did you see that again at the end of March, that there was an acceleration of loan growth, as well?

We did.

That our period-end balances are up at the end of the first quarter, compared to the average.

And so we had a nice close to the end of the quarter, which positioned us well in the second quarter, as well.

Great.

Thank you for your time.

Thank you.

Geoffrey Elliott, Autonomous.

Hello there.

I wondered if you could discuss, in a bit more detail, what you can do to deliver on the long-term cash efficiency ratio target, if rates don't go up?

So getting it down into the low 60%s, excluding rate rises.

Because I guess if I look at 1Q 2015, you were at 65.1%.

At 1Q 2014, you were at 65.1%.

So it feels like, without rates, that's been going sideways.

I guess you've got some plans that you think should enable you to get it down?

As far as the year-over-year stability, that we had some nonrecurring type of revenues in the first quarter of last year, including the gain on the sale of a leveraged lease transaction, which helped benefit the first quarter of last year.

As you look at our long-term plans, it's focused on driving positive operating leverage.

And so that starts with growing revenues.

And even with our full-year guidance for 2015, we talk about showing year-over-year growth and net interest income, even if rates are flat.

And we experienced that here in the first quarter.

If you look at the year-over-year change in our net interest income, it's up $8 million, despite the fact that rates are flat with the first quarter of last year.

Other revenue initiatives would include the benefit of some of the investments we have been making.

We been adding to our front line distribution capabilities for both the corporate bank and the community bank, and those aren't all fully mature yet.

And so we will see additional benefits from those investments.

We been making investments in payments space.

And if you look at our cards and payments revenue, it is up 10% year over year.

And that reflects the investments we've been making there.

And so our guidance for the full year this year is mid-single digit growth in fee income.

And so we believe that we can generate revenue growth, and keep our expenses relatively flat.

And the initiatives that we're focused on, on driving that expense levels to be flat, would include continued focus on reducing occupancy cost, both through non-branch space, where we have talked about reducing that by 15% between now and 2016.

Earlier, we mentioned that our branches are expected to go down by 2% to 3% per year, as we make that infrastructure more efficient.

And we're having ongoing efforts to take a look at our front- and back-office functions, to see, on an end-to-end basis, how can we make those efficient?

And that's just going to be part of the culture here, in driving that continuous improvement.

And so a combination of all of those, that revenue growth supporting -- supported by keeping the expenses flat, from getting cost saves to pay for the investments we're making, give us confidence that we can drive that efficiency ratio to that low 60% range, even without the benefit of rates.

And then just to follow up on some of the earlier questions, on credit and the tick-up in criticized assets.

I appreciate that credit is pretty good, and that one or two small [horizons] can move things around a bit.

But on the other hand, it looks like it's the end of a 23 quarter pattern of criticized assets declining every quarter.

So can you be at all more specific on what the areas were that were resulting in the uptick?

And how you think about things from here?

Yes, this is Bill Hartmann, Geoffrey.

So we track the portfolio very closely, and we are not seeing any trend that might be suggesting that there's been any change in the environment for credit.

Again, reiterating what I said earlier, we're at such a low level, across our loan books, that one or two names that might occur are going to change the -- are going to change some of those statistics modestly.

But we're not seeing that that's going to have a significant move in our credit losses at all.

And can you say what industries, or give a flavor of larger clients, smaller clients, geography, anything at all, to give us an idea of where this has come from?

We really can't say that, because it didn't -- in any one industry or geography, we are not seeing any trend.

It's just, we're operating with a lot of small numbers, and any day, you could have something that changes.

And that is just the way normal business environment is.

Great.

Thank you very much.

Thank you.

Jialong Shi, Credit Suisse.

Hi, good morning, thank you.

You touched on this a little bit in a prior question, just about the deposit mix and the CDs and time deposits coming down.

But could you speak more generally about total funding cost?

And what you factor in, in terms of your outlook for holding the NIM relatively stable from here?

Yes, that our outlook would assume that we're basically continuing to see funding costs remain relatively stable.

But show, again, a change in the mix overall, as far as the balance sheet and seasonal [loan] growth would exceed the deposit growth, and allow us to come up with a more efficient balance sheet.

Okay, great.

Thanks.

David Eads, UBS.

Hello, thanks for taking the call.

Just quickly, on expenses.

We saw a nice tick-down in the business services and professional fee line, both on a sequential and year-over-year basis.

It was a little bit surprising, just given all we've always heard about on pressures about regulatory and technology and spending front and all of that.

And I was wondering if you can touch on what you see the outlook for that expense line item?

Generally, we would see this as being the new baseline for us, and not seeing significant changes, one way or the other, from that line item

Great.

And then, if you could touch a little bit more on your energy vertical, since you have such a unique perspective there?

Are you guys seeing the clients looking to tap capital markets early?

And how long do you think that is going to last?

And how much appetite there is from investors?

And then I guess what that means for your -- the outlook for either putting more or less, in terms of energy, on the balance sheet?

David, it's Chris.

We have seen that our clients have been able to go to the markets.

And so that's one of the things that gives us confidence, with respect to the portfolio.

In our portfolio, less than 40% of the capital structure is typically senior debt.

And what we've seen is that our clients have been able to go to the high yield market.

So it's -- we feel that there will be a time when there's an opportunity to continue to grow the business, but I think right now, we're in the mode of advising our clients, as everybody works through what has been a very sudden price change.

Great.

Thanks.

Thank you.

Nancy Bush, NAB.

Also known as NAB, but that's okay.

(laughter) Good morning.

Could we go back to the -- your commentary on commercial line utilization?

We heard yesterday from, I think, both USB and PNC, that they were seeing an uptick -- or it sounded like a very modest uptick in the utilization of commercial lines.

And I guess I'm just a bit mystified, along with a lot of other people at this point, how we continue to see loan growth optimism about the economy, et cetera, without seeing anything happen in utilization of commercial lines.

Can you tell me what your conversations with your customers tell you about what seems to be a phenomenon?

Nancy you are right.

As we sit down with clients, rates never having been this low for this long, I think some of the basic behaviors have changed.

But you just described exactly what we're seeing, in that our deposits continue to grow, they continue to have cash.

They're really not -- our clients are not really tapping their lines.

I think, to some degree, companies are going to just run with higher levels of cash, going forward.

But it is a unique phenomenon.

EJ, do you have a perspective?

Chris I would agree with that.

Our clients' outlook on leverage -- in the community bank, our clients prefer to use their own cash.

They are generating a lot of cash in their business.

Our cash balances, like in the corporate bank, have been rising.

We had a good growth in cash balances in the first quarter.

So our clients just don't feel like they want to take on a lot of leverage right now.

Their businesses are good, and they are generating cash, but they just don't want to take on a lot of leverage right now.

With rates as low as they are, I guess my question is, what are they waiting for?

Do you think that if they begin to see the prospects, or more definite prospects of rates rising, that maybe they will dip into lines at that point?

Or what is -- what signal are they waiting for?

I think they're still -- Nancy, I think most of them are generating a fair amount of cash.

Most of them have really improved the operating efficiency of their business.

And I think what they are waiting for is to really make that step change.

And the step change would be to invest in a brand-new plant, to hire a lot of people, or to make an acquisition.

Other than that, they're really just generating enough cash that frankly, they don't need to tap their lines.

And Nancy, I would add, in my conversations with clients -- because I often get asked my view of interest rates.

I would summarize it that they often say, absent any sense that rates are about to make any compelling move, it doesn't factor in.

So it creates this no particular sense of urgency, to think about debt and their capital stack, or how they are operating the businesses.

Yes, but that would beg the question of whether, down the road somewhere, we are going to get a surge in commercial line utilization, as everybody runs for the door at the same time.

So hopefully, that will happen.

But I'm just, like a lot of other people, having trouble putting all the pieces of this puzzle together, and seeing when things get dramatically better for the banking industry and demand.

Nancy, when you figure that out, let us know, because were all looking (multiple speakers).

Yes, I will.

I'll be charging a lot more money then, by the way.

(laughter) Thanks.

Thank you.

Bill Carcache, Nomura.

Thank you, good morning.

Don, I wanted to follow up on some of the comments that you made on the non-commercial side.

After about 11 quarters of year-over-year growth, it looks like this was the first quarter where we saw a decrease in Key community bank home equity loans.

Is that slowdown a function of something happening on the demand side?

Or -- did you say?

Or is that something that you are doing.

And Beth, given your commercial focus, can you talk about your strategic commitment to home equity, and your growth outlook?

It's about 18% of your books.

So just trying to get a sense, as we look forward, does that probably go up or down, or stay flat?

Bill, this is Beth.

I will go ahead and say a commitment, as you said, with our commercial focus commitment to our home equity book.

I would tell you, while our business model, as we have talked about, is a heavy commercial focus, we're also very committed to our consumer clients.

And having a relative balance within our business mix is critical to our business model, our performance and our credit (technical difficulty) company.

Our primary lending vehicle in our consumer (technical difficulty) arena is home equity, which does have seasonal attributes, when demand typically surfaces.

And the fourth to first quarter is not a era where -- or a period where we often see seasonal demand, but it is a core product.

We have grown that.

If you look over the last couple of years, that has been an area where we have invested and grown.

And we consider it a core product of our consumer capabilities.

And I would ask Dennis to add anything about what he sees as particular attributes of how it has trended over the last several quarters.

Thanks, Beth.

You look across the industry, and you are not seeing growth in the home equity books.

And so given the dominant position that we've gone from a consumer lending perspective there.

You compare, as just as Beth said, first quarter last year, you didn't see a big pickup in that book, either.

So there is seasonal demand.

Second quarter and third quarter, you will see growth.

We're in the midst of a campaign.

From a new volume perspective, from an origination perspective, we are stronger than we have been in some time.

And so the -- it's a core part of our business.

As you have heard again and again, a core part of our relationship strategy is through the branch, and a focused effort of expanding relationships into our existing client base.

We've seen a heavy first lien position there.

You see really stable credit quality within that book, as well.

And it's a core part of our offerings to our clients.

So you'll see, it's stable.

And just as Don had shared earlier, consumer loans have been stable.

You've seen some offset runoff in other parts of our exit portfolios, as well.

Thank you.

You're welcome.

Kevin Barker, Compass Point.

You have been conducting branch consolidation and other efficiency initiatives for the last couple of years, and you've seen some incremental decline in overall expenses, because of these initiatives.

But in order to really get the efficiency ratio below 60%, you would need either higher rates or a broader initiative.

Given your footprint, why not sell some of the branches in smaller footprints, where you don't have scale?

And reinvest the proceeds, either in higher-yielding assets, or even buy back stock?

This is Don, and I'd take the first crack at that.

And one is that we do believe that we can get to the low 60%s without those types of structural changes.

That we believe, just by focusing on positive operating leverage and consistent with our guidance for this year, we should show revenue growth, and be able to keep expenses flat.

And that will help drive down the overall efficiency ratio.

When you take a look at downsizing through sale of certain portions of our franchise, keep in mind what you lose from that is the revenue associated with that book, and only the incremental costs associated with supporting that on a direct basis.

We do have an infrastructure here, from a technology platform and other perspectives, that you really can't reduce proportionally for the sale of those types of branches and geographies.

We do take a look at the performance at a branch level, and make sure that we are getting increased productivity from those branches, and achieving the types of positive operating leverage and efficiency improvements that we would expect.

And think that we can get there organically without having to go to other more strategic type of transactions.

Beth?

And Kevin, I would add that if you look at our business model, in any given market, it's bigger and broader than just our retail network.

It is foundational to what we call broader market presence, which would include our business banking clients, our commercial middle market, our private banking clients.

So in any given market, we are larger, and generating more revenue, than just our branch presence.

And yet without the branch presence, you would lose critical mass with the ability to serve those clients.

[But] as an integrated model within the community bank, and I don't think the branch density in any given market is necessarily indicative of what the broader performance in any market would be.

What level of deposits per branch, or loans per branch, do you think you need, in order to generate positive operating leverage, all for that specific branch?

What we are focused on right now, within the retail space -- and I'll let Dennis comment more on this -- is really looking at sales per person per day.

And by focusing on that, we can continue to drive up the loan balances and deposit performance at each of the branches.

Dennis, what -- add to that?

That's right.

On -- the core focus in the community bank is positive operating leverage.

And so every branch you find at a different place, in terms of average deposits or average loans today, but you see two things going on.

You look year over year, you look at any given period, growth in core deposits.

You see that in the community bank.

You see growth in the balance sheet.

And as Beth described, across the community back and across the different asset categories, while the branch count continues to come down.

And so the growth you see in the balance sheet, the growth you see in year-over-year fee income, all occurred with 3% fewer FTE and substantially fewer branches than we had a year ago.

That plays out in the trust and investment services category, in particular, that see within the Community Bank.

That's a function of Key Investment Services, which has had one of the strongest quarters we've ever had, as well as within the private bank.

And so it's bringing to life the entire relationship to our clients in those branches, is what we are looking to do.

Thank you for taking my questions.

Thank you.

And Ms. Mooney, I will turn it back to you for any closing comments.

Again, we thank you 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 at 216-689-4221.

That concludes our remarks.

Again, thank you, and have a good day.