KeyCorp (KEY)

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KeyCorp (KEY)

Q1 2011 Earnings Call

April 18, 2011 9:00 am ET

Executives

Henry Meyer - Chairman, Chief Executive Officer, Member of Executive Council, Chairman of Executive Committee, Chairman of KeyBank National Association and Chief Executive Officer of KeyBank National Association

Charles Hyle - Chief Risk Officer, Executive Vice President and Member of Executive Council

Joseph Vayda - Executive Vice President, Treasurer and Member of Executive Council

Beth Mooney - Vice Chairman, President, Chief Operating Officer, Director and Member of Executive Council

Christopher Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association

Jeffrey Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council

Analysts

Robert Placet - Deutsche Bank AG

Todd Hagerman - Sterne Agee & Leach Inc.

Craig Siegenthaler - Crédit Suisse AG

David George - Robert W. Baird & Co. Incorporated

Brian Foran - Nomura Securities Co. Ltd.

Betsy Graseck - Morgan Stanley

Erika Penala - Merrill Lynch

Nancy Bush - NAB Research

Kenneth Usdin - Bank of America Securities

Steven Alexopoulos - JP Morgan Chase & Co

Presentation

Operator

.

Good morning and welcome to KeyCorp's 2011 First Quarter Earnings Results Conference Call. This call is being recorded. I would now 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 First Quarter 2011 Earnings Conference Call. Joining me for today's presentation is Key's President and Chief Operating Officer and CEO-elect, Beth Mooney; and Jeff Weeden, our CFO. 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, Chuck Hyle; and our Treasurer, Joe Vayda. Now if you turn to the next slide.

Slide 2 is our forward-looking disclosure statement. It covers our presentation materials and comments, as well as the question-and-answer segment of our call today.

Slide 3 highlights the specific capital actions that were part of our comprehensive capital plan that was submitted to the Federal Reserve earlier this year. We were informed on March 18 that the Fed had no objections to our plan. This allowed us to move forward in repurchasing the $2.5 billion in preferred shares held by the U.S. Treasury under the TARP Capital Purchase Program. This was completed on March 30. That transaction followed the successful completion of about $625 million common equity offering and a $1 billion senior debt offering. A common equity issuance represented 25% of the TARP Capital, which is one of the lowest capital replacement percentages among the 19 SCAP [Supervisory Capital Assessment Program] institutions. This was accomplished by improving our financial performance, including returning the company to sustained profitability, improving credit quality and continuing to build our strong capital position. That put us in a position to repurchase the TARP shares in a less dilutive manner than would have been the case if we had proceeded earlier.

After repurchase of the TARP preferred shares, the U.S. Treasury continues to hold a warrant to purchase 35.2 million shares of common stock at an initial exercise price of $10.64 per share. Key has notified the U.S. Treasury of its intent to repurchase the outstanding warrant.

Our capital plan also included an increase in our quarterly common stock dividend from $0.01 to $0.03 in the second quarter of 2011, subject to the approval of Key's Board of Directors when they meet in May. Future increases will be evaluated by the Board based on profitability, financial condition and other factors.

Slide 4 shows the significant progress we've made on Keyvolution initiative. To date, we've realized approximately $317 million in annual run rate savings, which puts us in our targeted range of $300 million to $375 million. We have leveraged our technology and implemented dozens of individual efficiency initiatives to lower expenses and to change our cost base to be more variable in relation to business activity. As we have discussed in previous calls, a portion of the savings have been reinvested back in our businesses, including new branches, technology and people. And we don't view Keyvolution as an endpoint. In a slower growth environment, expense management is a critical factor in remaining competitive and producing value for our shareholders.

Now let me turn the call over to Beth Mooney to provide some overview comments on the quarter and her thoughts on the way we position Key for the future. Beth?

Beth Mooney

Thank you, Henry. And starting on Slide 5. This morning, we announced first quarter net income from continuing operations of $184 million or $0.21 per common share. Our first quarter results showed continued improvement in credit quality and disciplined expense control. Key's favorable credit quality trends have benefited from the ongoing modest economic recovery and the aggressive actions that we began over four years ago to exit higher risk lending activity. The result has been continued improvement across the majority of our loan portfolio, in both Key Community Bank and Key Corporate Bank. Key's net charge-offs are now at the lowest level since the first quarter of 2008, and nonperforming assets have declined for six consecutive quarters. We expect to continue to see decreasing levels of net charge-offs and nonperforming assets during 2011.

In terms of our balance sheet, Key remains in a strong position in terms of capital, liquidity and reserve. Our Tier 1 common equity ratio at March 31 was 10.7% and our Tier 1 risk-based capital ratio was 13.44%. These capital levels position us well for a successful transition to Basel III, and we remain among the highest in our peer group.

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