KeyCorp (KEY)

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KeyCorp (KEY)

Q4 2008 Earnings Call

January 22, 2009 9:00 am ET

Executives

Henry L. Meyer - Chief Executive Officer

Jeffrey B. Weeden - Chief Financial Officer

Beth E. Mooney - Vice Chairman and Head of Key Community Banking

Joseph M. Vayda - Treasurer

Peter Hancock - Vice Chairman National Banking

Charles S. Hyle - Chief Risk Officer

Analysts

Analyst for Matthew O'Connor - UBS

Brian Foran - Goldman Sachs

Justin Maller - Lord Abbott.

Nancy Bush - NAB Research

Gerard Cassidy - RBC Capital Markets

Michael Mayo - Deutsche Bank

Presentation

Operator

Welcome to KeyCorp's fourth quarter 2008 earnings results conference call. (Operator Instructions) At this time I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.

Henry L. Meyer

Good morning and welcome to KeyCorp's fourth quarter 2008 earnings conference call. Joining me for today's presentation is our CFO, Jeffrey Weeden. Also with us to participate in the Q&A portion of our call are Beth Mooney, Vice Chair of our Community Bank; our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda.

I am also pleased to have Peter Hancock with us this morning. Peter joined us in December as Vice Chair of National Banking and brings with him an extensive background in the financial services industry, spanning nearly 30 years. He was held positions in business management, capital markets, finance, and risk management, bringing a unique and important dimension to Key’s senior management team.

If I could turn your attention to Slide 2, which is forward-looking disclosure statement, it covers our presentation materials and comments as well as the question and answer segment of our call today.

Now if you would turn to Slide 3, today we announced a net loss of $1.13 per share for the fourth quarter. The loss was primarily attributable to a non-cash accounting charge for goodwill impairment and continued building of the loan loss reserve. Our core results continue to benefit from solid performance from our community bank and decisions made to exit higher-risk or low-return, non-relationship businesses such as subprime lending and the actions taken to reduce our homebuilder exposure.

Our results for the quarter and the year also reflect the decisive actions taken to fortify our balance sheet and position the company for this extremely challenging operating environment.

These actions included participating in the U.S. Treasury’s Capital Purchase Program which bolstered our capital by $2.5 billion. For all of 2008 Key raised capital of $4.2 billion. At year end our tier-1 ratio was a strong 10.81% and our total capital ratio reached 14.67%.

We also continued to strengthen our funding and liquidity position by issuing $1.5 billion of new term debt under the FDIC’s Temporary Liquidity Program.

The added capital and strong liquidity position allow Key to take advantage of new lending opportunities and support our existing relationships.

As highlighted in our earnings release, in the fourth quarter we entered into more than 22,000 new extensions of credit with clients, representing approximately $5.7 billion in new or renewed loans.

As I mentioned, we also continued to build our loan loss reserve given the current economic environment and uncertain outlook. In the fourth quarter our loan loss provision was $594.0 million, which exceeded our net charge-offs by $252.0 million. At year end our loan loss reserve stood at $1.8 billion and represented 2.36% of period-end loans and 147% of non-performing loans.

During the fourth quarter Key reached an agreement with the IRS on all material aspects about global tax settlement on leasing transactions. As you will recall, Key took a $1.0 billion after-tax charge in the second quarter as a result of an adverse court ruling that impacted the accounting for certain lease financing transactions.

During the fourth quarter Key and the IRS agreed on the terms for settlement on the disputed tax positions, which resulted in the reversal of $120.0 million of these charges.

The positive benefit of the settlement was partially offset by the accrual of $68.0 million of additional taxes for GAAP purposes for the wind down of our Canadian leasing operation.

Over the past several years we have also continued to focus on the strategic allocation of our capital. We have made substantial investments in our people, technology, and branch infrastructure, including our branch modernization program where we have completed 100 branches to date.

We have also made progress in reshaping our business mix by exiting low-return and indirect portfolios and reallocating capital to our relationship businesses. Jeff will provide an update on our exit portfolio in his remarks.

Key has clearly benefitted from past decisions to exit subprime mortgage, credit card, brokered home equity, consumer auto, and the McDonald brokerage business. We are also exiting direct and indirect retail and floor-plan lending for marine and recreational vehicle products and limiting new student loans to those backed by government guarantee.

Now I will turn the call over to Jeff Weeden for a review of our financial results.

Jeffrey B. Weeden

Slide 4 provides an overview of the company’s fourth quarter results. As Henry mentioned, we incurred a net loss of $1.13 per common share for the fourth quarter. While there are a number of items that impacted the quarter, the most significant items are noted on this slide and the respective EPS impact.

We have included a more extensive of items impacting our quarterly results on page 2 of today’s earnings release. Of particular note was the $465.0 million, or $0.85 per share, non-cash charge we took for goodwill impairment in our national banking operation. This charge had no impact on any of tangible or regulatory capital ratios.

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