KeyCorp (KEY) Q4 2010 Earnings Report, Transcript and Summary

Good morning, and welcome to the KeyCorp's 2010 Fourth Quarter 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. Mr. Meyer, please go ahead, sir.

Thank you, operator. Good morning, and welcome to KeyCorp's Fourth Quarter 2010 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our CFO. Available for the Q&A portion of the call are Key's President and Chief Operating Officer, Beth Mooney; and the leader of Key Corporate Bank, Chris Gorman; and Key Community Bank, 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 Slide 2. Slide 2 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 3. This morning, we announced fourth quarter net income from continuing operations of $292 million or $0.33 per common share. For the full year 2010, Key's net income from continuing operations was $413 million or $0.47 per common share. Our fourth quarter performance represents a strong finish to the year. Especially noteworthy was the continued improvement in credit quality and the progress we've made in growing our pre-provision net revenue. Credit quality continued to improve across a majority of loan portfolios in both Key Community Bank and Key Corporate Bank. In the fourth quarter of 2010, nonperforming assets were down $463 million and net charge-offs declined to $256 million. Key's net charge-offs declined each quarter in 2010 and are at their lowest level since the first quarter of 2008. Nonperforming assets declined for the fifth consecutive quarter and now stand at their lowest level since the third quarter of 2008. In addition to the continuing improvement in credit quality, pre-provision net revenue increased in the fourth quarter, in both the Community Bank and Corporate Bank. Both major business groups have benefited from the strategic actions taken to focus on profitable client segments, reduce risk and rationalize our expense structure. Investing in our businesses has also remained an important part of our strategy. Over the past two years, we have opened 77 new branches and renovated approximately 145 others. Key has also continued to receive recognition from a number of third parties for its services and customer satisfaction. The most recent was from Greenwich Associates, which recognized Key for excellence in both small business and middle market banking. Our improvement in Key Corporate Bank was largely driven by improving credit trends and by sharpening our focus on targeted industry segments, particularly in our noncapital-intensive businesses. During 2010, Key helped clients raise more than $100 billion through the successful execution of nearly 300 capital market transactions. This was achieved through increased levels of activity and elevated role serving clients in these financings and resulted in record fee income for KeyBanc Capital Markets in our equity and debt capital markets and Loan Syndications area. Key ended the year in a strong position in terms of capital, liquidity and reserves. Our Tier 1 common equity ratio at December 31 was 9.31% and our Tier 1 risk-based capital ratio was 15.1%. We're confident that these numbers position us well for the transition to Basel III. Our loan loss allowance at the end of the fourth quarter was approximately $1.6 billion, which represented 3.2% of total loans and 150% coverage of non-performing loans. We expect that both of these ratios should maintain our position near the top of our peer group. As I commented in this morning's earnings release, we're aware that certain of our peer banks have recently repaid TARP. The Comprehensive Capital Assessment Plan we submitted on January 7, 2011, included our proposal for repaying the TARP preferred stock in a manner that we believe makes sense for Key and our shareholders. The repayment of TARP is a top priority for Key, but our patience has been appropriate because it has allowed us to demonstrate improved financial performance and an increased stock price. Moreover, given the strength of our capital and our improved risk profile and profitability, it is our goal to repay TARP in a less dilutive manner than would have been achievable if we had repaid prior to undergoing the Federal Reserve's Comprehensive Capital Assessment. The final item on our strategic update slide focuses on the management changes that we've announced in the fourth quarter. As most of you know, Beth Mooney was elected President and Chief Operating Officer of KeyCorp and a member of our board of directors and will assume the role of Chairman and CEO when I retire on May 1 of this year. We also announced the elections of Bill Koehler to President of Key Community Bank, and Chris Gorman to President of Key Corporate Bank. I'm extremely confident in our new leadership team and their ability to execute on our strategic plan that will drive Key's future growth and success. With three consecutive profitable quarters and continued signs of increased economic activity on the part of our clients, I'm increasingly confident that Key has turned the corner and is positioned well for 2011 and beyond. Now I'll turn the call over to Jeff for a review of our financial results. Jeff?

Thank you, Henry. Slide 4 provides a summary of the company's fourth quarter 2010 results from continuing operations. Unless otherwise noted, our comments today will be with regard to the company's continuing operations. As Henry mentioned in his comments, for the fourth quarter, the company earned a net profit of $0.33 per common share. This was a result of the higher pre-provision net revenue and a credit to the provision for loan losses, as both net charge-offs and non-performing loans continued their trend of improvement into the fourth quarter. The fourth quarter profit compares to a profit of $0.19 per common share for the third quarter of 2010 and a $0.30 loss per common share for the fourth quarter of last year. Also as noted on this slide, the company's book value per share was $9.52 at December 31, 2010, compared to $9.54 at September 30 and $9.04 at December 31, 2009. On Slide 5 are Key's long-term targets for success we introduced in the first quarter of 2010. On the next several slides, I will comment on our progress towards achieving these targets. Turning to Slide 6. One of our objectives is to be a core funded institution with a targeted loan-to-deposit ratio of 90% to 100%. As of December 31, 2010, our loan-to-deposit ratio was within this targeted range at 90%. During the fourth quarter, the company experienced a $1.8 billion decrease in average total loan balances compared to the third quarter of 2010. Of this decline, $500 million was from our identified exit portfolios and $900 million was from our commercial real estate, as we continued to reduce risk in the company. From a period end balance perspective, we did see stability in our core commercial and industrial loans, as well as our leasing portfolio as clients gained more confidence in the strength of the economic recovery. We would also note that a number of our larger clients have used the strength of the capital markets to raise both debt and equity during 2010 and have paid down their bank debt as a result. We have benefited in the form of higher capital markets and investment banking income and loan syndication fees from these capital market activities in our corporate bank, as a result of our capabilities in assisting these clients in their capital needs. On the deposit side of the balance sheet, we continued to experience an improvement in the mix of our average deposit balances during the fourth quarter as compared to both the third quarter and the same period one year ago, as higher costing CDs matured and were repriced at current market rates or moved to other deposit categories or other investment alternatives. During the fourth quarter, we experienced a $2.2 billion increase in the combined average balances of NOW, money market deposit accounts and the bond deposit accounts compared to the third quarter of 2010. And these balances are up $4.3 billion from the same period one year ago. As we have been experiencing for more than a year now, our higher-priced CD book continues to mature, and depositors are choosing to move their money into other investment alternatives, including NOW and money market savings accounts. Average balances of CDs declined $2.3 billion in the fourth quarter compared to the third quarter average balances. And over the past year, average balances of CDs are down $10.4 billion. During the past year, the yield on the CD book has also declined from 3.44% in the fourth quarter of 2009 to 2.69% in the fourth quarter of 2010, benefiting the net interest margin. The decline in the CD book continued to moderate as scheduled maturities are smaller going forward. Turning to Slide 7. Our significant earnings improvement during the past year has certainly been driven by our improving credit quality. During the fourth quarter, we recorded a net credit to our provision for loan losses and also incurred lower cost associated with handling problem credits. As Henry mentioned in his comments, net charge-offs were down again this quarter to $256 million or 2% of average loans. Nonperforming loans were also down again this quarter to $1,068,000,000 or 2.13% of total loans at December 31, 2010, and are less than ½ of what they were one year ago. We continued to reduce nonaccrual loans during the fourth quarter. And as identified on Page 26 of our earnings release today, new inflows of nonaccrual loans declined to their lowest level since the third quarter of 2008. Nonperforming assets also were down this quarter, with both nonperforming loans held for sale and other real estate owned declining. While not shown on this slide, nonperforming assets declined by $463 million or by more than 25% from September 30, 2010, to $1.3 billion or 2.66% of period-end loans, nonperforming loans held for sale and other real estate owned. We continue to believe we have marked our nonperforming loans held for sale and our other real estate to realizable values. During the fourth quarter, we recorded net gains of $2 million from the sale of nonperforming loans held for sale and the sale of other real estate owned and recorded additional markdowns of $9 million on our remaining other real estate owned balances based on updated valuations. As a result of the continued improvement we've experienced in credit quality during the fourth quarter, the reserve for loan losses declined to $1.6 billion or 3.20% of total loans, and our coverage ratios of reserves to nonperforming loans increased to 150% at December 31, 2010. We would also note that the carrying amount of our nonperforming loans, nonperforming loans held for sale and other real estate owned at December 31, 2010, is approximately 62% of their original face values. Given our outlook for the economic recovery to continue, we currently expect further improvement in the level of our net charge-offs and nonperforming loans during 2011. And as a result, we expect our provision for loan losses will remain less than the amount of net charge-offs for the coming year. Turning to Slide 8. For the fourth quarter of 2010, the company's taxable equivalent net interest income was $635 million compared to $647 million for the third quarter. The net interest margin contracted 4 basis points to 3.31% for the fourth quarter compared to the third quarter of 2010. For the fourth quarter, earning asset yields declined 17 basis points from the prior quarter to 4.22%, while the yield on interest-bearing liabilities declined 15 basis points from the prior quarter to 1.31%. The overall level of our return in assets was relatively stable during the fourth quarter compared to the third quarter of 2010. However, the change in the mix of assets continued, with loans declining and securities available for sale and short-term investments increasing during the fourth quarter. We have included on this slide information on scheduled CD maturities and their associated cost at December 31, 2010. Based on current rates we are offering on CDs, we believe we have additional opportunities to improve our cost of funding in 2011, given our current outlook for rates. However, until we see a more significant pickup in lending activities, given our current rate environment, we expect the net interest margin in 2011 to be in the range of 3.20% to 3.30%. Turning to Slide 9. Our other revenue objective is focused on growing noninterest income and maintaining it above 40% of total revenues. For the fourth quarter of 2010, total noninterest income was $526 million and represented approximately 45% of Key's total revenues. Included in the fourth quarter results was a gain of $28 million from the sale of Tuition Management Systems and net gains on the sale of investments of $12 million, which more than offset the $6 million of loss we recorded on principal investing activities. The fourth quarter also reflects the full impact of Regulation E on the company. Compared to the third quarter of 2010, deposit service charges were down an additional $5 million and are down $12 million from the same period one year ago. During the fourth quarter of 2010, we experienced an increase in investment banking and capital markets revenues, primarily related to a reduction in reserves that are for customer derivative activities. As shown on Page 21 of today's earnings release, investment banking and capital markets revenues were up $21 million from the third quarter of 2010 and were up $110 million from the same period one year ago when we recorded losses and reserves on certain real estate investments. Turning to Slide 10. Through the fourth quarter of 2010, we had implemented $228 million of annualized expense savings towards our goal of $300 million to $375 million by the end of next year. For the fourth quarter, our total noninterest expense was $744 million, up from $736 million for the third quarter of 2010. During the fourth quarter, we experienced a $6 million increase in personnel expense due to higher incentive accruals, a $15 million increase in business services and professional fees, resulting from increased variable activity costs and professional fees associated with resolving nonperforming credits, a $6 million increase in other real estate owned expense and an $8 million provision for losses on low income housing tax credit guaranteed funds. These costs were largely offset by a decrease in operating lease expense and an increase in the credit for losses on lending-related commitments due to improving credit quality. Overall, we are positive about the progress we have made on expenses and remain committed to achieving our total goal of $300 million to $375 million of annualized expense savings by the end of 2012. Slide 11 shows our pre-provision net revenue and return on average assets. Pre-provision net revenue increased during the fourth quarter as a result of the gain we realized on the sale of Tuition Management Systems during the quarter. However, even without this $28 million gain, pre-provision net revenue is up significantly over the past year, as we have continued to execute on our client insight-driven relationship strategy and achieved our Keyvolution cost savings initiatives. Further, coupled with improved credit costs, our return on average assets increased to 1.53% for the fourth quarter of 2010. When provision expense normalizes, we expect our return on average assets to be in the range of 1% to 1.25%. And finally, turning to Slide 12. All of our capital ratios continued to improve during the fourth quarter compared to the prior quarter. At December 31, 2010, our tangible common equity to tangible asset ratio was 8.19%, our Tier 1 common ratio was 9.31%, and our Tier 1 risk-based capital ratio was 15.10%. Our regulatory capital ratios showed significant improvement during the quarter, not only from better earnings, but also as a result of lower risk-weighted assets, lower disallowed deferred tax assets and the elimination of intangible assets associated with our previous investment in Tuition Management Systems. As Henry said in his remarks, we submitted our capital plan to the government on January 7. We believe it is a good plan, which demonstrates the strength of the company's capital base, our improved earnings and credit quality. We look forward to the regulatory review of the plan and the eventual repayment of the TARP preferred capital at the appropriate time. Given that the plan is part of a confidential regulatory examination process, we will not be able to comment any further on specifics of the plan at this particular point in time. That concludes our remarks. And now I will return the call to the operator to provide instructions for the Q&A segment of our call. Operator?

[Operator Instructions] Let's begin with Matt O'Connor from Deutsche Bank.

If you could just dig into the securities book and some of the interest rate risk that, that brings? And I can appreciate that loans are coming down, deposit growth is good. So you've got this dilemma of what to do with all the excess cash. But just at what point do you start limiting the securities book or maybe adding more floaters or think about the health of maturity, just talk about just the interest rate risk and the securities book overall and how you think about it going forward.

Matt, this is Jeff Weeden. We do include in our deck today on Page 16 kind of an overview of the investment portfolio. And we've used the investment portfolio really to absorb the excess liquidity that we've had within the company from both loans paying down and the flow of deposits. And I think as we continue to model and go forward with the outlook that rates will eventually go up, we've kept the duration of the overall portfolio relatively short. So the duration, even with the backup in rates at the end of the year, is approximately three years at this particular point in time. I don't expect that we will see a lot of growth in the investment portfolio in 2011. We have some debt maturities that will come up that we'll also use to take down some of the liquidity in the company, and we're optimistic that we will see loan growth coming in the company. And with the cash flows that come off of the investment portfolio, we won't reinvest that cash flow and use that to fund future loan growth.

And I guess to follow up on some of the signs or hope that loan growth will improve from here. The average C&I was down, as you mentioned in your remarks, [indiscernible] was flattish, which I think is a big positive. What's going on there? We can see it from the industry trends, but maybe a little more granularity for you, and then what your outlook is for the C&I bucket.

Yes, Matt, this is Chris Gorman. Within the Corporate Bank, what we're seeing is basically, as you point out, period-to-period pretty flat. But underneath that, the focus in the investment that we put into the businesses is paying off. For example, in Keybanc Capital Market for loan, we brought on 90 new issuer clients that generated around $60 million in fees. So that doesn't show up in the loan book, but these are new clients that will be borrowing. And in addition to that, we're seeing a good pipeline. So we feel pretty good about where the prospects are for the loan book going forward. Now where we're not seeing a pickup yet is on utilization. And that's because we've raised so much capital for our clients. Our clients are frankly making very, very good profits right now. But the flip side of that is we saw a 10% increase in our deposits and the mix of our deposits have changed where that used to be kind of low 20s non-interest-bearing, now it's mid 40s. So while we are gaining these clients and while we're positioning ourselves for loan demand, I think we're in pretty good stead.

Matt, this is Bill Koehler here. In the Community Bank, we saw in the fourth quarter some pockets of strength. Eight out of our 21 districts showed a growth in their commercial segment in loan volume. The pipelines are strengthening, as we look into the first quarter, in both consumer and in certain of our regions within our commercial book. So we see opportunities going forward that would suggest we have an opportunity to use our capital into the year.

And just as an aggregate, Henry or Jeff, I don't know if you have any thoughts on what loans in total might be next year. You saw some run-off obviously, but it sounds like it's more than just pockets of strength. It sounds like it might be a little bit more broad-based, some of the growth. How should we think about loans progressing throughout the year in aggregate?

In aggregate, Matt, we would not expect to see growth beyond until the second half of 2011. We have still the run-off portfolios that we're working our way through here in the first half. We've made a lot of progress last year. We're continuing to make progress. And as the economy continues to strengthen here, we expect that the other organic growth initiatives will overcome a lot of that activity along with the fact that charge-offs are continuing to come down. So charge-offs in the past have also put pressure on the overall size of the portfolio, the growth of the portfolio. And so the charge-offs continuing to come down will also be another item that will be moving away from putting pressure on the book.

We will go to Brian Foran from Nomura.

I guess on the NIM guidance 3.20% to 3.30% versus the target of greater than 350. Is it loan growth that really is needed to get from the ’11 number to the target, or is it loan growth plus higher interest rates?

Brian, this is Jeff Weeden. As we look out, one of the things that we are going to need is going to have to have a little bit of increase in overall interest rates. A lot of our book is variable rate price, and we've been bringing down the cost of our funding throughout 2009 into 2010. And so we still have some room on that particular front, but there haven't been a lot of what I call good investment opportunities. So the investment portfolio has remained relatively short, and lending has been declining here. So we need to see an uptick in loans and also stability increasing overall interest rates would be a tremendous help because deposit pricing on transaction accounts obviously are rock bottom at this particular point in time. And when rates do come up, we will start to get some leverage that comes off of that by repricing our overall book. We're about 3% asset sensitive at the end of the year from an AL perspective to a 200 basis point movement.

And so if we put all your comments together, is it reasonable to expect, I think you said loans shrink a little in the first half and grow a little in the second half, securities book kind of flattens out from here and you run off some funding and then NIM guidance is lower than the long-term targets. So is it reasonable to expect the kind of NII trajectory is down for a couple of quarters and then in the back half of '11, start to get some loan growth and then whenever interest rates go up, you get an extra bump from that, so kind of down for a while and then up for a while in terms of a trajectory of NII?

Brian, that's how the math would work, based on our guidance that we provided.

The 32 bps weighted average cost of new CDs in 4Q. Should we interpret that as people are getting into short duration, three-month type CDs, or is that more the rate you're offering is -- you're intentionally putting the rate low so that someone wants a 1% CD, they don't come to you?

It's a blend. So you have to look at it, the majority of people are basically in the one-year or less type of a category, but it's a blend on out through a year.

Operating lease expense at $28 million this quarter, $40 million last quarter, is $28 million a good run rate going forward or is there anything unusual there?

$28 million is a better run rate than the $40 million. The $40 million had some additional write-offs associated with residual values and some of the operating leases as they came to a conclusion. And we updated appraisals based upon where we view the values.

We will go next to Steven Alexopoulos, JPMorgan. Steven Alexopoulos - JP Morgan Chase & Co: Henry, I won't ask you to comment on the specifics of the TARP proposal because you said you weren't going to comment on that. But I was hoping once you see the results of the cap exam, are you willing to further wait it out if the exit cost is not as shareholder-friendly as you hoped? Or are you now committed to exiting TARP and just optimistic the dilution is going to be more acceptable?

It's hard for me to answer any of that without giving you more than we know. It's all hypothetical. We look at the capital ratios. As I said in my opening comments, our Tier 1 is 9.31%. We look at where others are and think that there's going to be an opportunity to be more shareholder-friendly, less dilutive, but we've really got to wait and see. What I have experienced and what other banks have reported is that there's a process of discussion with our regulators. And I think as most of you know, January 7 was the submission date for those 19 institutions that were part of the SCAP. And the process right now is silent. They're going through the analysis. It's a horizontal analysis and then we'll get into a discussion with the regulators. But there are a lot of factors and we’re going to try and do the right thing. And we'll just have to see how that comes out. Steven Alexopoulos - JP Morgan Chase & Co: Is repaying TARP a personal goal of yours before you turn over the CEO role to Beth?

No. There's no I in this team. My guess is that it will be right around that date, but the date wasn't set after I thought we'd get out and there's no pressure on me to have it paid off. We're going to do the right thing for our shareholders. And in good graces, we've made a lot of progress in this company, and we want to do the right thing with the regulators too. Steven Alexopoulos - JP Morgan Chase & Co: It looks like a lot of the credit improvement and the charge-offs is in the C&I bucket. Do you see that $18 million run rate is a good run rate for net charge-offs for C&I, or is this a one-quarter anomaly?

Steve, this is Chuck Hyle. I would say that some of the historical charge-offs in the C&I sector were what I would call real estate-correlated. And I think as those numbers have come down, we're getting closer to a normal run rate in the C&I side. So I think that's really the way to frame it.

We will go to Ken Usdin from Jefferies. Kenneth Usdin - Jefferies & Company, Inc.: Jeff, I was wondering if you could just [indiscernible] a little bit on pretax pre-provision. You mentioned on Page 11, you show that's 417 this quarter. And for Brian's earlier question, it seems like we start with a negative delta fourth to first in terms of NII. But there's so many different ins and outs on fees and expenses. I guess can you just try to give us a little direction on overall pretax pre-provision from here, in terms of what the right starting point is for next year?

Well without giving specific guidance on each and every item, Ken, I guess what I would say is, if you take $28 million out of the number, you're down into the 390 level for the fourth quarter. And of course, we have pluses and minuses in the other items whether it's the provision for unfunded commitments that was a larger credit this time or we had the additional reserves that we ended up taking on some of the Lytec [ph] guaranteed funds, so a lot of pluses and minuses in that particular level. But it's probably going to be somewhat less than that 390 level, so if you were to think of giving a broad range, it's at $360 million to $385 million, $390 million, something along those particular levels. Kenneth Usdin - Jefferies & Company, Inc.: And then secondly, to your comments about your credit looks great, and obviously you continue to release an incremental amount every quarter. So to your point about you’re continuing to expect that provisions run lower than charge-offs this year, I guess two questions. Do you expect that this magnitude of release continues at the same rate? And then is it also possible that we continue to see negative provisions on a quarterly basis?

Ken, I was asked the question I think at the end of the third quarter call, whether we would see a negative provision. And at that point in time, I did not envision that. But we had significant improvement in the overall level of nonperforming loans in the fourth quarter, and you can see the ending balances on nonperformers are coming down quite nicely. And I think as also related to that, net charge-offs coming down. With coverage ratios improving, it's difficult to say where we will be at any given point in time because it's all facts and circumstances. We're calling the direction, not the absolute level of any of these particular items at this point.

We will go next to Mike Mayo from CLSA.

Just a follow-up on the negative provision, that kind of got me by surprise. I mean no other large banks had a negative provision. And I apologize in advance if I'm being too cynical, but does the effect of the negative provision and the higher earnings perhaps help your TARP status, perhaps helps the stress test, perhaps helps your compensation? Just a little bit more color on why you chose to have a negative provision? Because optically, it looks like you're being a lot more aggressive than some of your peers.

Mike, this is Henry. I would have thought you were familiar with the TARP rules. And obviously because our TARP funds are still outstanding, there is no accrual or performance allowed in TARP compensation. So the answer to that is a categoric No, by the rules. And we wrestle with the right number every quarter based on what happens with our credit quality. And with the scrutiny that we have, the implication that we may be shaving this is a little bit offensive. Because the truth is the charge-offs, the non-accruals came down dramatically. And as has been written, there's this battle between the regulators who have never seen a dollar reserve they didn't like and independent auditors who feel that there is a proper amount. So every quarter, we true-up our reserves to be at the appropriate amount. And that's what we've done this quarter and every other quarter.

So I guess what was the big surprise in your mind in the NPA area that was so much better than what you had expected at the end of the third quarter?

Mike, this is Chuck Hyle. I think that we've made very, very significant progress in our commercial real estate book. We've said for a long time that the really difficult part of that portfolio has been residential, commercial real estate. We took action very early, well over two and a half years ago to manage that portfolio down. We took our lumps early. It was a sector that we felt was going to get worse, and it wasn't going to recover for a very long time. And I think that has been a pretty good prediction. And so we've worked that number down quite dramatically. So that has really helped us I think in more recent quarters. And I think the remainder of our commercial real estate book, which is more standard in terms of multifamily, office, et cetera, et cetera has performed relatively well. And that's all cash flow-based. And as that portfolio has been completed and stabilized, I think that has helped our numbers pretty well as well. If you look at some of our other leading indicators, we've got a slide in, I think it's number 23, in terms of the direction of our criticized assets, they’ve come down quite dramatically over the last three quarters in 13%, 15%, 16% sort of number each quarter and classified to follow the similar trend line. So if you look at all of our credit statistics, they have moved very much in the right direction and to some degree in the fourth quarter accelerated, particularly in December. I think the only slight blip in those numbers is the 90-plus delinquency numbers, which was really a bit of an aberration. We had a couple of transactions, syndicated deals that with the holidays couldn't quite get over the finish line, in terms of renegotiation, so they pitched up on the 90-plus scale, but they're accruing loans and they have cleared in terms of renegotiation in the first couple of weeks of the quarter. So that blip has gone away as well. So all the directional stuff, as Jeff indicated and Henry indicated, is moving very well in the right direction.

On the syndicated deal side, the deal value of your syndicated loans, third to fourth quarter went down by 15%, according to Dealogic, whereas for the industry it went up a whole lot. Is this a deliberate effort not to grow syndicated loans? Did you pull back there? Are you seeing credit quality not as good as you want or what's going on?

Mike, it's Chris Gorman here. Actually what you're looking at is we had an exceptional third quarter and that we had two very, very significant deals that we underwrote and syndicated. By the way, for the year ended up having a record year in syndicated finance, we still think for the areas that we're focused in, there are plenty of quality deals to do. We're seeing a lot of them. And I think the pipeline remains pretty strong.

And when you do -- last quarter, whatever, was it $5 billion or so. How much do you keep on your book, and how much do you parcel out on average? Is it 1%, 5%, 10%?

Mike, it depends on the deal. The two significant transactions that I referenced in the third quarter, we underwrote amounts in the neighborhood of say $300-ish million and ended up holding somewhere between $25 million and $50 million.

Our next question comes from Gerard Cassidy from RBC Capital Markets.

In regards to the loan loss reserves, I know the regulators look at the reserves relative to classified assets, and we the outside investors tend to look at loan reserves to NPAs or loans. Can you guys give us a suggestion on where you think the loan loss reserves to total loans will normalize out after we get through this final mess that the banks got into with this downturn?

Gerard, this is Jeff Weeden. The process that we go through, of course, is really a lot of it is going to be driven by our public disclosures that we have to make and the documentation that we have to generate. So it's very difficult for us to say what percentage that's going to be. I guess if asked differently, do you think that it could drop to where they were before? I think they will drop. It's a question of will they get down to the 1¼%, 1½%, and how quickly will they get to that particular level? If we enter into a time where we have economic expansion, and we have good quality of credit and we have positive credit migration up, in terms of the grades, it will lead to lower levels of reserves because your probability of default and your loss-given default will end up getting impacted by that. So it's a pretty elaborate process. I think that reserve levels are on their way down. But I cannot give you the exact level at which they will decline to.

This is Chuck. I would just add, emphasize a point that Jeff made. That this is a mathematical process in many ways. We grade our rate exposure, credit migration which is clearly improving. It clearly has an impact but it becomes, I wouldn't call it a mechanical issue completely, but it is largely driven by the numbers. And it can be fairly formulaic. And that's why there’s nothing else we can say about the process.

I think Henry touched on it in an answer a moment ago. We all remember prior to this downturn that the accountants, the SEC were pressuring the banks to lower the reserves because the charge-offs didn't justify the reserve levels. And it seemed like the bank regulators were somewhat silent at the time. Do you guys, when we get beyond this and we get into that discussion again, do you think the regulators may carry more weight and insist on to Jeff’s point that we don't bring reserves down to 1.25% or 1.50%. Maybe they stabilize at 1.75% to loans. Do you guys have any thoughts on where that discussion may go between the regulators and the SEC?

Yes, this is Henry. One of the things that, and Chuck mentioned it, but we have and the industry has become much more analytical. You'll remember or you might remember the idiosyncratic part of the reserve. All of that was sort of the fudge factor. What we're doing now is really looking and developing a history of a much more arithmetic approach to the reserve. So that as credit quality starts to get worse, that math, in terms of everyone's reserve, will push for a higher number. That's what's happening in reverse right now. Again, as Chuck indicated is that the math, the algorithm is saying that the reserve levels are adequate or more than adequate, which is why we might have been the only one to take away, but a lot of companies' provision was less than their charge-offs, again showing that trend. But it's much more analytical this time around than it was before. We were all doing the best job that we could, but we didn't have all the math that we now have.

Gerard, one last comment. I think to give everybody some comfort, I think capital levels will be much higher in the future. I think we've already seen that. So capital levels today are significantly above what they were three years ago. And I think as we go through this, I think the way the rules are being drafted under Basel III, there will be additional countercyclical type buffers that are built into it. So that may be a different way to look at this, with the loan loss reserves, as well as our Tier 1 common, I think a number of the ratios that people will look at will be nonperforming assets to Tier 1 common, plus your loan loss reserves and see how that percentage also plays out.

Jeff, you talked about the loans coming down in the fourth quarter. I think you mentioned that some of the run-off portfolio declined by about $500 million and commercial real estate fell by $900 million. Were those customers refinanced out by the capital markets or other banks? How did you get rid of them?

Well the exit portfolios are simply a lot of just paying down and continuing to run down. So there's a significant portion of that portfolio is going to be on the Consumer segment at this particular point in time. The other parts of it that are in the Commercial segment, I think there are about $60 million of the exit portfolio that declined was in the Commercial side of the equation. A lot of those were refinanced that was in the Marine and RV floorplan loans. So those were refinanced elsewhere.

Finally, I noticed that the asset management revenue was slightly down, and your assets under management were down sequentially and year-over-year. And that contrasts to Bank of New York or Northern Trust who have had up numbers. Can you guys give us some color on what's going on in the Asset Management business? What's the outlook for it?

Sure. This is Chris Gorman speaking. A couple of things going on. One, we got out of one of the products we were in, our product, which is basically a fixed income product. So that impacted the revenues from an assets under management, we finished the year at about $41 billion. And again our main focus, as you know, is mid-cap value for our victory funds. And we continue to focus and build out that strategy.

This is Beth. I would just add. In Core Trust and Key private bank clients, you see linked quarter increases, and we ended the year with our strongest year ever in new business volumes and in this investment management and trust. And so you're starting to see not only the effect of an improving market but a growing client base with more assets under management in the Community Bank.

[Operator Instructions] We will go next to Betsy Graseck from Morgan Stanley.

Question on the reserve. I know we've spent a lot of time talking about this already. And I think the challenge that we have is that we'd like to have an insight into how you're thinking about it so that we can forecast more effectively. [Indiscernible] And since you've got a lot of excess reserves in a normalized credit environment, so what's the piece and trajectory of that coming down overtime? Is it more a function of NPL shrinkage? Delinquency shrinkage? Is it more a function of what the historical trends have been, or is it the margin changing to your outlook? I know in the release you cited reserves to NPLs of -- was an important measure. If you could just kind of think about your interim in the context of we have to forecast this going forward, and how would you guide us to doing that?

Betsy, this is Jeff Weeden. As we think about the reserve, and we have the migration of credit, and we're talking about those credits that would be either nonperforming or in that criticized level. Those particular credits obviously have a higher probability of default, and then we look at the individual loss given default. So as we see that migrate on up, so we see those decreasing levels of criticized assets, that means there's just less that is reservable on those specific credits. And then we really have to look at each of the individual areas and have a view on it also as to where we see those particular outlooks for credits. Now consumer credit's a little bit different, but we don't have a lot of exposure on the consumer credit side. Most of our consumer credit, a lot of it's in exit or run-off, with the exception of our branch-based home equity book. So from our perspective, we look at positive migration of commercial credit is really driving a major portion of the overall reserve. And that's why we still think we're going to see improvement in that credit quality. The direction of it. The pipeline of identified credit's on the watch list, et cetera, continuing to come down, which should lead to lower levels of the reserve and provision expense being less than charge-offs, along with the fact that we just have fewer nonperforming credits. So the charge-off potential has been reduced and we've taken already losses against a number of those nonperforming credits.

Are you going to be moving any of your specific reserves into general reserve, or are they all going to be moved out of the reserve?

We allocate everything to individual lines of business as well as individual asset types.

There's no general reserve?

There's no "general reserve". We have reserves that we set against individual portfolios. Those particular reserves against portfolios change based upon the overall direction that we see of those particular books.

Is there any indication that you might move up that portion? I'm hearing that from some other institutions.

Betsy, this is Chuck Hyle. I think we're constantly looking at all aspects of the reserve. As I said earlier, it is fairly mathematical. But we do a lot of forward projection work on all of our portfolios. We do it at least quarterly. We also do a stress test, regardless of the most recent government one. We do it quarterly anyway, so we're constantly trying to evaluate not just historical data, and we do update our probabilities of default. We look at them at least quarterly and update them at least annually. So we take a pretty hard look at both historical information, and for better, for worse, we have a lot more data points to look at over the last three years. So that has, I think, helped our modeling to a certain extent. We also very much look to the future in terms of where we think the economy is going and how it's going to impact each of our sub-portfolios. And that really helps in our judgement on this whole allowance issue. On the consumer side, Jeff alluded to it, we look at four quarters forward and add one standard deviation. So it is a very mathematically-oriented business on the consumer side and it's been pretty stable. We’ve had a very stable portfolio on the home equity side.

And the improvement in the criticized assets has been accelerating positively, is that right?

Yes, very much so. Again the slide on 23 gives you a good sense for it. And the acceleration, we saw it on acceleration of it really in the fourth quarter, particularly in December.

And we'll go next to Matt Burnell from Wells Fargo.

Question for Chuck on OREO sales and nonperforming loans sales, those were up fairly dramatically quarter-over-quarter and above recent run rate. Just wondering if you could give us a little color on the market or OREO sales if you did any, and if you see a better environment for potential bulk sales in early 2011.

Matt, I would say that from the spring of 2010 through the fourth quarter, we saw every quarter getting better in terms of general liquidity, and commercial real estate in particular. But as we said and commented earlier, it's very much a bifurcated market and continues to be so. For stabilized assets, particularly multifamily, we're seeing for Class A good location properties. We've seen very good activity both in note sales, as well as in terms of sale of the asset itself. And that has continued. Cap rates have come down. Investors have adjusted their expectations. But I think the other side of the market is really getting back to the comment I made earlier on residential commercial real estate where prices are hard-to-find, and we think values have continued to go sideways to down. So what's good is getting better. What's not so good is not getting better. And we've been very happy through the fourth quarter. I think that I can't really comment too much on bulk sales. It's not something we've been looking into. We did ours two and a half years ago, which we've very happy about. We’d hate to try to replicate that trade today in the residential side. So I think, I won't be able to help you too much on that particular part of the market.

For Henry and Beth, in terms of the Consumer business. Jeff made a comment earlier that you don't have a lot in the Consumer portfolio, relative to many of your peers. I'm just wondering, as you have better data on Consumer performance, is this an area that you might focus on, in terms of portfolio growth in 2011 and '12, or is the unemployment and economic backdrop just too uncertain to do this?

Matt, this is Beth Mooney, and that is a good question because as we have watched new business volumes across all our segments through 2010, we saw a very strong uptick in the end of this fourth quarter in our middle-market new business volumes, our business banking and small new business volumes and we continue to see still very modest consumer demand. And we think it is a function of three factors right now. One, depressed home values since our primary source of credit for Consumer still is related to home equity. And we see continuing pressure on home values. We see continuing pressure from unemployment. So as you go through the cycle, we have had relatively modest new business volumes in our home equity books compared to anything that was historic. And as you've seen, we've had a trajectory of run-off, albeit not very steep decline because our book was branch-based clients, heavily canted towards first lien, good, strong, FICO, home values and [indiscernible]. So we continue to emphasize that appropriately to our client base and use it as a new client acquisition in our new branches. But the demand is still relatively tepid, and I think that is going to be a lagging piece of our economy for demand in Consumer segment to come back.

So no real plan to branch into additional consumer-lending opportunities, auto lending, a lot of the stuff that arguably you got out of two to three years ago?

We are emphasizing the more robust relationship products such as loans, deposits, investment management products. Our opportunities there we think outweigh those incremental lending opportunities. We partly plan to stay well within our sweet spot of consumer home equity, small business, business banking and middle market.

And we'll go next to Jeff Davis from Guggenheim Partners.

[indiscernible] was out this morning and looks like we were down a little bit again. Could you just comment on housing prices within your various footprints? What you see? And if it's negative, does it matter that much for your outlook, given your more commercial focus?

Jeff, this is Bill Koehler. The housing prices, as a general matter, have stayed relatively soft in some of our markets. We do see continued declines, but the prices are not declining as fast as they did maybe a year, 18 months ago. And depending on the market, depending on the situation, appraisal values would support that. So we stay focused as Beth said on the relationship or any aspects of that business and are trying to stay within our risk parameters to make sure we grow it in the proper way.

And Jeff, this is Beth. I would add that if you look at our portfolio statistics, that is still largely a 75% loan-to-value book, and net debt is reflecting current valuation. It is north of 50% first lien, and average FICO scores are 740. So we feel like that book and asset has performed through the cycle. I think among peer medians, it's been the highest performing home equity book for charge-offs. When we see an incidence of loss, we see it largely driven by the event of unemployment.

But just not to put words in your mouth, but in terms of outlook for housing though, you don't necessarily subscribe to the thought there's another material leg down, at least within your footprints?

We're not forecasting a material leg down within our footprints. We still think there's still some pressure out there because there's still a backlog of foreclosed property, an overhang in the marketplace and also unemployment is still relatively high. So we think there's certainly pressure on prices in the downward direction, but it's more stable to slightly down. We're not forecasting double digits.

This is Chuck Hyle. I would say that it's more focused on the West where there's a little bit more pressure, less so in the East and in the Midwest.

We'll go next to David Konrad from KBW. David Konrad - Keefe, Bruyette, & Woods, Inc.: Just a follow-up question on the fee income. Investment banking and capital markets did really well again this quarter. But compared to the last quarter, it seems to be under the dealer trading derivatives line item. So just wondering if there's a CBA adjustment there, or if that's a good run rate for that line item.

As we said in the press release, there is an adjustment that took place with respect to the customer derivative reserves, just like there's been negative adjustments in prior quarters. We've had positive migration of credit in the past couple of quarters. And so, it's reversed itself on through. David Konrad - Keefe, Bruyette, & Woods, Inc.: And how much was that positive adjustment?

The positive adjustment is around $20 million for the fourth quarter. But it all set about a similar amount in the first quarter of this year. So for the year, it's going to be basically a non-event. It's the timing of it. David Konrad - Keefe, Bruyette, & Woods, Inc.: And then on other income, that seemed to kind of jump quarters, is there anything special on that, that we should know?

There's the $28 million gain associated with the sale of Tuition Management Systems that happened in the fourth quarter.

This is all the time we have for questions. At this time, I would like to turn the call back over to Mr. Meyer for any closing comments.

Thank you, operator. Again, we thank you for taking time from your schedule to participate in today's call. If you have any follow-up questions, you can direct them to our Investor Relations team, Vernon Patterson and Chris Sikora at 216-689-4221. Thank you all, and that concludes our remarks.

That does conclude today's conference. We thank you for your participation. You may now disconnect.