Beth Mooney - Chairman and CEO Don Kimball - CFO Chris Gorman - President, Corporate Bank EJ Burke - Co-President, Community Bank Dennis Devine - Co-President, Community Bank Bill Hartmann - CRO.

Matt O'Connor - Deutsche Bank Steven Alexopoulos - JPMorgan Ken Usdin - Jefferies Bill Carcache - Nomura Bob Ramsey - FBR Erika Najarian - Bank of America Merrill Lynch Matt Burnell - Wells Fargo Securities Mike Mayo - CLSA Richard Bove - Rafferty Capital Markets Marty Mosby - Vining Sparks Nancy Bush - NAB Research.

Good morning and welcome to the KeyCorp’s Fourth 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 fourth 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 are 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. I’m now turning to slide three.

I’ll provide some overview comments on the fourth quarter of the year and then I’ll turn it over to Don to discuss our financial results and our outlook for 2015. Fourth quarter was a strong finish to the year.

As the conclusion of our third quarter, we indicated that our fourth quarter performance would better reflect the earnings power of our company. And I’m pleased to report that in the fourth quarter our results improved significantly and we met or exceeded the guidance we provided.

And as we communicated our results over the last two quarters were reflective of the variability in our business model especially in some of our fee income categories like investment banking and debt placement where we saw some activity move from the third quarter into the fourth quarter and as a result we finished the year with record performance.

We also generated positive operating leverage relative to both the third quarter and the year ago period. Earnings per share were up 8% from last year as we continue to grow organically by acquiring and expanding targeted relationships which provide the solid growth in both loans and deposits.

Core expenses were well controlled as we’re realizing the benefits of our initiatives and our continuous improvement efforts. Our cash efficiency ratio was down 300 basis points from the year ago quarter and it is a continued priority for us to identify additional efficiency and productivity opportunities as we go into 2015.

Asset quality also improved over the years as we continue to originate good quality relationship business while staying disciplined with structure and consistent with our capital management priorities we repurchased $128 million of common stock from the fourth quarter. Slide four is a summary of our full year 2014 results.

We delivered on our commitments to our shareholders by generating positive operating leverage and by remaining disciplined with both risk and our strong capital position.

Average loans were up 5% from the prior year driven by strong growth in commercial, financial and agricultural loans of 11% which also help to create a record year in investment banking and debt placement fee.

Expenses were well controlled down 2% from the prior year or 3% excluding the 2014 acquisition of Pacific Crest Securities and asset quality improved with net charge-offs of 20 basis points for the year which is well below our targeted range. During the year, we continue to invest in our businesses to accelerate growth.

In addition to Pacific Crest, we added bankers across our franchise expanded our payment capabilities and enhanced technology in areas such as mobile, online and cyber security.

We also exited non-strategic asset that we’re not consistent with our relationship strategy such as international leasing and we made a number of leadership changes to drive focus in execution including in our community bank.

In 2014, we were able to reward shareholders by returning a peer-leading 82% of our net income through both dividends and share repurchases. Overall it was the strong finish to what was a good year for our company.

We’re well positioned with momentum and confident in our business model and our team and I’m excited about the opportunities we have ahead. Now I’ll turn the call over to Don to discuss the details of our fourth quarter results and our outlook for 2015. With that let me turn it over to Don. .

Thanks Beth. I’m on slide six. This morning we reported net income in continuing operations of $0.28 per common share for the fourth quarter, this compared to $0.26 for the year ago quarter and $0.23 for the third quarter. I’ll cover many of these items of this slide throughout my presentation so let’s now turn to slide seven.

Average total loan growth continued in the fourth quarter with balances up $3 billion or 5% compared to year ago quarter and up $745 million from the third quarter. Our year-over-year growth was once again primarily driven by commercial, financial and agricultural loans and it was broad based across Key’s business lending segments.

Average commercial, financial, and agricultural loans were up $3 billion or 12% compared to the prior year and were up $732 million or 3% annualized in the third quarter. Importantly, we’re remaining disciplined with our relationship focus as well as the quality and structure of our new business.

Continuing on the slide 8, on the liability side of balance sheet average deposits were up $1.3 billion one year ago and up $1.4 billion from third quarter. Deposit growth of 2% from both the prior year and prior quarter was largely driven by inflows from commercial clients as well as increases related to our commercial mortgage servicing business.

And the cost of total deposits decreased to 15 basis points from 20 basis points one year ago reflecting our more favorable deposit mix. Turning to slide 9, taxable equivalent net interest income was $588 million for the fourth quarter compared to $589 million in the fourth quarter of 2013 and $581 million in the third quarter of this year.

Our net interest margin was 2.94%, which was down two basis points from prior quarter. The margin was impacted by higher levels of excess liquidity driven by commercial deposit growth and lower earning asset yields.

Compared to the third quarter of this year, net interest income was up $7 million primarily due to asset growth, higher loan fees and lower funding cost.

We expect to maintain our modest asset sensitivity and the duration and characteristics of key loan and investment portfolios continue to position us to realize more benefit from a rise and the shorter end of the yield curve. Slide 10, shows the summary of non-interest income which accounts for 45% of our total revenue.

Non-interest income in the fourth quarter was $490 million up 8% from the prior year and up 18% from the prior quarter, primarily due to strength in core business activity. We also benefited from recent investments like the acquisition of Pacific Crest in the addition of client facing FTE.

As Beth mentioned, this was both a record quarter and a record year for investment banking and debt placement fees, which finishes the year with $126 million in the fourth quarter.

As we indicated on our third quarter call, there is variability in this business from quarter-to-quarter but we had a strong pipeline in September and that carried through to the fourth quarter.

We also saw growth in many other fee based businesses including trust investment services and corporate services which had strength and derivatives in non-loan fees. Consistent with our comments last quarter we also saw a normal seasonal lift and corporate owned life insurance and a stronger quarter from principle investing gain.

Turning to slide 11, our non-interest expense for the fourth quarter was $704 million down $8 million from a year ago period and stable with the third quarter. Reported expense included $8 million in efficiency charges and $3 million pension settlement charge, combined these two items added approximately 100 basis points to our efficiency ratio.

If you adjust for Pacific Crest, efficiency charges and pension settlement, our core expenses decreased to $676 million from $688 million in the year ago period.

This quarter our cash efficiency ratio was 64%, while this level reflects our hard work and improvement over the last few years, efficiency ratio remains an important measure for us and we expect to continue to make progress in 2015 from our level in 2014.

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. Turning to slide 12, net charge-offs of $32 million or 22 basis points on average total loans in the fourth quarter which continues to be below our targeted range.

At December 31, our reserve for loan losses represented 1.38% of period in loans and 190% coverage of our non-performing loans. Importantly, the quality of our new business volume has consistently been better than that of our existing portfolio.

Turning to slide 13, our tangible common equity ratio and estimated Tier 1 common equity ratio both remain strong at December 31, at 9.88% and 11.18% respectively. As Beth mentioned we repurchased $496 million in common shares in 2014 including 128 million or 9.7 million common shares in the fourth quarter.

We have approximately 187 million of growth repurchase authorization remaining under our 2014 capital plan, which runs through March of this year. We submitted our 2015 capital plan with Federal Reserve earlier this month and plan on announcing our results in March following the Federal Reserve’s release of their analysis and finding.

Importantly, our capital plan reflects our commitment to remaining disciplined in managing our strong capital position. Our Tier 1 common ratio has remained above 11% while we’ve paid out a peer-leading amount of capital to shareholders.

Moving on to slide 14, as Beth mentioned on our third quarter call, we indicated the fourth quarter will be more reflective of our earnings power of the company and that we would meet our full year guidance. With our fourth quarter results we delivered on our commitment and achieved our previously communicated guidance.

In 2015, we expect to drive positive operating leverage and continue to improve our performance. Average loans should grow the mid-single digit range as we benefit from the strength in our commercial businesses.

We anticipate net-interest income growth in the low to mid-single digital percentage range compared to 2014, this does include the benefit from higher rates as we are currently modeling short term rates to increase 50 basis points late in the year.

Without the benefit of the higher rates, we would anticipate net-interest income to be up in the low single digit range. Our net-interest margin should remain relatively stable and based on interest rates may increase later in the year.

Non interest income is expected to be up in the mid-single digit percentage range for the year which would include the full year impact of Pacific Crest Securities.

Keep in mind revenue activity tends to be seasoning lower in the first quarter compare to the fourth quarter and area such as investment banking and debt placement as well as seasoning lower and up corporate-owned life insurance. We also anticipate returning to a more normal run rate for principal investing gains.

Full year reported expenses should be relatively stable in 2014 which includes a full year of expenses related Pacific Crest offset by lower efficiency and pension charges. Credit quality should remain a good story with net charge-offs below our targeted range of 40 to 60 basis points. We also expect provision to approximately next net charge-off.

And finally, we expect to continue to execute 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) And with that we’ll go to Matt O'Connor with Deutsche Bank. Please go ahead..

Good to see the expenses come in where you thought, despite better fees. As we think about next year, we're seeing some other banks talk about upward pressure on expenses, and you're holding the line on the expenses while you're still expecting some revenue growth.

So I guess the question is, the continuous improvement that you're doing, just elaborate a bit more on where some of the gross savings are coming from? And then, where some of the investment or offsets are?.

Great Matt and this is Don Kimball, and as far as we’re receiving savings and in 2014 for example we consolidated 34 branches throughout our franchise a little bit more than 3% of the total branches which resulted in savings of just less than $9 million a year.

Other things we did last year included reducing the headcount levels in our fixed income trading platform that was reduced by over 20%. We exited our international leasing operation. We finished a telecommunications network transformation which we had resolved of $20 million and run rate savings for the year.

And more importantly what we’re doing from a cultural perspective is focused on continuous improvement and that’s for using tools like Lean Six Sigma which were kicked off in 2014 and we expect to see ongoing benefits for that in ’15 And so going forward, I’d think we some of the things continue that we would expect to see branch consolidation from that 2% to 3% level and we’ve also talked about other occupancy cost that we’re reducing 15% of our non-branch ware footage, so a lot of corporate office space we have been reduced throughout the year.

And again just focusing on that end-to-end profit management making sure the people are helping to drive ongoing improvements in our productivity and efficiency.

As far ass some of the investments this last year we’ve added over 25 new senior bankers within the corporate bank and I think you’re seeing the benefit from that in our year-over-year growth and our investment banking and debt placement fees and so we’re making investments there. We’re making other investments in products and services like payments.

And like many other we’ve been making investments in our risk management compliance and other modeling capabilities, over the last two years staffing for compliance and modeling is up over 50% and we expect to see that increase again going forward and so we’re bearing those kind of cost that we expect to be able to achieve the kind of synergies and efficiencies from that focus on continuous improvement to help fund those cost going forward..

Okay. Great. Thanks for all that color. And then just separately, on page 18 of your appendix, you've got a slide on oil and gas exposure, which is relatively modest to the size of the Company.

But just any early signs of pressure there? Or maybe in areas that benefit from energy? And how are you monitoring that differently now, say, versus three months ago?.

Yes, Matt, this is Beth. Given the attention on this topic, we did add slide 18 in the appendix and hope that will be helpful color and context for folks as they look at the quarter as well as our portfolio.

And I would say the headlines are that it is a longstanding area where we have history and expertise and as you said it is a small portfolio for us it’s only 2% of our outstanding. We are mainly in the EMP or upstream end of the market. We would say we have a quality client book.

They’re well reserved and well protected with minimal oil field services exposure. So it’s a small portfolio, it is not a big concern to us and we will continue to monitor it.

And I think the slide in the appendix has helped giving good understanding of what we see and we also mentioned in that slide that we have reflected it in our reserves and allow at the end of the fourth quarter given current prices and where we’ll benefit is I think we’re saying that, if certainly will be a boom to consumers their capacity to spend we’re confident and on average while there will be some [stutter] steps in the economy I think this will be a net positive to have lower oil prices for our economy in 2015..

Our next question is from Steven Alexopoulos with JPMorgan. Please go ahead..

Don, maybe to start and follow up in on your expense comments, when I look at the 2015 guidance, which is relatively stable versus what you guys promised and then ultimately delivered in 2014, which was a slight reduction in expenses, what's really the difference in 2015? Because it seems that you still have ample room to cut expenses, but you're not guiding that.

You're going to follow through with that this year.

So what's changed in 2014 versus 2015?.

The biggest impact there Steven is the full year impact of Pacific Crest so we do have increases there, but we’ve also talked about making investments to grow revenues and we’ve done that within the corporate bank this past year and we’re looking for other areas to make those similar investments and we’re focused on as driving positive operating leverage in addition to flat expenses where we’re showing our guidance to reflect and expect the increase in both net interest income and fee income and we think that’s a direct benefit from the investments we’re making.

.

Don, what would be helpful to us, as we assess the progress you're making on the efficiency front, could you break out for us, what was the expense and revenue contribution from Pacific Crest in the most recent quarter? And what do you expect that incremental build on both of those to be in 2015?.

What I would say on the slide on expenses we do breakout the Pacific Crest impact which is about $17 million for the quarter it was about a breakeven for us and so going forward we see more and more of the Pacific Crest operation being integrated with our overall capital markets and so it’s going to be tougher to really single that out especially as we look at integrating some of the back office and operations activities.

.

Okay.

I know your timing to the same amount of loan growth for 2015 as you did last year, do you see double digit C&I growth sustainable in 2015?.

What we’re seeing is our commercial growth should still be strength for us, but we’re seeing some growth in our retail bank for consumer lending but that’s being offset by the exit portfolio wind down.

So we could see other components of the commercial category also providing some growth for us, but I think in aggregate it all translates to mid-single-digit kind of growth expectation which is consistent with ‘14. .

Okay.

And just a final question, the exposure you outlined in energy relatively small, we shouldn’t expect any impact from that on your capital last for this year, is that correct?.

That’s correct..

Okay. Thanks for the color..

Our next question is from Ken Usdin with Jefferies. Please go ahead..

Thanks. Good morning. Don, I noticed that the period end balance sheet was significantly larger than the average for the fourth quarter. And it looks like there was a really nice surge in non-interest bearing deposits.

So just wondering if you can flush out the sources of that deposit growth, if we're onto a meaningfully different trajectory for average earning assets? And what are some of the moving parts there?.

Chris take care of the loan question and then I’ll go ahead and fill in some background deposits, so Chris?.

Sure, I’d be happy to. Good morning Ken. Just to remind everybody our business model is one where a relatively small amount in case of 2014 about 19% of the $54.4 billion that we raised actually ended up and state on our balance sheet. So within any period and within any category there is just a lot of variability.

So first of all that’s one thing always keep in mind with respect to our business, as we think about our ability to grow the loan side of it we’ve been pretty successful in taking share. We have 599 new clients in 2014 and we actually think that as we think about it Ken our model resonates with our targeted clients in prospect.

So while it seems aggressive, we think we can continue to grow our loan portfolio, but we really do so not necessarily going after loans but really seeking clients that we think would fit into our business model..

And then as far as the deposit to period end we had some fairly large increases from some of our governmental customers we had at the end of the year which were short term in nature.

So we do not expect that to be an indication of the start point for us for deposit growth that we would expect going forward there are long growth will exceed our deposit growth so that will help to drive greater efficiency on overall balance sheet..

Okay. And then my follow up, then, Don, also just on securities buildup and long-term debt funding, where you had done a lot of that pre-funding for LCR, and we've seen that in the securities book.

Can you talk about where you are there? And how much issuance you might continue to do versus securities build?.

Good question, and throughout the month of December we’re in the mid-80s as far as our LCR ratio, keep in mind that we have to be at 90% level by the first quarter of ‘16 and we think that we continue to get there through some minor adjustments going for that we’ve shifted our investment portfolio to about 42% being comprised -- securities which is very helpful and you see some cash flow going in that category which will allow us to over the next year continue to push that ratio up, nothing considered as part change going forward..

Okay. Just one little follow-up on that point. And do you expect that you'll run with a buffer to the trajectory? Or just once -- or just track to the 90, 100 of -- over time. .

Yes, we do believe that we’ll have some buffer because you don’t want to have any exposure for being under that number but I think buffer will be modest..

And next one is from Bill Carcache with Nomura. Please go ahead. .

Thank you. Good morning. I had a follow-up question on deposits. Don, you mentioned that there was an impact from some governmental clients in the quarter. I believe that you guys had previously said that you were de-emphasizing municipal deposits, because you viewed them as punitive from an LCR perspective.

Can you update us on how you're thinking about those deposits currently, in light of the most recent LCR revisions? And then how all that fits in with the growth that you saw from those governmental clients this quarter?.

As far as our focus on the collateralized government deposits, we have seen those balances come down in the fourth quarter and especially in some of the time deposit categories. We will continue to support our strong customers and those that have those relationships that have an expanded type of product relationship with us.

But we will expect those collateralized municipal deposits to come down. The growth that we saw really was at the end of the calendar year, for a few days prior to the end of the calendar year and stayed with us for early part of January. And it was very temporary in nature as far as that buildup at the December 31st balance..

Okay. So you're looking across the relationship and it sounds like -- so I guess along those lines, separately, can you elaborate on how you guys. How that Flynn influences your lending decisions and describe how that process has evolved over the last couple of years as we've kind of -- as competition has intensified..

Sure, Bill. This is Chris Gorman. First I'll talk about our public sector, public finance. Let me start more broadly. We have a requirement that we get to a 20% rate of return with our clients. Obviously, where a lot of debts is priced right now, it's required that we have a wholesome relationship in order to hit our return hurdles.

Every single six months we sit down and we go account by cut on what the game plan is, what the returns are, what we have targeted, what we have achieved and so it's a very, very disciplined approach. Once the clients are actually on our platform.

But I think even more importantly is the process that we use in terms of targeting our clients, figuring out who we can be relevant to. In our instance, we're looking for people in certain sectors that are middle market companies that we think need and value what we can provide which we think is differentiated.

So as it relates for example to public sector, public finance, we are only focused on certain entities, certain agencies where we have a relationship that as Don mentioned is broader than just a deposit. Just as on the corporate side, we're focused on companies where the relationship is much broader than just a loan.

What I'd like to do now is ask EJ to comment from a Community Bank perspective because they take a similar discipline..

That's right, Chris. We approach our client targeting in a very consistent fashion with the Corporate Bank.

I would say that in the Community Bank, we tend to compete against smaller banks and in that type of arena our broad product capability, especially in payments, has helped us to price competitively because we can look over -- we look at a three year time horizon to say what kind of revenue are we going to earn over that period of time and how many products can we add.

And where the answer is positive, we can be very competitive. Where a client says I want to just use your balance sheet, but another bank is going to be my provider, we will move on to the next client..

And we go to Bob Ramsey with FBR, please go ahead..

A very strong quarter for investment banking fees and great to see the balance and fee income generally. Just wondering if you could talk a little about the investment banking pipeline heading into this next quarter and sort of what is incorporated in growth in 2015 versus 2014 and your total fee income guidance on the banking line..

This is Chris. I'll start and talk a little bit about the investment banking piece of it. When I look at it, I really kind of look at what are the fundamentals of the business over a period of time. And as I look at those, I think we've expanded our capabilities. We've expanded our sectors like technology, consumer. We just mentioned public sector.

And I think the level of discussions and the strategic nature of the discussions that we're having are better than they've ever been. Having said that, obviously there is a great amount of volatility in when these fees actually come to fruition. I don't really think about it on a quarter to quarter basis but I do look at it over a period of time.

And if you go back to 2010, we were at about a $200 million run rate. Now we're at about a $400 million run rate. If you look at our trailing 12 number currently it's about 13% greater than our trailing 12 number was a year ago.

And I think we can continue that kind of a trajectory in this business, based on the people that Don mentioned we've been able to bring onto the platform and the clients we've been able to convert. So while I like our trajectory, I think the long-term trajectory will continue. There of course will be variations on a quarter to quarter basis.

As it relates specifically to the pipeline, with the exception of one particular area, we are above where we were in our pipelines last year. So I feel good about our pipelines. But as always, first of all we have to execute and secondly we have to have the continued cooperation of these markets..

Okay. Great. That's helpful. I guess also while I'm on fee income, corporate services seemed particularly strong this quarter.

Just any commentary around what drove that line item?.

We had some stronger derivative income along with some non-yield loan fees occur many we also had a slight reclass from other income up into corporate services this past quarter. And so all three of those contributed to the growth. .

Okay. That's helpful. And then I was just wondering, I know you sort of talked about how much you've got left in your existing CCAR capital plan. I just want to be clear, I guess it's your intent to fully complete that in the first quarter here before you guys reload..

That would be our intent to complete it. Because you use it or lose it. That would be our expectation..

And then sort of high level, I'm sure you don't want to be too precise, but thinking about capital plans for next year, you paid out 82% of earnings this year, your capital ratios are every bit as strong as they were a year ago and you all continue to sort of build capital.

Would it be your hope to sort of return a little bit more than that in the coming year?.

Bob, this is Beth. As we indicated, we have submitted our 2015 capital plan. I think we have always indicated that we believe we are well positioned both in terms of our capital base as well as the inherent risk in our businesses as well as our balance sheet. So we think we're well positioned for this CCAR cycle.

We've been successful in the last several years to be a peer leading returner of capital and we look forward to being consistent and an advocate for our shareholders in that regard and being able to announce our results in March..

Our next question is from Erika Najarian with Bank of America Merrill Lynch. Please go ahead..

Good morning. I just had one follow-up question.

Beth and Don, I really appreciate how you laid out your outlook and expectations for the year and I guess as a follow-up to Steve's question, is the message to us that even if -- even without the benefit of higher rates that key is targeting positive operating leverage for 2015?.

That's absolutely the case, yes, that we would expect revenues to grow not only in aggregate but both net interest income and fee income to grow and expense to be relatively stable, so we would show positive operating leverage in both scenarios..

And we'll go to Jared Cassidy with RBC. Please go ahead..

Question for you. You've given us the targets and you've met -- on slide 16 of the handout and clearly you've reached some of these targets.

Can you paint us a scenario where you'll get your net interest margin to over 3.5% from the standpoint of an interest rate environment, what do you think you would need to see for that target to be reached or exceeded? I know higher rates, but if you could be a little more precise..

A couple things. One is I think we'd have to see rates up at least 300 basis points from where they are today and continue to see our balance sheet become more efficient. We've talked about loan growth exceeding deposit growth and we think that's a component of us being able to achieve that 350 guidance..

And with the rates being 300, Don, would that also include a steepening or maintenance of the steepness in the current curve or is it more just the front end of the curve that you're focused on..

It would require some continuation of the steepness of the curve. We're most impacted from the three to five year end of the curve and shorter. So as long as we see the steepness thigh that, I think that would help drive that kind of an absolute increase in the overall net interest margin. .

And then coming back on capital, clearly you guys are very well if not over-capitalized by many measures. You've obviously focused on returning that to shareholders. Can you share with us your thoughts on acquisitions or mergers. Obviously there was a big one announced today.

Do you guys consider that or is it more just let's return it to shareholders for the time being and not really focus on doing M&A?.

Gerard, this is Beth. I think as we've talked about, our capital relative to our business plans and strategies over the last couple of years, we have had a consistent hierarchy of how we see utilizing our capital and returning and deploying it.

First and foremost, to support the organic growth of the Company which we feel our capital base clearly adequately supports.

Second, includes dividends and share repurchases and then we said it's important to have capital available for strategic opportunities and in recent years we said obviously there's nothing in our business model we don't have that we need to be successful and you've seen us do some puts and takes in terms of adding businesses and exiting things that are nonstrategic.

But we clearly have adequate capital to be opportunistic, should something present itself that makes sense for our Company, accretive to our shareholders and is additive to our business plan. It has been a relatively quiet acquisition era with more what I call one-off idiosyncratic type transactions.

But in the coming years it's hard to predict what would transpire but I think what's more important is to know that we are committed to having the agility as well as the capital to do the right things by our shareholders..

And then finally on returning of capital, we recognize the regulators are not very supportive of banks giving back more than 100% of earnings just yet, but should that change possibly in the 2016 CCAR philosophically are you guys comfortable with if there aren't any other opportunities to use that capital of giving back more than you potentially could earn in 2016 especially in your Tier 1 common ratio stays at the levels it's at now.

I think that would depend on a lot of things as far as what we're seeing from an economic environment, as far as what we're seeing for our organic growth. If we look back throughout 2014 we had an 82% return on earnings as far as our dividends and share buybacks and our capital ratios remained relatively flat.

Just because the economy did not allow us to grow the balance sheet at a faster pace, so we were able to maintain our capital ratios. We believe our capital ratios are higher than where they need to be long-term.

And so one way to get there might be higher distributions in the future but that's all speculative as far as what kind of a change would we see in the overall regulatory environment going forward..

Our next question is from Matt Burnell with Wells Fargo Securities. Please go ahead..

Good morning, everyone. Just a question on the level of pension and efficiency charges. I think those totaled on a combined basis about $80 million in 2014. I think in the past you've suggested that maybe a $30 million level for those combined expenses would be reasonable starting point for 2015.

Just curious if you've had any changes in your thinking on that..

Generally in that range and depending upon -- you look at the pension settlement charges, those occur from two factors. One with rates being very low and also the high level of headcount reductions we've had throughout the year. Our headcount is down almost 1,000 people year-over-year. And so that is a direct impact of that as well.

And so if that were to occur again next year, the $30 million to $50 million range wouldn't be bad and that's contemplated as part of our guidance..

Okay. Thank you. And then just finally from me, on page 26 it looks like you saw some higher non-performing loan balances, specifically in commercial, but also in home equity. Is there anything to read into that or is that just given that we're at such low levels, we're going to begin to see volatility in those numbers, not just p consistent declines..

Matt, hi, this is Bill Hartman. You're absolutely right. The numbers are low and any movement is almost expected at this point where things will just bump around, go up a little, down a little. We're sort of into three quarters of fairly stable performance right now with the rate of improvement not as great anymore. Your observation is correct..

And we’ll go to Mike Mayo with CLSA. Please go ahead..

Hi. Looking at efficiency, it seems like a bad news/good news store. I'd love some more color. In my bad news list, first, it seems like you might have missed your old efficiency target. On page 14 of the release it says you had a 66% cash efficiency ratio for 2014 and your prior target I thought was 60% to 65%.

Second, your long-term target implies by 2017 you'll get to an efficiency ratio that would still be 200 basis points worse than where it was almost a quarter of a century ago when you first had the merger.

Third, it seems like you have some of the savings already, like the fixed income headcount reduction's done and you've already exited some businesses. That's my bad news column. My good news column is 64% efficiency over in the fourth quarter. Not clear how sustainable it is. That's an improvement. You do have s some things left.

Branches 2% to 3% reduction per year. How many more years and what do you have left in Six Sigma. Third, the investment bank seems to be an extra lever. It's interesting. Seems like your smaller investment bank is having better results than a lot of the large investment or the largest investment banks out there.

So Beth and Don can you help reconcile my kind of bad news/good news thoughts when it comes to efficiency..

Mike, you get the prize for the longest question of the day. We'll give it a shot and try to be direct here. So as far as our full year 66% efficiency ratio, you're right, it's higher than our previous near term guidance range of 60% to 65%.

I'd say that going into 2014 we saw that revenues were going to be weaker than what we had expected so we took additional steps to accelerate some of the cost savings.

That resulted in restructuring/pension charges of $80 million which were $50 million higher than our plan and so absent those, that increase, we would have been within that range despite the fact that revenues were flat. And so that was clearly an issue for us from that perspective. Good news, you're right, current quarter is 64%.

It was benefited by the strength in the revenues and also our continued discipline as far as managing those costs. And we are very focused on driving those.

As far as the branch rationalization that we do believe that we have a period of time here where we will have the ability to reduce 2% to 3% of the branches for a few years, just the way that our customers are using those branches, that they have a different definition and becoming more of a sales office than they are just a service center.

And so we think that is an opportunity for us and the past year we were able to save run rate a little less than $9 million a year from that type of consolidation effort. We had also talked about the occupancy cost in other areas. Our non-branch related space. And we've been reshuffling a lot of that space.

Benefit he especially later in 2015 because that's when we'll see the benefit of those lease terminations come through. And we expect to see a 15% reduction in our non-branch space over the next year and-a-half. And that will translate to about a $12 million a year run rate savings for us.

As far as Lean Six Sigma and our continuous improvement focus, I'd say that we're early stages there, that we really have just started to kick off those programs and we're getting more and more traction, that the benefit that we're projecting from that in 2015 is stronger than what we had in 2014.

And we think that will continue to gain hold and become more engrained as part of the culture and will help drive that going forward for us..

Okay. One follow-up then. The specific follow-up, the 15% reduction in occupancy, you guys said it was 17% when Beth presented in. Was that a lower number or did you receive some of those savings. As it relates to Lean Six Sigma can you quantify any aspect of that or is that kind of culture. My big picture question for Beth.

We've been down this road before. Again, just comparing the efficiency ratio of some of your peers, not to mention the 1994 level versus where you are today, and I understand you're changing the culture and you've made strides but is there something a little bit more structural would you consider more business exit. Thanks..

As far as the occupancy for the non-branch space, it's reflective of the changes we've already made. We have not reduced our projection as far as the savings there. It's just what we have left out of that 16% or 17% that we would have shared in September.

Then as far as Lean Six Sigma, I would say that the economic benefit from those Lean Six Sigma he reviews that we implemented in 2014 was $25 million. Our projection for 2015 is $40 million for those efforts. And that's not all the cost savings. It's just for those specific initiatives that are tied to that use of the Lean Six Sigma tool..

Mike, this is Beth. And to the second part of your question, we have made progress in 2014 and we are committed to continuing that progress in our efficiency goals and our productivity in 2015.

This was a year and you have seen across the industry a number of people have noted that progress was difficult in this continued low interest rate environment as well as slow economic growth.

So we did as Don indicated make some decisions early in the year that brought through some higher restructuring charges to make sure we continue to do the things that keep us on the path to be sub-60, which is our commitment. We are on that path. We are committed to it.

And as I look at us relative to peers, each and every institution has their own unique business model and there are attributes of ours that are different from some of our peers and specifically we have talked about being predominantly a commercial bank with a distinctive Corporate Bank model which as you indicated has indicated significantly to our performance in the form of investment banking and debt placement fees and is a lever.

Our trailing 12 on that business is right at $400 million now.

So as we look at it positive operating leverage is something we've been talking about for well over a year, in addition to efficiency, as something that is driving our performance and as we have the Corporate Bank is a big contributor, it is not a low efficiency business but it has certainly been an outperformer both in absolute performance as well as relative performance this year and as we look into the future.

And we do not have as large a payment business or some of the high yielding consumer assets. When I look at the mix of our business, I think what's important is our focus on the operating leverage, focus on our path and our commitments that we're making and continuing to deliver on those..

And we’ve question from Richard Bove with Rafferty Capital Markets, please go ahead..

I've been looking at page 19 I guess of your press release and it indicates that funds available for shareholders actually went down by 1% in 2014 versus 2013.

And trying to relate that to the stock price, which was up about 3.6% in 2014 or well below the improvement in the market and even with the rally going on in the stock right now, if you take a look at the stock price from let's say January 1st of 2013 to the present, it's down about 4% in a market which has been relatively robust.

So I guess the question is have you done any studies at all which indicate what the impact of repurchasing $128 million worth of stock has on the stock price? In other words, do you have any rational which shows that by buying back stock it has a positive impact on the stock price?.

I'll go ahead and take the first crack. This is Don. As far as the comment as far as the net income available for key, the line that you're looking at that includes our discontinued operations and in 2013 we had a gain on the sale of our victory capital. And in 2014, we had a loss from the sale of our residual interest in our student loan trust.

And so if you look at just the net income available from continuing operations, we're up 8% year-over-year and so I think that's showing the strength in the overall performance for that line item. As far as the share buyback program that we do believe that it is additive or beneficial to our existing shareholders.

We are constrained as far as what we can do to help manage our capital position based on how the current rules work in this environment and so we believe that it is helpful. Keep in mind that at $128 million in the current quarter, it really doesn't move the dial a lot as far as the market activity and flows for our stock.

So it's helpful but I don't think it's a meaningful addition from that perspective..

And I would just add that I appreciate the perspective on the stock performance because obviously it is among our goals to deliver top performance to our shareholders in terms of returns, both through our performance as well as our capital actions.

And if you look at us on a three year TSR, we are among the highest performers in the index and really driven in 2013 where we led the peer index in the group in that regard. Many times following a record breakout year, you tend to migrate back to more of the middle of the pack, which we did in 2014.

But again, when we look and I think shareholder return needs to be viewed kind of in multiyear windows, extremely strong performance both retroactively on a three year basis.

We felt like 2014 was solid and as we said as we go into this year, with positive momentum and confidence tore what we will continue to do in terms of our ability to build value for our shareholders..

I understand that basically there's a massive demand upon all managements in this industry to buy back shares. What I don't understand is in virtually no case where there's been huge buybacks of shares has there been outperformance of the stocks vis-a-vis the market.

And I'm guessing that the reason why managements are buying back stock is not because they studied the impact of the buybacks on stock prices, but because their investors are saying we want you to buy back stock.

And therefore, I'd really be interested if you have a really have studied, is there a relationship between buying back stock and an increase in the price of the shares? Because clearly with all these banks selling at premiums to book value, buying back stock is not what it used to be..

Well, I would just like to add there that we do continuously look at whether or not we should be using the capital and the earnings to buy back shares. We do believe that it still is an attractive price for us to buy back, that we are generating earnings that exceed the need from a capital perspective to support our business organically.

And so we feel it's most appropriate for us to return that to our shareholders. And based on how the current rules are structured, that we are limited as to the form that that distribution can occur.

And so again, we feel that it's appropriate for us to continue to buy back shares and feel that it's an appropriate price for us to continue to use the earnings to do so..

And we have a question from Marty Mosby with Vining Sparks. Please go ahead..

Thank you. I wanted to focus on we've seen the invest banking kicking in a lot of the super-regional banks.

What is the tailwind or competitively how's the landscape shifting to be able to allow for you all to take advantage of what really seems to be a very strong trend?.

Marty, I will let Chris Gorman augment the answer. I do think it is important to note that we have a very distinctive Corporate Bank model and it's something that we have built over years to be a very sophisticated platform and I think as we look at 2014, had record performance and relative outperformance versus a regional peer group.

I'll let Chris talk a little about what some of what the drivers are of what we think is a very distinctive part of our business model..

Sure, Beth. Marty, the way we see it is there's -- although there's 7,000 banks in the United States, there's probably 18 or so kind of globally that have the capability to complete sort of integrated corporate and investment banking type work. Most, the pre come fence predominance of those banks are focused on very large companies.

We are focused on mid-cap, middle market. You have many boutiques who have very good at what they do. Clearly don't have the capabilities that we do. So the opportunity for us is first and foremost, focus and we focus on certain industries and specifically on the middle market. We think actually focus propels growth.

The second thing that we think we have a huge advantage is our size. And when I say size, I mean sizes and small. Our entire Corporate Bank only has 2,000 people in it so it's pretty easy for us to ma maneuver and to get things done on behalf of our clients.

The other thing I would say that really as we think about some of these step functions, I think the stability of our platform over a period of time is both attractive to the people that we bring on to the platform and I think it's attractive to our clients and prospects. So that's the sort of the opportunity that we see out there..

And Beth, what I also wanted to kind of focus on was your investing in payments or cash management. That's an area where you've been kind of behind the curve.

Can you see you replicating the success there as you have developed investment banking platform that we just talked about?.

Marty, we do have our commercial payments business embedded within our Corporate Bank to align is very much to the strategies and how our targeted clients, we can matter to them, meet their needs. So we have done a variety of things as we've invested to align our commercial payments capabilities with some of our targeted industry groups.

We have developed new product capabilities that we have deployed in purchase and prepaid. And again, that fits well with some of our targeted verticals.

So within that, we are making sure we have a core competitive offering and then we're also using the strength of our Corporate Bank model and our Community Bank model to make sure that we find unique niches of growth and opportunity where we can be relevant and have the opportunity to get returns and growth for it..

Thanks.

Just lastly, principal investing, is that an outgrowth from having more connection with these middle market and investment banking and other types of avenues or is that something else? What are kind of the sources? Does that tie to your core business?.

Marty, this is Don. This is a piece of the business that we've had for a number of years. It really isn't linked at the hip with our capital markets activity. It's just an investment strategy that existed years ago and we've been benefiting from that.

It's more of a wind down mode for us now and we think over the next 10 years that that will continue to. .

Thanks..

And we have a question from Nancy Bush with NAB Research. Please go ahead..

Good morning. I just got off the BB & T conference call. They were of course touting the Susquehanna acquisition and the fact they will again entry into Cincinnati and I think their plans are to expand further into the Midwest. Can you speak to the competitive conditions there and where we stand in terms of pricing and structure.

We're hearing a lot of horror stories earlier in 2014 and if you can just tell us how we ended out the year..

Nancy, this is Beth. I will tell you that I think this has been a year where in virtually every conference call, I think every bank has talked about the competitive intensity in the market, particularly in the loan generation area. So I would tell you nationally we see a lot of intensity.

It is true that historically the Midwest has been outsized in its competitive intensity, given the number of competitors that are here. We find that we compete well across all those different markets.

And as we look into 2014, I think it will be, continue to be highly competitive on pricing, on struck structure, on product offerings and I think we have done over the last couple years, if you hear us talk, trying to sharpen our focus about where we can matter, up our execution and our ability to reach targeted clients and bring the full relationship offerings of our bank and translate those into meaningful gains in acquisition and expansion of client relationships.

And we feel like we have several years of performance in that regard and as we said, we have confidence, we look forward that that's a strategy that fits our bank and our markets..

Okay. And another question for you and/or Don. I mean, liquidity, you only in recent years have you become what I would call a very liquid organization. Obviously hanging onto core deposits is a big goal for you.

As we get closer to the interest rate increase time and I'm hoping we are getting closer, how are you -- what kind of conversations are you having with your retail clients and what kind of product planning are you doing to make sure that when liquidity starts to lessen, that you hang onto the deposit base that you've got? And grow it, hopefully..

Nancy, this is Beth.

I believe this would be a nice opportunity for Dennis Devine of the Co-President of our Community Bank to talk a little about the value proposition and how we are making sure that the core funding, which we also by the way agree that we hope interest rates are very close to going up, but as rates potentially move that our core funding and our deposit mix as well as our client base there has really changed substantially over the last couple years and puts us in a very different position..

Thank, Beth. Thanks for the question, Nancy. You see in the balance sheet the continuing decline of time deposits. So the CD book has really begun to roll over the years. But a commensurate offset with the growth in the our core liquid deposits, transactional deposits as well as money market deposits within the.

Commercial deposits we talked about earlier. The strategy of the retail organization is organized around client growth. You've seen new products introduced this year to accomplish just that. We have a relationship based strategy.

So when you look at the yields that we're currently offering within the non-time book today you see we continue to manage that. Really thoughtfully around those client relationships and certainly as rates begin to -- as interest rates grow they the market, we've got a core relationship book that we'll be working with.

As we assess what the yield on those deposits will continue to look like. So you'll see us grow clients. You'll see us really thoughtfully manage the current book. And it will be a sense of what.

Holistically across key but certainly very deliberate understanding of what does that look like in the money market book relative to what does that look like against each one of the transactional deposits that we have within our business.

We're in a strong position given the decline that you've seen in timed deposits and a strong relationship based liquid book within our Community Bank. .

Do you feel that you'll have to perhaps give more of the rate rises to clients and to customers and more quickly than you have in the past? People have been complaining and I'm sure you're aware of low rates for a very long time and my sense is that they're going to be more sensitive when they begin to hear the news that rates have begun to rise..

It's an unprecedented rate environment. We clearly will manage that closely going forward. We've got some good experience here and we expect that given the relationship nature of our clients, that we'll be able to manage that very well. And we don't have rate shoppers today..

And with no further question I’ll turn it back to you Ms. Mooney for any closing comments..

Again, we thank you for taking time from your schedule to participate in our call today. If you have any follow-up questions, you can direct them to your Investor Relations team at 216-689-4221, and that concludes our remarks. Please have a good rest of the day..