KeyCorp (KEY)

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KeyCorp (KEY)

Q2 2009 Earnings Call

July 22, 2009 9:00 am ET

Executives

Henry Meyer – Chairman & CEO

Jeff Weeden – CFO

Chuck Hyle – Chief Risk Officer

Analysts

Craig Siegenthaler – Credit Suisse

Gerard Cassidy – RBC Capital Markets

Terry Mcevoy - Oppenheimer

[Analyst] – Morningstar Equity Research

Jeff Davis – FTN Equity Capital

David Konrad - KBW

Charlie Ernst - KBW

Presentation

Operator

Welcome to KeyCorp's second quarter 2009 earnings results conference call. This call is being recorded. At this time I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer. Mr. Meyer, please go ahead.

Henry Meyer

Thank you, operator. Good morning and welcome to KeyCorp's second quarter 2009 earnings conference call. Joining me for today's presentation is our CFO, Jeff Weeden and also available for the Q&A portion of the call are our Vice Chairs, Beth Mooney and Peter Hancock; Chief Risk Officer, Chuck Hyle and our Treasurer Joe Vayda.

Slide two is our forward-looking disclosure statement. It covers our presentation materials and comments as well as the Q&A segment of our call today. Now if you turn to slide three. Today, we announced net loss from continuing operations of $236 million or $0.69 per common share. These results reflect an extremely weak operating environment and continuation of the credit cycle.

Jeff will comment more on the earnings in a minute but before he does I want to make a few comments about the measures we are taking here at Key to address this challenging environment which we believe will then put Key in a position to compete and win with our clients and for our shareholders.

First, we have raised over $1.8 billion of tier one common equity to address the SCAP requirement. We believe Key has always maintained a strong capital position and with these most recent actions, along with the update we have provided in today’s earnings release with respect to the pending exchange of new common shares for our existing retail capital securities, we will further fortify this position.

At June 30, 2009 our tier one common equity ratio was a strong 7.27% and our tier one risk based capital ratio was 12.42%. In light of the prevailing weak economic environment we have continued to build our reserve for loan losses. For the second quarter our provision exceeded our net charge offs by $311 million. In addition, we continued to work down the exit loan portfolio balances. The combination of building reserve balances and a smaller loan portfolio resulted in a reserve for loan loss coverage ratio of 3.53% at June 30, 2009.

We have also continued to strengthen our funding and liquidity positions which have benefited from deposit growth in both our community banking and national banking organizations. In our community bank, average deposit balances were up $2.7 billion or 5.5% compared to the year ago period and in our national banking group average deposit balances increased $1 billion or 7.9% compared to the second quarter of last year.

Focusing on our client relationship business model and maintaining our expense discipline to deliver value have remained our top strategic priorities. We continue to look for ways to serve our clients better by streamlining our operations to eliminate lower valued activities and capitalize on investments we have made to improve the client experience. As we discussed previously, we have a corporate wide initiative called Keyvolution underway that is designed to simplify process and improve both client service and speed to market.

Over the past 15 months we have been reviewing our business mix and evaluating our processes throughout the company. As a result, we have eliminated certain business activities and installed new technology to improve the client experience. We have also reduced employee headcount by approximately 8% or 1,500 positions.

As highlighted in our earnings release, in the second quarter we entered into extensions of credit with clients representing approximately $8.2 billion in new or renewed loans and commitments.

Now if you will turn to slide four. Slide four provides a summary of the company’s previously announced second quarter 2009 capital initiatives. We believe this additional capital along with a current offer to exchange common stock for up to $500 million of our outstanding retail capital securities which we expect to complete on August 4th will provide us with even greater flexibility to benefit from new business opportunities over the next several years.

Slide five shows our progress through June 30, 2009 and the future expectations with respect to Keyvolution over the next 2.5 years for process improvements here at Key. Initiatives that have already been implemented will result in an annualized cost savings run rate of $63 million with an additional $72 million in flight. There are approximately $58 million in one-time costs and investments including severance associated with these savings opportunities.

We have also identified additional targeted benefits with Keyvolution of $165-240 million which along with our implemented or in flight initiatives will produce total annualized run rate cost savings of $300-375 million with a significant portion captured over the next two years and the full run rate to be achieved in 2012.

Actions taken this year include reducing and realigning our sales force and management infrastructure in community banking and national banking. We have rebalanced relationship manager client loads and refocused RM’s towards client segments that offer the greatest risk adjusted earnings potential. We are also realigning our sales service roles so Key is better positioned to attract new clients and serve existing relationships.

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