KeyCorp (KEY)

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KeyCorp (KEY)

Q4 2009 Earnings Call

January 21, 2010 9:00 am ET

Executives

Henry Meyer - Chairman & Chief Executive Officer

Jeff Weeden - Chief Financial Officer

Beth Mooney - Vice Chairman

Peter Hancock - Vice Chairman

Chuck Hyle - Chief Risk Officer

Joe Vayda - Treasurer

Analysts

Betsy Graseck - Morgan Stanley

Nancy Bush - NAB Research

Mike Mayo - CLSA

Ken Usdin - Bank of America/Merrill Lynch

Jessica Halenda - FBR Capital Markets

Gerard Cassidy - RBC Capital Markets

Rob Placet - Deutsche Bank

Nancy Bush - NAB Research

Presentation

Operator

Good morning and welcome to KeyCorp’s 2009 fourth quarter 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 everyone and welcome to KeyCorp’s fourth quarter 2009 earnings conference call. Joining me for today’s presentation is our CFO Jeff Weeden, and available for the Q-and-A portion of our call, our Vice Chairs Beth Mooney and Peter Hancock, Chief Risk Officer Chuck Hyle, and our Treasurer Joe Vayda.

Slide two is our forward-looking statements 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 number three. Today we announced a net loss from containing operations of $258 million or $0.30 per common share. Although this remains a challenging environment, we are encouraged by the continued stabilization of the economy and some positive trends in our fourth quarter results.

Our net interest margin increased 24 basis points from the prior quarter as a result of reduced funding costs and better earning asset yields and although net charge-offs remained elevated, we saw meaningful improvement in the fourth quarter in most of our credit metrics, we including decreases in delinquencies, criticized and classified assets, non-performing loans, and non-performing assets.

Slide three shows the strategic priorities that guided our actions in 2009 and continue to be the primary areas of focus in 2010. These priorities are built around three strategic imperatives, maintaining a strong balance sheet, reducing risk, and positioning the company for growth.

While 2009 was one of the most challenging years in our company’s history, I am pleased with the progress that we have made on these priorities. The first priority is balance sheet strength, which is one of the foundational elements on which all of our business strategies are built. We believe that strong capital, reserves and liquidity are critical, not only in today’s environment, but also to support future growth opportunities.

During the year, we took a number of actions to strengthen our balance sheet, including generating approximately $2.4 billion of new Tier 1 common equity and continuing to build our loan loss reserve. At December 31, our Tier 1 common equity ratio was a strong 7.46% and our Tier 1 risk based capital ratio was 12.68%, both measures are up significantly from the year ago period.

Over the past year, we also increased our allowance for loan losses by over $900 million to $2.5 billion. At the end of the fourth quarter, our loan loss allowance represented 4.31% of total loans and 116% of non-performing loans. Both of these ratios should place us in or very near the top quartile of our peer group and we made significant progress on strengthening our liquidity and funding positions, our average loan to deposit ratio at year end was below 100%, compared to several years ago when we were in the 140% range.

This improvement was accomplished by growing deposits, which reduced our reliance on wholesale funding. We also exited non-relationship businesses, while increasing the portion of earnings assets invested in highly liquid securities. Proactively addressing credit quality and reducing our risk profile has been and continues to be one of our top priorities.

One of our primary areas of focus has been reduce our exposure to the higher risk segments of our commercial real estate portfolio. Since the first quarter of 2008, we have reduced our commercial real estate, residential properties exposure, by over $2.5 billion, or 69% to $1.1 billion, which includes significant reductions in our California and Florida exposures.

We have also continued to address other parts of our commercial real estate portfolio, including working with our developer clients to provide interim financing on viable projects, when long term takeout financing is not available. We have been successful in re-underwriting many of these credits, while strengthening Key’s collateral position and adjusting pricing to reflect current market conditions and we have been aggressive in disposition higher risk loans and assets.

Key was one of the first banks to initiate the sale of a large portfolio of at risk commercial real estate homebuilder loans and since that time, we have continued to sell both loans and other real estate owned. A strong balance sheet and improved risk profile position us to leverage the investments that we have made and continue to make in our core relationship businesses and despite this difficult operating environment, we’ve made progress in creating some distinctive businesses with attractive growth opportunities.

In Community Banking, we’re continuing to invest in our people, infrastructure and technology. In 2009, we opened 38 new branches in eight different markets and we plan to open an additional 40 branches this year. We have also completed 160 branch renovations over the past two years and expect to renovate in the 100 branches in 2010.

In addition, we created 157 business intensive branches last year, which are staffed to serve our small business clients and while many of our competitors have reduced our commitment to this segment, Key is taking a longer term view and will be uniquely positioned in our markets as the economy improves.

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