Beth Mooney - Chairman & Chief Executive Officer Don Kimball - Chief Financial Officer Chris Gorman – President, Corporate Bank EJ Burke - Co-President, Community Bank Dennis Devine - Co-President, Community Bank Bill Hartmann - Chief Risk Officer.

Steven Alexopoulos - J.P.

Morgan Scott Siefers - Sandler O'Neill & Partners Erika Najarian - Bank of America Ken Zerbe - Morgan Stanley Josh Cohen - Jefferies & Company Bob Ramsey - FBR Capital Markets Bill Carcache - Nomura Terry McEvoy - Sterne Agee John Hearn - RBC Capital Markets Geoffrey Elliott - Autonomous Research Sameer Gokhale - Janney Capital Markets.

Good morning and welcome to the KeyCorp's, third quarter 2014 earnings conference call. This call is being recorded. At this time I’d like to turn the conference over to Beth Mooney, Chairman and CEO. Please go ahead ma'am. .

Thank you operator. Good morning and welcome to KeyCorp's, third quarter 2014 earnings conference call.

Joining me for today's presentation is Don Kimball, our Chief Financial Officer, and available for the Q&A portion of the call is Chris Gorman, President of our Corporate Bank; EJ Burke and Dennis Devine, Co-Presidents of our Community Bank; and Bill Hartmann, our Chief Risk Officer.

Slide two is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call. Turning to slide three. Key’s third quarter reflects solid trends in our core businesses, good credit quality, and disciplined capital management.

However, overall results did not meet our expectations. We will provide more color and context around our results, as well our expectations for improvement in the fourth quarter.

In both the Community and Corporate Bank, revenue increased relative to previous quarter; however, the improvement was more than offset by lower gains from principal investing and leverage lease terminations. Average loans increased 5% from the year ago period, driven by a 11% increase in commercial, financial, and agricultural loans.

Linked quarter average balances showed a modest increase. Our commercial loan growth was negatively impacted by seasonality, capital markets activity, and the exit of non- strategic assets. Period end loan numbers were up 1% reflecting growth late in the quarter, and that momentum has continued into early October.

We continue to make progress on our client focused strategy, including growth in retail clients and increasing sales productivity across our franchise.

Late in the third quarter, we also closed the acquisition of Pacific Crest Securities, adding an important new industry vertical and underscoring our commitment to being the leading corporate and investment bank serving middle market clients. There was a fair amount of activity in the expense line this quarter.

A pension settlement charge and our Pacific Crest acquisition added $26 million. Absent those items, core expenses were well controlled and were down from the prior year and previous quarter, as well as below our guidance range. Additionally, we incurred $15 million in charges related to our efficiency initiatives in the quarter.

Our reported efficiency ratio was 69.5% for the quarter, and we do not find this acceptable. The ratio excluding pension and efficiency charges was 66%, which was above our previous run rate and was largely a result of lower revenues in a few categories.

It is important to note that we expect this number to come down next quarter and to continue to make progress on our efficiency goals. Don will discuss more about our path forward in his remarks. Our strong risk management practices resulted in another quarter of good quality trends.

Net charge-offs to average loans were 22 basis points, well below our targeted range. Non-performing assets declined 28% from the year ago period and our non-performing asset ratio is down to 74 basis points.

Our level of new loan originations was consistent in the quarter with the prior quarter and our new business has a better overall risk rating than our existing portfolio, and while the environment remains competitive, we are remaining disciplined with structure and staying true to our relationship strategy.

In terms of capital management, we continued to execute on our capital plans by repurchasing $119 million in common shares in the quarter and we also closed our Pacific Crest acquisition in under 60 days from the time of announcement, and remain on schedule with our integration plans.

As I look at our results, I’m encouraged by many of the trends in our core revenue and expense; however, the quarter overall did not reflect the earnings potential of our company and fell short of our expectations.

Don will spend some time discussing the details of our third quarter results and more importantly, our outlook for improved performance in the fourth quarter. Additionally, we remain on a path to achieve our full year guidance. With that, let me turn it over to Don. .

Thanks Beth. I’m on slide five. This morning we reported net income from continuing operations of $0.23 per common share for the third quarter compared to $0.25 for the year ago quarter and $0.27 for the second quarter. This quarter, we incurred $35 million or $0.03 per share of costs associated with our efficiency initiatives and pension settlement.

The pension settlement charge was $20 million and was triggered by lump sum distributions, which were related to the reduction of approximately 1000 FTE as a result of our efficiency initiatives.

Similar to last year, we would anticipate having additional settlement charges in the fourth quarter, which are expected to be in the range of $5 million to $10 million.

On the revenue side, we also had some developments late in the quarter that impacted our results, the most significant being several investment banking transactions that were delayed into the fourth quarter.

We also saw lower than expected principal investing gains, as well as a $7 million reduction to revenue that was related to the visa litigation settlement. I’ll cover many of these items on the slide throughout my presentation, so I’ll now turn to slide six.

Average total loan growth continued in the third quarter with balances up $2.5 billion or 5% compared to the year ago quarter and up $185 million from the second quarter. Our year-over-year growth was once again driven primarily by commercial, financial, and agricultural loans, which was broad-based across Key’s business lending segment.

Average commercial, financial, and agricultural loans were up $2.6 billion or 11% compared to the prior year and were relatively stable with the second quarter.

Third quarter loan balances were negatively impacted by seasonality such as floor plan lending, clients taking advantage of attractive capital markets, alternatives and the exit of non-strategic assets such as Key Equipment Finance International. Importantly, new business loan originations remain consistent with the prior year.

We also saw more loan growth in the latter part of the quarter, and as Beth mentioned, this momentum has continued into October and bodes well for the fourth quarter.

And based on that, we expect annualized link quarter average loan growth in the fourth quarter to be in the mid-single digital range driven by commercial lending, and that we will meet our full year guidance. Importantly, we are remaining disciplined with our relationship focused in the quality and structure of our new business.

Continuing on to slide seven. On the liability side on the balance sheet, average deposits were up $2.4 billion from one year ago and up $1.3 billion from the second quarter.

Deposit growth of 4% from the prior year and 2% from the prior quarter was largely driven by inflows from commercial clients, as well as increases related to our commercial mortgage servicing business.

And as a result of our continued focus on improving deposit mix, year-over-year interest-bearing liability costs declined from 56 basis points to 52 basis points. Turning to slide eight.

Taxable equivalent net interest income was $581 million for the third quarter compared to $584 million in the third quarter of 2013 and $579 million in the second quarter of this year. Our net interest margin was 2.96%, which was down 2 basis points from the prior quarter.

The reported decline in net interest income and the net interest margin from the prior year was primarily attributed to lower asset yields and higher levels of excess liquidity, which was partially offset by loan growth and a more favorable mix of lower cost deposits.

Compared to the second quarter this year, net interest income was up $2 million, primarily due to an asset growth, higher loan fees, and an improvement in funding costs and the benefit of the day count. For the fourth quarter, we expect net interest income to remain relatively stable with the third quarter level.

We also expect to maintain our modest asset sensitivity position. As we have highlighted before, we have the flexibility to manage and quickly adjust our rate risk position and the duration and characteristics of Key’s loan and investment portfolios continue to position us to realize more benefit from a rise in the shorter end of the yield curve.

Slide nine shows a summary of non-interest income, which accounts for approximately 42% of our total revenue. Non-interest income in the third quarter was $417 million, down from both the prior year and prior quarter, primarily due to lower gains from principal investing and leverage lease terminations.

We did, however, see positive trends in several of our fee-based businesses. Despite several large transactions being delayed into the fourth quarter, investment banking and debt placement fees remain strong at $88 million. We also saw growth in trust and investment services and deposit service charges.

For the fourth quarter, we expect non-interest income to be up in the low double-digit percentage range from the third quarter as a result of a strong finish to the year for investment banking driven by a strong pipeline, which includes deal activities that moved into the fourth quarter.

It also includes a full quarter’s worth of Pacific Crest activity and a normal seasonal lift in corporate-owned life insurance, as well as a more typical run-rate for principal investing gains.

Turning to slide 10, non-interest expense for the third quarter was $704 million, down $12 million from the year-ago period and up $15 million from the second quarter. Quarter expenses were well controlled and below our previously communicated guidance.

As I mentioned earlier, reported expense includes $15 million in efficiency charges and a $20 million pension settlement charge. Combined, these two items added 350 basis points to our efficiency ratio. We also incurred expense of $6 million during the quarter related to Pacific Crest Securities.

Normalizing for Pacific Crest and the pension charge, which were both not included in our prior guidance, expense levels came in below our previously communicated $680 million to $690 million range as outlined in the lower right hand side of the slide.

Core expense levels continue to benefit from our continuous improvement efforts, including the consolidation of 12 branches in the third quarter and the rightsizing of our businesses and support areas.

In the fourth quarter we would expect reported expense levels to remain relatively stable with the third quarter, including a full quarter of Pacific Crest and a reduced pension settlement charge anticipated to be in the range or $5 million to $10 million.

We also anticipate fourth quarter expense levels to include efficiency charges of approximately $10 million. Importantly our guidance is consistent with our previous outlook for 2014 expenses.

We remain committed to continuing to generate cost savings through our continuous improvement efforts, which will enable us to make investments and offset normal expense growth. Moving to slide 11, our report efficiency ratio was 69.5% for the quarter and 66.7% on a year-to-date basis. This was clearly higher than our expectations.

However, it does include elevated efficiency and pension charges, which year-to-date totals $69 million, well above our original estimate of $30 million for the full year. Excluding efficiency and pension charges our year-to-date efficiency ratio was 64.5%.

The higher charges reflect an acceleration of our initiatives as we continue to manage core expenses in an appropriate pace and make investments that will translate into future revenue growth. The efficiency ratio remains an important measure and we expect to continue to make progress in the fourth quarter and 2015 from our current level.

We have a pass forward built around business growth and expense management. Over the next two to three years we are committed to moving our cash efficiency ratio down to 60%. Importantly, longer term we are targeting a ratio in the high 50s.

Turning to slide 12, net charge-offs were $31 million or 22 basis points of average total loans in the third quarter, which continues to be below our targeted range. At September 30, 2014 our reserve for loan losses represented 1.43% of period in loans and 201% coverage of our non-performing loans.

Importantly as Beth mentioned, the quality of our new business volume has consistently been better than that of our existing portfolio. We expect net charge-off to remain below our targeted range of 40 to 60 basis points in the fourth quarter.

In turning to slide 13, our tangible common equity ratio and our estimated Tier 1 common equity ratio, both remain strong at September 30 at 10.29% and 11.26% respectively. As Beth mentioned, we repurchased $119 million or 8.8 million common shares in the third quarter.

Importantly, our capital plans reflect our commitment to remain disciplined in managing our strong position. Our Tier 1 common ratio has remained above 11%, while we have paid out a peer-leading amount of capital to shareholders. Moving onto slide 14, this is our fourth quarter and our full year 2014 outlook.

As Beth mentioned, we continue to expect to achieve the full year guidance that we provided at the beginning of this year. For the fourth quarter we expect an improvement from our third quarter run rate consistent with my comments today.

Average loans should growth in the mid-single digit range annualized from the third quarter, as we benefit from recent growth, solid pipelines and normal seasonal trends, especially in our commercial businesses.

Revenues should reflect a meaningful pickup in non-interest income next quarter in the low double-digit percentage range as a result of a strong finish to the year for investment banking, including a full quarters impact of Pacific Crest Securities and a strong pipeline heading into the fourth quarter, a normal seasonal lift in corporate owned life insurance and what we would assume to be a more normal run rate for principal investing gains.

Reported expenses should remain relatively stable with the third quarter, including the addition of a full quarter of Pacific Crest, as well as an additional pension and settlement cost this quarter, albeit at a reduced level. Credit quality should remain a good story with net charge-offs below our targeted range of 40 to 60 basis points.

And finally, we expect to continue to execute on our share repurchase authorization consistent with our capital plans. With that, I’ll close and turn the call back over to the operator for instructions for the Q&A portion of the call. Operator. .

Thank you. (Operator Instructions). The first question is coming from the line of Steven Alexopoulos. Please go ahead sir. He is with J.P. Morgan. .

Good morning everyone. I’m assuming that’s me. .

Good morning. .

Good morning. .

Can I ask you guys; on the efficiency ratio, it seems that focus is shifted to this long term 60% target. Are you still targeting 60% to 65% over the near term? It doesn’t seem like we are hearing much about that anymore. .

Steven, this Don. What I would say is that for the last several quarters, we’ve talked about our plans to drive that efficiency ratio to the lower end of that previous guidance, and with the benefit of rates we should be able to drive it to something below 60%.

So at the conference this past quarter, we changed our guidance to a long-term perspective of driving at below 60%. So we would expect to have a path to continue to drive it down from the current levels and be in that long-term guidance range over the next two to three years..

But Don, should we read into that, that you don’t think you’re going to be in that range near term.

Is that why you are moving this to a longer-term view?.

I would say the concern we had was that there were questions around would we be happy if we maintained it at the higher end of that range, and so 60% to 65% range was the previous guidance.

And what we are focused on is driving positive operating leverage and the outcome of that should be to continue to drive that efficiency ratio lower, and that is our expectation for next quarter going into 2015 and for the next two to three year time period. .

Okay, and simultaneous with including an outlook for higher rates. The 10 year has now hit 2%. Can you help us think about how much incremental pressure that you put on loan yields, securities yields, and I don’t know where you are with HQLA, but do you need to build securities here at this level. Thanks. .

The long end of the curve doesn’t have as much of an impact on us as the shorter end of the curve. If you look at our asset portfolio, loans typically have an average life of three years. Most of our loans are LIBOR based and so we are going to see more lift when we see the shorter end of the curve moving up.

When we look at the investment securities that we are purchasing, over the last couple of quarters, we’ve seen yields for purchases in the 2 to 2.25 level and so with the longer end of the curve coming down, it’s pushed that down a little bit, but it shouldn’t have a meaningful impact in the overall margin from what our current guidance would suggest.

And then as far as our HQLA and the LCR implications that we estimate as of September 30, that our LCR ratio would be around 80%.

Our target for the first quarter of 2016 would be 90%, and we think we can get there with cushion with making some modest changes to continue to change in our mix of investment portfolio over to more Ginnie Mae’s, maybe some slight increases in the overall investment portfolio and then also some product changes, which we don’t think will be significant in any way.

.

Great. Thanks for all the color. .

Thank you. .

Scott Siefers with Sandler O'Neill is next. Please go ahead sir. .

Good morning guys. .

Good morning Scott. .

So I guess first question is just on loan growth. There has been a little noise in the last couple of quarters. I think last quarter it was the flattish end of period numbers, and in this quarter, a little more sluggish average.

Obviously it hasn’t caused you to alter the full year guidance, but I was just curious if you could maybe put some or make some comments around any changes in demand you are seeing or any kind of changes in your risk appetite that might have caused things these last couple of quarters to come in a bit lighted than you had anticipated, if first of all that’s an appropriate conclusion.

.

Sure Scott, this is Chris Gorman. Good morning. As you think about our model, our model is we only put about 15% of all the capital we raise on to our balance sheet. So on a trailing 12 basis for example, we raised about 55 billion in over 1,000 transactions, and again only about 15% finds its way to our balance sheet.

And what that means is we can have some pretty big variations as you look quarter to quarter. If you look over the last five quarters or so, it probably ranges from $350 million to $900 million. Now as you think about the third quarter, a couple of interesting things.

One, new business volume was basically spot on from what it was in the prior quarter when we grew by $900 million. The reason that occurs is we sometimes bridge significant transactions. In the case of last quarter, we bridged something in the second quarter and took it out in the third quarter. That total was about $250 million.

There was one particular transaction that was about $170 million, just to give some texture. The other thing that we are always doing is reallocating our capital and all of our other resources for that matter, and in the third quarter as we always do, we really exited about 200 million of loans.

The last thing I would tell you is, we continue to maintain our discipline. So as you know Scott, we are leading most of these deals. We could easily take a bigger piece; we could be a buyer of some of this paper. We’ve elected not to do that. So you are going to see variations as you go quarter-to-quarter.

I think both Beth and Don alluded to the fact that as you look forward, we are comfortable with the guidance that we’ve provided all year, and the reason for that is (a) our pipeline; and (b) if you look at the fact that in the corporate bank we grew say $350 million during the quarter or 1.6%.

As we look at the ending balance, it was up about $650 million. So I hope that gives you a little bit of texture for kind of what’s going on intra-quarter here in the Corporate Bank..

Yes, that does. So, I appreciate that Chris. And then while I’ve got you, maybe a separate question. Don had alluded to a couple of the deals that you got in the investment-banking pipeline getting pushed to the fourth quarter.

Are you able to provide a little context around that? In other words, are these just kind of individually unique circumstances that happen to tally to a few deals, so we get pushed through or are there any concerns given the market volatility and weakness that those deals would just not get completed.

How are you thinking about that dynamic?.

Well Scott, let me start with, they are always market dependent and we are always worried about market volatility as you think about our transactions. What Don alluded to is there were a couple of significant transactions, neither of which had gone away, both of which were pushed from the third quarter to the fourth quarter.

But as you look at our total pipeline and we always probably adjust our pipeline, we feel pretty good about the fourth quarter.

In fact, based on our interactions with our clients, the discussions we are having with our clients and our risk-adjusted pipeline, we believe the fourth quarter will be the strongest quarter of the year for us in investment banking and debt placement fees. .

Okay, good, that’s helpful and I appreciate it. That’s it for me, so thank you..

Thank you, Scott. .

Thanks Scott. .

Erika Najarian with Bank of America is next. Please go ahead. .

Good morning. Thank you. .

Good morning. .

Good morning. .

My first question is just a clarity question.

In terms of your guidance for expenses for fourth quarter, should we take the $704 million reported as the base or the $678 million core as the base?.

Our guidance was compared to the $704 million reported, because keep in mind that in the $704 million this quarter included the pension settlement of $20 million and roughly $6 million of Pacific Crest.

Next quarter we’ll have a full quarter’s worth of Pacific Crest and so that will roughly be $20 million or so of expenses and then we expect our pension charge to be lower.

So again, pension we said would be in the $5 million to $10 million and so with the combination of those items, the total will be expected to be relatively stable with that $704 million reported level. .

Got it and just sneaking one last one in, given Don your comments on the LCR being at 80% now and just remixing your securities portfolio to exceed your fully phase-in requirement by 1Q ’15, and clearly you’re more sensitive to the short end of the curve.

Is it fair to say that this quarter’s margin represents close to the bottom near term, even though the 10-year is at 2%. .

If we look at our margin today of 2.96%, we believe that even with rates being flat with where they are at today, that the margin will hold in relatively stable for next several years and so we do believe that we are at kind of a plateau there and I think you saw that with stability in our net interest income on a relative basis compared to the previous quarter and even the previous year now and so I think that’s starting to reposition that dynamic a little bit for us.

.

Great. Thank you very much. .

Thank you. .

Thank you..

Ken Zerbe with Morgan Stanley is next. Please go ahead. .

Great, thanks. Don, a quick question for you. In terms of the unusual charges or the efficiency charges as you call them, how much longer do we take these, because they’ve been around for a long time. It seems that you would expect them to be around for a while more.

What’s the outlook on that?.

For this quarter we had an additional consolidation of 12 branches and some other expense moves in connection with rightsizing some of the business and staff areas. And to your point, we will always have some smaller level of efficiency related changes going forward.

I would say that this year the level of them have been much higher than what we would have expected. We talked earlier in our script about $69 million worth of efficacy and pension related charges this year on a year-to-date basis, versus our full year estimate of $30 million.

And so I would say that $30 million level is probably more of a full year type of projection and more of a normal environment. What we did see this year was probably a little bit more pressure on revenues and felt that it was important for us to take additional efforts further enhance our expense reduction efforts. .

Got it. Okay, so $30 million for ’15 at least a ballpark estimate, okay. .

And we haven’t given guidance yet for ’15, but I think that will be more of a normal level, that’s correct. .

Okay, and just second question, in terms of how you are thinking about lending or which categories you are targeting, where the 10-year is currently at 2%, does that drive any of your lending decisions or more specifically is there any loans, like CRE for example where you may pull back because of where rates are if things don’t change. .

So Ken, its Chris Gorman. With rates like this at the 10-year, what you’ll see is a significant pick up in some of things we do when we act agent, not principle. And as a result whether its Fannie, Freddie, FHA, those longer term fixed deals, you’ll see a lot of our clients opting for those.

Obviously the CMBS market has enjoyed a nice recovery this year. We think total issuance in the CMBS market will be between $90 billion and $95 billion this year. So that’s really – you really see it impacted more, our clients going long and going fixed and that really lends itself to our business model where we are functioning as agent not principal.

.

All right. Thank you. .

Ken Usdin with Jefferies is next. Please go ahead. .

Hey, this is actually Josh in for Ken. Thanks for taking our question.

Can you speak to the low tax rate you guys realized this quarter and then how we should think about this going forward?.

Yes. Our tax rate reflects the benefit of a couple of credits. Those would be typical for us to have credits throughout the period. I think that our tax rate prospectively should be in the 25% to 28% range. .

Okay and then I noticed that the CRE yields held flat linked quarter after almost 10 quarters of compression, and this is on top some pretty strong loan growth in that bucket.

Can you provide some color on what you’re seeing here in terms of competition?.

Sure. This is Chris Gorman speaking. I’ll take a pass at that and then EJ Burk may have some things to add to it as well.

What we’re seeing is we are very, very targeted and so as you think about our multi family business, these are people that we do a lot of business with and so its really kind of a relationship approach as opposed to sort of one piece of paper that’s sort of a one-off piece of paper.

So I would say it’s a relationship at something for our targeted owners of real estate. We are doing a lot with them. Those are the people that in fact were providing some construction loans too. So I would say that’s why it’s holding up. .

Yes, and the only other thing I would add is that our mix in real estate has changed a bit.

Early in the cycle we did a lot of refinancing and with the market much stronger and property fundamentals a lot better, we shifted a little more to private owners of real estate, more stabilized property and there you are going to see, you will have a little better pricing power..

Okay, thanks for the color..

Great, thank you..

Bob Ramsey with FBR Capital Markets is next. Please go ahead..

Hey, good morning guys. First question, talking about Pacific Crest, I know you identified the costs that were there this quarter and your expectation for the fourth.

Could you talk about the revenues? I know they weren’t around for very long this quarter, but the revenues if any that were there this quarter and sort of what the expectation there is in the fourth quarter?.

Sure Bob, Chris Gorman. Let me start by, I just want to welcome the whole Pacific Crest team onto the platform. We have been very, very pleased with how the integration has gotten since we announced this transaction just at the end of the second quarter. In terms of revenue, they were only around for part of September.

The revenue and expenses were about $6 million on each side of the equation. As we go forward, what we’ve said publicly is they had a run rate last year of between $80 million and $85 million. Their pipelines are stronger today than they were when we started talking to them way back in August of last year, August a year ago that is.

So we feel good about the trajectory of the business. We feel good about what it brings to the platform..

Okay, great. And then remind me, the revenues coming through is a combination of the investment banking line and the trust investment services line.

Is that correct?.

That’s correct, and it’s about half and half as you think about their business; half investment banking, half equity sales trading and research..

Great. And then I was also curious; I know you talked about loan growth. You guys said earlier that you could easily on the commercial deals take a bigger piece in a lot of these transactions. Given that the asset quality, the loans you guys are marking today seems to be even better than the historical book.

Is there a reason that your not taking little bit bigger pieces of these when you’ve got so much capital on your balance sheet and why not grow a little faster?.

Well, we clearly want to grow, make no mistake. I mean, as we look at every single quarter, we want to grow loans, deposits, fees, clients, bankers, we want to grow across the board.

We think the way to do it and the most sustainable way though is to really go at growing clients and while its tempting to buy a piece of paper or its tempting to take a big hold position, what we want to do is maintain our moderate risk profile. We think over the cycle that will serve us well. .

Okay. Thank you guys..

Thank you..

Bill Carcache with Nomura is next. Please go ahead..

Thanks. Good morning..

Good morning..

Good morning..

I had a follow-up question on your earlier comments regarding your efficiency initiatives.

The additional expenses make complete sense as the industry evolves and adapts to the technological changes that we’re seeing, but there are others who are absorbing those expenses into their normal ongoing operations without having to call out specific efficiency initiatives.

And so I guess my question broadly is, what do you think it will take for Key to reach the point where it can absorb these costs without having to call them out every quarter and maybe some of your earlier comments you just said that will – maybe its next year when we’ll reach a point and I guess maybe I’ll stop there and love to hear any thoughts around that..

Right. And we’re not calling those out to say that they are non-recurring, because we do expect to see a recurring level of restructuring charges.

Why we call them out each quarter is that there is some fluctuation of their ability in that expense line from time-to-time and so this quarter and last quarter we had higher than normal levels of branch consolidations, which increased the level of restructuring charge.

And so we think it’s just important for us to highlight what the core level of expenses are and also recognize that there is going to be some variability in that restructuring line item. .

Okay, thank you. My other question is around the deposit mix.

We know that over three quarters of your deposits reside inside of the Community Bank, but how much of that is small business and I guess more specifically, can you share how you think about the retail versus commercial mix of your deposit base?.

Sure. As far as small business, it’s in the $4 billion range as far as total deposits for smaller business.

We are very focused on our retail core deposit base and that would include small business as a part of that and we recognize the value of those deposits is clearly going to increase with the new rules as far as the LCR requirements and so we are very focused on that.

Dennis would you like to add anything as far as retail deposit base?.

Sure. This is Dennis Devine, Co-President of the community bank leading consumer and small business; that’s absolutely right.

And as you think about consumer and small business and business banking for deposits, I would certainly think about that continuum across how we think about our business banking segment and down into small business; very important segments for us. In our deposit base you see quarter-to-quarter growth.

You do continue to see the improved mix of those deposits as well. So as this trench of CD’s, higher rate CD’s continues to run, you see us growing core deposits.

You see us aggressively in the context of the community bank and in the retail bank looking to grow the client base, to grow our relationship strategy, introducing the products, which have had some real success over the course of the past quarter and growing the number of clients that we are bringing to Key.

And so that’s a central part of how we think about success in the community bank as the growth of core relationship clients, the deposits that come with them and certainly as the rate environment rentals see more and more value there..

Thank you, that’s very helpful..

Terry McEvoy with Sterne Agee is next. Please go ahead..

Thanks. I just have a question on the payments business. You’ve been spending there for the last few years on just generically speaking payments. So if I look at the revenue line, its kind of flat quarter-over-quarter and up a bit year-over-year.

Was that spending just to stay competitive or would you expect that line, the revenue line to grow over time. .

Yes Terry, this is Don and I would say that we clearly expect that revenue line to grow over time, and we are making investments in new products and capabilities.

We are starting to sell those and so we are starting to see some benefit from those, but it clearly hasn’t hit stride yet, the full stride yet and so we would expect this to be an area where we would see better than average growth for our fee income for that category.

Chris, anything else you want to add there?.

No, Terry its right. It’s something we’ve invested a lot of time. We’ve actually moved a lot of talented people into our commercial payments area. Its an area that we are very much focused on; we are getting traction on the purchase card.

The prepaid program that we are involved with, we just had a couple of major wins and based on the competitive landscape, we are actually pretty optimistic about being able to be impactful in the prepaid space, particularly because from a public sector perspective we are very focused on certain public entities that we think could benefit from it..

And then just a follow-up question. Beth, I was reading the American Banker article last week about you and it mentioned the key basic credit line, which was compared somewhat with the deposit advance product, but it just didn’t fit that description.

As others were getting out of that product and similar products, is this scenario of growth and maybe quantify how large this specific product is for Key..

Yes Terry, I’m going to ask Dennis Devine to augment my answer, but it was an opportunity for us to really differentiate how we are thinking about responsible banking and serving client bases that historically have been underserved and with products that are under scrutiny and concern, and we feel like we’ve done a number of things in that space to really make sure that we’ve made affordable alternatives available, and I’m going to let Dennis tell you a little bit more about that, because I do think it’s a point of distinction as well as a point of pride for a company..

Thanks Beth, and to reinforce Beth’s point specifically, it is not a deposit advance product. It’s a small line of credit that we make available, specifically to clients who traditionally have been unable to attain traditional or prime credit to the banking relationship.

The criteria that we look at are deep and its based on the client’s relationship that they have with us. Again, these are small lines and we look to build our credit history. Its very much designed to help introduce our clients to their ability to obtain and then manage credit.

I think very small lines in the thousands of dollars has been a traditional max in the low end of the thousands of dollars and we’ve just extended that number up a little bit higher to try to create greater opportunity for our clients, but its designed to serve a population that wouldn’t otherwise be served in a responsible credit facing way, so that we can serve underserved populations and continue to build out the communities that we have.

But again, very much directly aligned with our relationship strategy. These are core clients of Key that have brought our relationships with us that we are looking to extend and help..

I appreciate that. Thanks..

Gerard Cassidy with RBC Capital Markets is next. Please go ahead..

Good morning. This is actually John Hearn on for Gerard. Just a quick question for you on the interest rate sensitivity table in your Q. I believe it’s a 200 basis point increase in rates, result in a 3% increase in net interest income. Does that exist exclusively on the short and intermediate terms or is it parallel shift of the yield curve..

The underlying assumption is that the entire yield curve moves up by 200 basis points over a 12 month period and keep in mind though that really our asset sensitivity is more generated or source from that shorter end of the curve and so that’s where we would benefit the most and so that 10-year into the curve really doesn’t have as much of an impact..

Okay. And have you examined where we see a flattening of the yield curve where it happens more in the front end and not in the back end.

Can you say what the result would be for net interest income then?.

We have looked at twists and one of those would be where you see a flattening, where the short end of the yield curve moves up and that would be beneficial to us. We haven’t quoted what kind of an impact that would be, but it would be helpful just from having that LIBOR and the shorter end of the curve move up..

Great. All right, perfect, thank you. And then just as a quick follow-up, with your mobile banking adoption, could you speak to just the percentage of customers that are in the mobile channel currently and what are you expecting as we look forward, maybe to 2015..

This is Dennis Devine. We’ve seen north of a 30% year-over-year increase in the activity of our mobile clients.

You’ve seen us introduce very competitive and strong solutions across not just the core mobile platforms that you would traditionally expect, but across an expanded set as the devices that our clients are using as we extend into windows and Droid and Amazon capabilities.

And so as building on Beth and Don’s comments from earlier, as Key looks at its ability, both to serve its clients and to reposition our business, to serve those clients in a cost efficient and effective way, our digital investments really build upon mobile and so from a mobile first perspective is the way we think about serving many, many of our clients and on important part of our strategy is making sure that we’ve built up the talent to be able to do just that.

So we’ve seen substantial growth. There is no doubt it’s the most explosive source of client activity in our business over the course of the past year. We expect that to continue. .

Great. Thanks for taking our questions..

Thank you..

Geoffrey Elliott with Autonomous Research is next. Please go ahead..

Hello there. I wondered if you could discuss how the widening in high yield spreads impacts the business; either in terms of impacts on the investment banking and capital market side or on the lending side by potentially pushing customers back from capital markets and other alternatives towards borrowing from Key’s balance sheet. Thank you..

Sure. This is Chris Gorman speaking. I mean, the biggest driver in the high yield market is if there are net inflows or outflows and after seeing a series of launch where there were outflows, there have been inflows into the high yield market and in fact we’ve been able to price a deal, one deal already this week.

So if that market is healthier, that is the high yield market, that is very, very beneficial for transaction related revenue and we have a pretty significant M&A business. That business is up year-over-year 70% and part of the reason that its up is the availability of financing vehicle such as the high yield market.

The interesting thing that we’ve talked about before; right now our model is frankly best served when the markets have some level of disequilibrium, because we are able to move from product to product.

So to the extent they are seized to be a high yield market, that would probably benefit our platform overall, because we have all the various tools that we can go to, to fill in that gap in the capital structure..

Thank you..

(Operator Instructions) The next question is coming from the line of Sameer Gokhale with Janney Capital Markets. Please go ahead..

Thank you. Good morning everyone..

Good morning..

I had a question about your share buybacks this quarter. When I look at your buybacks, I think you spent $119 million and based on your remaining authorization it looks like you could do – you have $315 million left, about $158 million per quarter.

Your run rate has been a little bit below that and I was curious as to whether we should expect you to use up all of that authorization looking out the next two quarters or might you not spend all of that on buybacks.

How should we think about that?.

As we look at our share buybacks, they are consistent with our capital plan that we submitted to the federal reserve earlier this year and so some of the timing of the share buybacks are based on shares that are issued in connection with employee compensation plans and other things and so some of those maybe weighted toward the quarters that those are granted, which is typically in the first quarter of each year.

And so absent that I would say that generally the share buybacks are fairly consistent throughout the year and our progress to-date is very consistent with the plan that we submitted..

Okay, but I’m sorry.

We should expect the pace of buybacks to pick up over each of the next two quarters?.

We would expect to see greater share buyback in the next two quarters compared to what we’ve exercised in the first two quarters of this capital plan, that’s correct, yes. .

Okay, thank you. And then another question was just your Lean Six Sigma initiative. Obviously you’re very focused on improving your efficiency ratio.

Of course part of that is part of function of revenues, but in terms of just your Six Sigma implementation and it sounded like this was really the first time you’ve ever measured end to end process ever at a company, and I want to find out if you have any early reads, any early wins in those related to Lean Six Sigma or if its just too early in the process here to really talk about it in depth.

Because it sounds like for a company that really hasn’t ever measured its processes end to end, it could be a lot of low handing fruit that you could take over the next few quarters.

Can you talk about that a little bit?.

Yes, I’ll go ahead. This is Beth, and give some context on that and then I’ll ask Don to give perhaps more granularity. We do look at Lean Six Sigma as an opportunity for our company and you are correct.

What you would call the true Lean Six Sigma approach, the end-to-end process where you both drive for a revenue opportunity, client outcomes, as well as looking forward to ways to be more productive and efficient as an opportunity for our company. We have launched approximately 10 different Lean Six Sigma programs.

Of course our projects right now are varying in degrees of size and significance, but it is something that we are more broadly putting into the company, everything from our sales process to how we look at our credit originations.

So we are excited at early outcomes, root causes, where we are in the process and the opportunities that will yield both for revenue expenses, as well as a better client experience and I’ll let Don give a little bit more dimension to that..

Sure.

A couple of examples of where we found success with this and it would include in our branch sales process that Dennis have talked before and we’ve mentioned recently here that if you look at our sales per person, per day in the branches, they are up over 30% year-over-year and that whole process was subjected to a Lean Six Sigma effort and review and I think it was helpful in achieving that.

I wouldn’t say it was that by itself, but that clearly helped set the table for us.

Another area that we are close to wrapping up as well is the whole commercial lending side and within the middle market space and so we’ve seen some real good progress there as far as making that process much more efficient and effective and are counting on lots of benefits from that going forward as well.

And so as Beth said, this is in the early stages. We do believe this could be a core part of our culture going forward and we are getting a lot of excitement and interest from all of our employees that have participated in these efforts already..

Great, thank you..

Thank you..

And we have no further questions. I would now like to turn the conference back to our host Beth Mooney; please continue..

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

That concludes the call for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect..