KeyCorp (KEY)

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KeyCorp (KEY)

Q3 2012 Earnings Call

October 18, 2012 9:00 am ET

Executives

Beth E. Mooney - Chairman, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee and Member of ERM Committee

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

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

William R. Koehler - President of Key Community Bank

William L. Hartmann - Chief Risk Officer, Senior Executive Vice President and Member Executive Council

Analysts

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Marty Mosby - Guggenheim Securities, LLC, Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Bryan Batory - Jefferies & Company, Inc., Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Presentation

Operator

Good morning, and welcome to KeyCorp's Third Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Chairman and Chief Executive Officer, Ms. Beth Mooney. Please go ahead.

Beth E. Mooney

Thank you, operator. Good morning, and welcome to KeyCorp's Third Quarter 2012 Earnings Conference Call.

Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer, and available for the Q&A portion of the call are the leaders at Key Corporate Bank and Key Community Bank: Chris Gorman and Bill Koehler. And also joining us for the Q&A discussion are our Treasurer, Joe Vayda; and our Chief Risk Officer, Bill Hartmann.

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 provides some highlights on our third quarter. Our results underscore the company's sustained drive to increase revenue, reduce cost and grow the franchise. We recorded net income from continuing operations attributable to common shareholders of $214 million or $0.23 per common share this morning. Revenue for the quarter benefited from a 6% improvement in net interest income, driven by 17 basis point increase in the net interest margin and continued loan growth. C&I loans rose for the sixth consecutive quarter, and we surpassed our commitment to lend $5 billion to small businesses with up to $20 million in revenue, 2 years ahead of schedule in this quarter. Home equity loans reached their highest level in recent years, in part due to our successful borrowing campaign we have launched. On the cost side, we are on pace to reach our targeted annual expense reductions of $150 million to $200 million by December 2013. These efficiency initiatives will lower Key's cost structure to align with the current operating environment and should improve the company's competitive position in its markets.

During the quarter, we took steps to enhance our franchise, our product offerings and our profitability. We re-entered the credit card business by acquiring a $725 million Key-branded credit card portfolio, made up of our own clients, and by beginning to self-issue cards. The acquisition provides us with an opportunity to solidify our payments platform while realizing attractive financial benefits. To strengthen our share of 2 attractive markets in Western New York, we acquired 37 branches in Buffalo and Rochester from which we expect to grow current customer relationships and build new ones. Our underlying credit quality continues to improve, and in this quarter, we did make provisions to account for our acquisitions and to meet updated regulatory guidance. Jeff will cover these items in his remarks.

The final few items on this slide highlight our continuing commitment to disciplined capital management. In addition to leveraging our strong capital position through recent acquisitions, we have continued to return capital to our shareholders by repurchasing common stock and through dividends.

Turning to Slide 4. I'm sure everyone on the call today is aware of the challenges facing our industry. We have endured a protracted period of slow economic growth and historically low interest rates, and we believe these conditions are likely to continue. That said, we have taken steps to position Key for growth and improve profitability. We are focused on revenue growth, improving efficiency and disciplined capital management. Our results this quarter are evidence of our progress.

First, we are increasing revenue. Organically, our relationship model is generating results from new customers and expanding relationships with existing clients, who are using more of our services. We are seeing our lending businesses grow and our market share expand. And as I mentioned, we continue to invest in our businesses. This quarter included our branch acquisition and reentering the credit card business. Both provide new revenue streams and opportunities to grow our client base. In addition, we are able to deploy the additional balance sheet liquidity from our branch acquisition into higher yielding credit card assets and into the redemption of the trust preferred securities. Next, we believe one of our most effective levers comes from lowering our expense base and creating a more variable cost structure on the one hand, and delivering a high-quality client experience on the other. As we said earlier, we made progress this quarter on our efficiency initiative, and we remain focused on reaching our efficiency ratio target of 60% to 65%, all this while remaining committed to our relationship model. Finally, we see our capital position as a competitive advantage. How we manage our capital will continue to be one of the most important decisions we make for this franchise over the next several years. Overall, our third quarter results were another step forward for our company as we continue to make progress on our targets for success. Now let me turn our call over to Jeff for some further comments on our results. Jeff?

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