Good morning, and welcome to KeyCorp's 2010 Second Quarter Earnings Results Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to KeyCorp's Second Quarter 2010 Earnings Conference Call. Joining me for today's presentation is our CFO, Jeff Weeden; and available for the Q&A portion of our call are our leaders of Community Banking and National Banking, Beth Mooney and Chris Gorman; our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda. If you turn to Slide 2, this 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. Now if you turn to Slide 3. This morning we announced second quarter net income from continuing operations of $56 million or $0.06 per common share. The improvement over the prior quarter was due to a lower provision for loan losses, higher fee income and well-controlled expenses. Overall, the results are encouraging and the return to profitability represents an important step forward for our company. Despite the challenges that our industry faces in terms of the pace of the recovery, and other environmental factors such as regulatory reform, I am confident that we are taking the necessary actions to position the company for better long-term performance. I was especially pleased by the continued improvement in credit quality, which was the major contributor to our improved financial results for the second quarter. Credit quality improved across the majority of loan portfolios in Community Banking and National Banking, which contributed to the positive net income reported for both groups. Net charge-offs declined by $87 million, and nonperforming loans decreased by $362 million from the previous quarter. This was the third consecutive quarterly decline in nonperforming loans. Delinquency trends and the inflow of new nonperforming loans were also favorable. Although net charge-offs will likely to remain elevated for the remainder of 2010, we expect to…

Thank you, Henry. Slide 4 provides a summary of the company's second quarter 2010 results from Continuing Operations. Unless otherwise noted, our comments today will be with regard to our Continuing Operations. As Henry mentioned in his comments, for the second quarter the company earned a net profit of $0.06 per common share. This was a result of lower provision for loan losses as both net charge-offs and nonperforming loans decreased from the first quarter levels. In addition, the company showed improved pre-provision net revenue as a result of higher noninterest revenue and well-controlled expenses. The second quarter profit compares to a net loss of $0.68 per share for the same period one year ago and an $0.11 loss per common share for the first quarter of this year. While not noted on this slide, the company's book value and tangible book value increased during the second quarter to $9.19 and $8.10 per share, respectively. Turning to Slide 5. For the second quarter of 2010, the company's taxable equivalent net interest income was $623 million compared to $632 million for the first quarter of 2010 and $591 million for the same period one year ago. The net interest margin contracted two basis points to 3.17% for the second quarter compared to the first quarter of 2010. However, it is up 40 basis points from the same period one year ago. The benefit from repricing maturing CDs was more heavily weighted to the last half of the second quarter and will provide us with some improvement to the net interest margin in the third quarter of this year. In addition, during the third quarter, we have approximately $2.8 billion in CDs maturing at an average cost of 4.51%, which were originated prior to 2009. On the other side of the balance…

[Operator Instructions] And we'll go first to Brian Foran at Goldman Sachs.

I guess I have a couple of questions all related to the same things, so I'll throw them out at once and tell me which is most important. As we think about net interest income, is there enough liability in CD repricing specifically left to get you eventually to your $350 million target? And if not, which is more important? Is it rising rates, or is it loan growth, or it a little bit of both to get there? And then on the other side of the balance sheet, how should we think about what a normal level of securities portfolio is? And assuming the current level is elevated, is it a stop gap until rates go up, or is it stop gap until loan growth reemerges? Or is it ultimately going to be replaced by acquisitions? Just how are you thinking about potentially exiting that trade over time?

Brian, this is Jeff Weeden. With respect to the margin, we still have some additional runway that will help us here into the third quarter, obviously, because of the repricing that happened in the second quarter of the CD book. Most of that benefit doesn't hit until the third quarter. And of the $2.8 billion that I mentioned, that's repricing in the third quarter, the majority of that benefit, of course, will not hit until the fourth quarter of this year. So while not giving specifics on the question with respect to the 350 margin, we will see improvement. And we expect to see improvement here in the third quarter and again in the fourth quarter. But of course, to get much expansion beyond and on up significantly, it will require an additional change in the overall rate environment. Currently, with the company's position, we're approximately 4% asset-sensitive. So as we look out into the future, we're positioned for higher rates but not in the foreseeable, what I call the foreseeable future. As a result, we added to the Investment portfolio in the second quarter. You can see the average balance for the quarter was about $17.3 billion, and the ending balance for the quarter was closer to $19.8 billion on the Investment portfolio. We are keeping the Investment portfolio relatively short in buying securities basically in the two and a half year duration. And we stay also for quality. Fannie, Freddie and Ginnie, CMO packs are sequentials. So I think before we're going to see expansion in the margin above that 350 range, we are going to have to see some loan demand coming back into play. We are working very hard in the field to garner that business at this particular point in time. And I'm sure that Beth and Chris will comment on that later. The Investment portfolio though is something that is there to serve as a reservoir, if you will, for when the loan demand does come back. So it's very difficult for me to tell you the exact level of the Investment portfolio. But we will maintain higher levels in the Investment portfolio than we historically have in the past just because the environment has in fact changed.

And maybe one follow-up on debit interchange. I know it's too early to tell, but what offsets are available to banks in terms of thinking about changing the way that product works, and how easy and realistic is it to implement? Or has the U.S. banking consumer just become so used to free checking and free debit that it might be hard to bring back things, these different fee-type things?

Brian, this is Beth. And obviously, the industry is in the process of reviewing what clients value, what constitutes profitable account activity, and using analytics and insights to make sure that as we think about how we potentially reposition products, introduce new products or try and enhance certain kinds of activities and behaviors that are desirable to our client base and services that they want. We are obviously in the process of doing that. And I believe that the industry, and I know we are actively researching those various elements to look at potentially launching as we did this week, the -- announced the new Key coverage account. We're also looking at substitutes to free checking, but again, based on a value proposition that clients would want and need. And then how do we take certain programs and expand our client services so that we can garner deeper and fuller relationships through usage of certain kinds of services. So I think it will be something that will evolve over time. And I'm sure all of us are looking at what's the right value for the client proposition that also helps us maximize our revenue potential.

And we'll go next to Craig Siegenthaler with Credit Suisse. Craig Siegenthaler - Crédit Suisse AG: Just a question on loan growth. If you look at your commercial bucket of loan growth, the deterioration there is actually pretty high, and it's almost just sequentially as high as your Exit portfolio, which actually is positively surprising us in terms of how slow it's running off. Can you just talk about maybe what you're seeing in terms of new loan demand in the commercial bucket? And also, how should we expect or how long should we expect for this Exit portfolio to run off here?

Yes, Craig. This is Chris Gorman. What we're seeing from a utilization perspective in the C&I bucket, it's basically flat vis-a-vis the first quarter. It's down very slightly from the first quarter of 2008 before the financial crisis, and down actually rather significantly from the peak of the financial crisis in the fourth quarter of 2008. We don't see anything in the near term that's going cause those utilization rates to go up. If you think about it, there's not a lot of upward pressure on commodities which forces people to pre-buy. Additionally, people are able to garner whatever they need to keep their operations running on relatively short notice. So we're projecting that the utilization rates are going to remain relatively flat as they were from the first quarter to the second. Craig Siegenthaler - Crédit Suisse AG: And then on the run-off on the Exit portfolio, just trying to be really slow here. Just talk about maybe how slowly that should kind of fall off here.

Craig, this Jeff Weeden. We've talked about the fact that the portfolio will probably go down about $500 million a quarter. It was actually $600 million in the second quarter. We've got various buckets here. There's two buckets that are a longer duration. Within the commercial lease finance, there's about $2.4 billion. There's $1.1 billion of that are the LILO/SILOs, and those will go out for 10 years. So that's a very slow piece of that. And the other part of the equation that's a little bit slower is also the Marine. Now Marine typically picks up in the second quarter and the third quarter each year with the improvement in the weather and people get out boating, et cetera, but that's also a much longer-duration portfolio. So the other books continue, I think, to pay down. The Residential Properties was down $90 million approximately in the second quarter. And so that's really where we're going to see pay downs are going to continue probably at about a $500 million a quarter plus or minus a little bit. And so this -- until we get down to those last two big portfolios that are there. Craig Siegenthaler - Crédit Suisse AG: And then given those trends versus what you're seeing on the deposit side, do you think we could really reach 80% loan to deposits, kind of well below your range, over the next year? I know that's not where you want to be, but just given the macro environment?

It's always possible because we're seeing high levels of deposits and liquidity. And I think one of the things, too, that -- as Chris was kind of talking about, the availability of people being able to buy and get whatever resources they need, they're able to do that with a lot of their cash. I think in terms of what was announced by our report, I think that came out from the Fed a week ago, the amount of cash that businesses have right now is extremely high. And we see that in our deposit accounts. Whether we get to an 80% loan-to-deposit ratio or not, I can't predict that at this particular point in time. I think what we are doing is continuing to reprice our deposits and basically our inventory, and continue to be on the outlook for signs of an uptick in loan demand here in the future.

And we'll go next to Paul Miller with FBR Capital Markets.

This is actually Jessica Halenda in for Paul. I was just wondering if you could just give us a little bit of color on your OREO book. It looks like zone fills were up slightly, but we're still seeing some valuation adjustments on that portfolio. So I was just wondering if you could talk a little bit about pricing, what prices of portfolio you are having to further adjust downward, and just where the overall book is marked to today.

Well, this is Jeff Weeden. Chuck Hyle will comment on the OREO book in just a minute. But I can tell you that there's a slide in the earnings release, and I believe it is on Page 25 of the press release, it provides the activities that go through ORE during the course of the quarter. So we did have some marks that we took in the quarter, valuation adjustments of approximately $24 million. But we were also able to sell some of the property during the quarter that we realized an overall gain on some of the properties that sold. So we think we have a mark fairly close to value. Some properties we're selling at a profit. Some of the others we're continuing to mark until we can clear the market and keep those properties moved. We have a tendency to try to move as much ORE during the course of the time period that we can. And a lot more of it, of course, that's coming in now is less of the residential side and is more on the income side of the equation. But I think that's a good summary that's provided on Page 25. And in my comments, I commented about, in total, all of our other nonperforming assets, whether it's ORE or other nonperforming loans or loans held for sale that are in nonperforming category, are carried at approximately 56% of their original face values.

This is Chuck Hyle. Jeff gave a great summary there. I would just want to emphasize the fact that in the Held-For-Sale book, which we've seen, I think, better values, and we've been -- with the liquidity improving a bit in the second quarter, we've been able to realize a few gains at a Held-For-Sale portfolio. The marks on the OREO side, as Jeff indicated, is primarily on the residential side and a few other assets that have been in for a long time when it was slightly higher loss content. But I think the general color I would put on it is we felt better during the course of the quarter on both the OREO book and the held-for-sale book.

[Operator Instructions] We'll go next to Terry McEvoy with Oppenheimer. Terence McEvoy - Oppenheimer & Co. Inc.: I was just wondering if there was any I'll call it bright spots across your franchise where you're seeing some decent lending opportunities. And then looking ahead when there's more confidence in the economic recovery, is it safe to say maybe the Rocky Mountain region and the Pacific Northwest would be the first areas where KeyCorp would start to show some loan growth?

Yes, Terry. This is Chris. A few places where we're starting to see activity. One is in our Leasing business, which we think is an early-cycle business, Both in the bank channel, which works very closely with the Community Bank, we've seen upward trends there, and also in our Vendor business. Our Vendor business, as you might know, is focused on technology equipment. And we've seen a lot of lift there. So from an asset perspective, we've seen it in those areas. Also, on the transaction side. We've been fortunate enough to be involved in several transactions and are involved in several acquisition financings. And we've seen an uptick there. So those are a couple of areas where we've seen a bright spot.

And Terry, this is Beth Mooney. I'll give you a little color as well and would say that while new business volume obviously hasn't got to the point where it exceeds run-off, we have seen some general increases in our loan pipelines over the last couple quarters and have had actually months where we see fairly robust activity and then the next month will lag back. So it's an indicator to me that loan demand is still relatively soft. It can be more episodic than trending at this point. As you can see, companies still continue to delever and have a fair amount of liquidity. But with that said, if I look at it regionally, the Pacific Northwest and the Rocky Mountains, to your question about where in the cycle and demand, actually went into the slowdown of the latest of the markets. And we actually see them coming out the slowest at this point. And then our Northeastern Great Lake regions, we see some general growth in the economies as manufacturing starts to expand. And so we see actually some regional differences with the Pacific Northwest and the Rockies lagging at this time. Terence McEvoy - Oppenheimer & Co. Inc.: And then I just want to get some clarity on your credit outlook. Charge-offs remaining elevated in the next couple of quarters, I'm reading into that levels being somewhat consistent with the second quarter. And then in terms of the reserve release we saw in the second quarter, is it safe to assume based on what we know today that, that would continue and it would be to the same degree that the spend potentially reported in Q2?

Terry, this is Jeff Weeden. The level of -- we made the comment. We actually expect net charge-offs and nonperformers to continue to trend down. When we say they remain elevated, they remain elevated from a historical perspective, but we are seeing improvement. Credit improved overall and the trends in credit, we believe, are going to continue to show improvement, even though we put in a caveat in there unless there's a substantial reduction or turnaround in the overall economic activities. So we do expect it'll improve. We do expect that charge-offs will exceed provision levels for the balance of this year, also.

We'll go next to Gerard Cassidy with RBC Capital Markets.

Jeff, when you talked about the investment portfolio, I think you said that you're putting on securities with a duration of about two and a half years. What kind of yield are you guys seeing or getting for that type of investment?

Gerard, we put the investment securities on going back to the May and then more in June time period. And so, when we were putting on securities at that time, basically they're going to average about 2.8% to 2.9%, somewhere in that particular range for the quarter.

And are you continuing with that program? In the second half of this year, do you expect to purchase as many securities as you've done so far in the first half, or will it slow down or accelerate?

Well, it's going to be dependent upon cash flow. So to the extent we have loans that continue to pay down and we have good deposit flows, we're going to make investment decisions on that cash. So we're much better off to have it invested in high-quality securities, particularly with the outlook that rates will remain low here for an extended time period.

Gerard, this is Henry. We also went into the earlier part of this year with a much larger liquidity cushion in terms of Fed funds sold or Fed funds at the Federal Reserve. We've reduced that to a level now that we think continues to put us in a solid position, but a much smaller cushion. And we sopped up, if that's the right term, that excess liquidity. Instead of earning 25 basis points, we've gone into these shorter maturity investments. So we won't have that pick-up again in terms of the Investment portfolio. It will then fall back to, as Jeff said, the liquidity that we get through the deposit side or loss on the asset side and loans.

You guys have had some success with managing your operating expenses. When we look at your balance sheet, and if we for the moment take the securities out of the balance sheet, your balance sheet last year without the securities, which totaled $12 billion, probably came in around $86 billion. If I take out the $20 billion from securities this year, the balance sheet drops to about $74 billion. When we look at T&C's numbers today, U.S. Bancorp yesterday, T&C's efficiency ratio today came in at 51%. You have U.S. Bancorp in the high 40s. Yours hovers around 70%. Do you guys need to do another -- I know Keyvolution is underway, and its toward the end of it. Is there another expense savings program that you might have to undertake if this loan growth continues -- if the loans continue to diminish and you're just using securities to hold your over?

Gerard, this is Jeff Weeden. I think in terms of our Keyvolution initiatives are ongoing, and we still have a number of things that are taking place there. Part of our objective is to become more variable in nature in some of our costs, so we adjust faster to the changes in the underlying loan demand and the changes in the market conditions as a whole. We are still focused on expenses. And we have to remain focused on expenses. And I think you pointed out our efficiency ratio is high. What we have to do is also grow the revenue side of the equation. We need to see some additional margin expansion. We have to continue to go out and attack the market also for noninterest revenue. On the expense side, I think if we have loans remaining very soft and trending down, we're going to have to look at what are the measures that we can do on the expenses. But it's not something -- it's all part and parcel to our Keyvolution initiatives that are taking place. So it's not like "a new program" that would be introduced.

I would also say, this is Henry, that we're at about $200 million in run rate saves for Keyvolution, on our way to $300 million to $375 million. So past the 50% range, but still with significant opportunity ahead of us. We've identified those. This isn't a wish list. It's a matter of getting in the position to realize those savings. So there's a lot of opportunity ahead of us. And as we've said earlier, it really isn't until early 2012 that we're targeted to get that full 300-plus million dollar run rate from Keyvolution. So it isn't like we've stalled. We're still on track, and we've got a good runway in terms of identified and yet-to-be-implemented efficiencies. We're not shooting for a high-40, low-50. Our business mix has some businesses that are just inherently less efficient in terms of how the costs flow through our P&L.

And I know in this environment it's very easy for everybody to harp on the lack of loan growth, and none of us can see when it's going to come back. But maybe, Henry, in talking to your customers, and with your experience of past cycles, does this one seem different? Is the United States actually going through a delevering, whether it's the consumer or the commercial borrower, that we could see for the industry, not just KeyCorp, but for the industry that loan demand is indefinitely impaired because there is this change that we need to delever?

Well, I'm with you 100% except for indefinitely impaired. My crystal ball isn't that good. But I have been involved with Beth in some meetings with our clients, a whole series of meetings. And while they're optimistic, and really recently we saw more optimism about their profitability, but when asked the question, "Are you going to add employees," there was no pause. The answer was "No." They're using some temps. But they're really going to wait until there isn't the uncertainty in the economy. And when we ask them about borrowing in terms of property, plant equipment and expansion, the answer was, "We have a lot of capacity. We're more productive than we have ever been, and we're going to continue to use that leverage as opposed to adding more debt." So I think it's going to take a lot more confidence, which we'll be able to see through various metrics, before companies and individuals are going to borrow the way they did as we built into the -- as we built up to the financial crisis. So I think it is going to be longer, Gerard. I don't know whether it's permanent. But I think some companies clearly are thinking differently about their liquidity and about their leverage.

And just one final question on credit. Maybe Chuck can answer this. Your criticized loans or your watch list, did you guys see a similar decline in those levels like you did in your nonperforming assets in the quarter?

Gerard, we did. And the trends there have been, I think, extremely good. And I think the other positive I would mention is that it accelerated actually during the quarter. So June was a very good month in that respect. And it's really a combination of some improvement in migration, not just the inflows, but some upward migration, but also the paydowns. So we're seeing pay downs in criticized classified assets as well. So the trends, all of our credit metrics virtually across the board, were positive and improving during the second quarter.

[Operator Instructions] And Mr. Meyer, at this time there are no further questions. I'll turn the conference back over to you.

Thank you, operator. Again, we thank you for taking the time from your schedule to participate in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team, Vernon Patterson or Chris Sikora, at (216) 689-4221. That concludes our remarks. And thank you again for participating.

And again, that does conclude today's conference. Thank you for your participation.