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KeyCorp (NYSE:KEY)

Q3 2011 Earnings Call

October 20, 2011 9:00 am ET

Executives

Jeffrey B. Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council

William R. Koehler - President of Key Community Bank

Beth E. Mooney - Chairman, Chief Executive Officer, President, Chief Operating Officer and Member of Executive Council

Christopher Marrott Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association

Analysts

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Michael Turner - Compass Point Research & Trading, LLC

Bryan Batory - Jefferies & Company, Inc., Research Division

Russell Gunther

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Kevin Barker - FBR Capital Markets & Co., Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Eric B. Anderson - Hartford Financial Management, Inc.

Operator

Good morning, and welcome to KeyCorp's 2011 Third Quarter Earnings Results Conference Call. This call is being recorded. At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Ms. Beth Mooney. Please go ahead, ma'am.

Beth E. Mooney

Thank you, operator. Good morning, and welcome to KeyCorp's Third Quarter 2011 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer, and available for the Q&A portion of the call are the leaders of our key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler. Also joining us for the Q&A discussion are our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda.

Slide 2 is our forward-looking disclosure statement. It covers our presentation materials and comments, as well as the question and answer segment of our call today. Now, if you would, please turn to Slide 3.

This morning, we announced third quarter net income from continuing operations, attributable to common shareholders of $229 million or $0.24 per common share. Our results reflect continued improvement in credit quality, good expense control and the ongoing execution of our business plan. Key's favorable credit quality trends have benefited from the actions taken to improve our risk profile and our early recognition and resolution of problem credits.

Key's net charge-offs to average loans declined to 90 basis points which is our seventh consecutive quarterly improvement and the first time that it has been below 1% since the first quarter of 2008. Nonperforming assets continue to decline during the third quarter, representing the eighth consecutive quarterly decline.

We also reached an inflection point in our loan portfolio. Period-end loan balances increased in the third quarter, reflecting the progress we've made in repositioning our business and a 5.7% increase in our commercial, financial and agricultural portfolio. This increase in our CF&A loans was driven by continued activity in the industrial sector, as well as increases in middle market lending in all 3 of our geographic regions.

The increase in loan balances also reflects our ability to leverage the alignment of our organization across business lines to deliver value to our clients, as well as identify, share and convert new opportunities. We remain focused on our targeted client segments and in supporting small and medium-size businesses. To that end, Key recently announced that it will provide $5 billion in loans to qualified small business owners over the next 3 years. We believe that this is an important initiative to foster growth and expansion which are critical to job creation.

We are also focusing on sustaining and building noninterest income which is critically important given the headwinds from regulatory changes. As Jeff will discuss in our financial review, consistent with general industry trends, we saw a reduction in the third quarter in some of our market-sensitive businesses, including investment banking and capital markets. This was offset by higher net gains in our principal investing business for the quarter.

We have been active in implementing strategies to impact -- mitigate the impact of the new debit card rule. These strategies are focused on retaining and expanding our engaged client relationships by offering client choices, aligned with their needs and preferences, and we are in the process of reviewing how to reduce the cost structure of our Consumer Payments business.

At a time when many competitors are raising fees and eliminating or deemphasizing customer rewards, we believe that we can differentiate Key in the marketplace by offering exceptional service and a more compelling value proposition to our clients.

In the third quarter, we launched our enhanced relationship rewards program which is our unique response to Durbin and the changing regulatory environment. By staying true to our client insight approach, we took the time to listen to our clients and identified what is important to them. Key's new program will reward customers for taking advantage of our full range of services and for choosing Key as their primary bank. We believe this will help us drive new client acquisition and deepen relationships with our existing clients.

The final item on this slide focuses on capital management. Key ended the third quarter in a strong position, with our Tier 1 common equity ratio at 11.34% and our Tier 1 risk-based capital ratio at 13.55%. These levels should place us in the top quartile of our peer group and position us for a successful transition to Basel III.

Our strong capital position provides us with the flexibility to support our clients and our business needs and evaluate other appropriate capital deployment opportunities. We are currently in the process of finalizing and presenting our 2012 financial plan to our board which will then become our base case for our capital plan submission to our regulators.

While we continue to wait guidelines for the 2012 process, we preliminarily expect our capital planning process to include an assessment of certain capital distributions, including potential dividend increases and share repurchases in the future.

On Slide 4, we showed the progress that we continue to make on our long-term goal. On a number of these measures, we are currently within our targeted range, including maintaining a high quality and a diverse revenue mix, and we are continuing to make progress on other measures such as returning to a moderate risk profile and bringing asset quality within our targeted range.

And at the bottom of this slide, you can see that our return on average assets for the third quarter was 1.14%, which was also within our targeted range.

Before I turn the call over to Jeff, let me conclude by saying, our third quarter results demonstrate consistent, positive momentum for Key, as we continue executing our relationship strategy. Despite the uneven pace of the recovery and regulatory changes, we are gaining traction, in both the Community Bank and the Corporate Bank, and we believe we have the right business model to compete and win in the marketplace.

With a strong foundation of our strong balance sheet in place, we are well-positioned to organically grow our franchise and remain disciplined, with respect to expense and capital management. Now I'll turn the call over to Jeff for a review of our financial results. Jeff?

Jeffrey B. Weeden

Thank you, Beth. Slide 6 provides a summary of the company's third quarter 2011 results from continuing operations. As Beth commented on earlier, for the third quarter, the company earned a net profit of $0.24 per common share compared to $0.26 for the second quarter of this year and $0.19 for the same period one year ago. Overall, we were encouraged by the continued progress we experienced in credit quality, loan demand and expense management during the third quarter.

Over the next several slides, we will review in more detail the results from the current quarter.

Turning to Slide 7. Average total loans declined $446 million during the third quarter compared to the second quarter of this year. However, this doesn't reflect the underlying strength that we saw in our commercial client base, with commercial and industrial loans increasing 2.7% linked quarter on annualized. And as Beth mentioned, on an ending balance basis, we saw our total loan portfolio increased $355 million or 0.7% on annualized.

This was the first period end -- the period end increase in the total portfolio since the third quarter of 2008.

As a result of this period-end balance increase, our pipeline of lending opportunities remaining solid and the reduced levels of run-off and balances in our exit portfolio, we believe we have reached an inflection point in our loans where we can begin to show an increase in average balances going forward.

While our clients remain cautious about the world economic conditions, they are making capital investments in their operations and taking advantage of historically low interest rates and available liquidity for lending.

Another encouraging sign of where we are winning with our clients came from the increase in our commercial financial and agricultural loan commitments during the quarter. This was the second consecutive quarter where we experienced an increase in total CF&A commitments and an increase in utilization rates by our clients.

Moving to Slide 8. On the deposit side of the balance sheet, our trend of improving mix of deposits continued during the third quarter where we experienced an -- where we experienced a $1.2 billion or 2.8% annualized increase in non-time deposits. As noted on this slide, average balances of time deposits declined approximately $700 million during the third quarter. And at quarter end, we had $11.2 billion in time deposits outstanding.

We have identified under the Highlights section of this slide, the scheduled maturities of our CD book and the rates that apply to these balances. Approximately 74% of the CDs outstanding at September 30 mature over the next 5 quarters, allowing us the opportunity for continued repricing of the book. And as a point of reference, the weighted average rate paid on new and renewed CDs during the third quarter is 25 basis points.

Turning to Slide 9. We continue to experience an improvement in our asset quality statistics again this quarter. Net charge-offs declined to $109 million, or 90 basis points, of average loan balances from the third quarter. As Beth mentioned, this was the first time since the first quarter of 2008 that our net charge-offs, as a percentage of average loans, was below 1%. In addition, our nonperforming loans declined to 1.64% of period-end loans at September 30, 2011. Our reserve for loan losses stood at $1.1 billion or 2.35% of period-end loans, and represented 143.5% coverage of nonperforming loans at September 30, 2011.

As we have identified on Page 21 in the Appendix of today's materials, criticized loans outstanding continued to decline during the third quarter.

For the fourth quarter, we anticipate nonperforming loans to continue to trend lower for our net charge-offs to be relatively comparable to the third quarter level and for the provision for loan losses to remain below the level of net charge-offs.

Turning to Slide 10. For the third quarter of 2011, the company's taxable equivalent net interest income was $555 million and the net interest margin was 3.09%, down from $570 million and 3.19% for the second quarter of this year.

Average earning assets were relatively stable for the third quarter compared to the second quarter with loans and investment securities down approximately $1 billion and short-term investments up approximately $1.4 billion. This shift in mix explains the majority of the pressure on our net interest margin for the third quarter.

Our expectation is for the net interest margin to be stable to up and for average earning assets to remain relatively stable for the fourth quarter compared to the third quarter of 2011. Helping reverse some of this margin pressure is the expectation of modest improvement in the mix of assets with short-term liquidity coming down, as it is redeployed for debt maturities and for the expectation of growth in our loan balances and continued improvement in the mix of deposits compared to the prior quarter.

Looking at noninterest income, we experienced an increase in gains from principal investing of $17 million, as well as gains associated with the redemption of certain capital securities in the amount of $13 million during the third quarter compared to the second quarter of 2011. In addition, we saw growth in deposit service charge income and letter of credit and loan fee income for the current quarter. These increases helped offset declines in our investment banking and capital markets income, as well as trust and investment services income. Both market sensitive areas were impacted by the market conditions that existed during the third quarter.

Also as we look at the fourth quarter, the effect of the new pricing controls on debit transactions are estimated to negatively impact our revenue by $12 million to $15 million per quarter before implementation of mitigation strategies.

Turning to Slide 11. Expenses remained well controlled for the third quarter of 2011. For the current quarter, noninterest expense was $692 million, up from $680 million for the second quarter of 2011. The change between the third quarter and the second quarter can be largely explained by a reduction in the credit to the expense for the reserve for unfunded commitments which declined by $11 million to a net credit of $1 million for the third quarter. Also of note was the continued favorable experience we had during the third quarter related to other real estate expense, resulting from gains on dispositions of property, helping to offset operating expense and valuation adjustments in this area.

For the third quarter, other real estate expense was an expense of $1 million versus a credit of $3 million for the second quarter of this year.

Slide 12 shows our pretax pre-provision net revenue and return on average assets. Pre-provision net revenue at $346 million for the third quarter was relatively unchanged from the second quarter of 2011. As effective expense control, better results from principal investing and gains associated with the redemption of the capital securities, more than offset the decline in net interest income and the decline in market-sensitive revenue from investment banking and capital markets activities during the current quarter. Also shown on this slide, are a return on assets for the past 5 quarters. The return on average assets for the third quarter was 1.14%. Our return on average assets for the third quarter continued to benefit from provision expense remaining low due to improving credit quality and well-managed expenses.

And finally, turning to Slide 13. Our tangible common equity ratio and estimated Tier 1 common equity ratio both increased during the third quarter to 9.82% and 11.34%, respectively, at September 30, 2011, placing us in the top quartile of our peer group on these ratios.

In addition, both book value and tangible book value per share increased this quarter to $10.09 and $9.10 per share, respectively, at September 30.

As Beth mentioned in her comments, we are in the process of finalizing our 2012 profit and capital plan at this time. This is critical input to our CCAR submission that we expect to complete during the fourth quarter and submit to regulators with our 2012 capital action request. At this time, we are in the process of updating our own stress test scenarios and we, like others in the industry, will need to incorporate into our analysis, the regulatory stress test once it is available.

Beth further commented on our priorities, with respect to capital management, which will include reviewing the dividend for possible increase and seeking authority around potential share repurchases. However, until we have additional transparency into the 2012 CCAR process, we are not able to comment further on this at this time.

That concludes our remarks. And now we'll return the call to the operator to provide instructions for the Q&A segment of our call today. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Steven Alexopoulos from JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Jeff, regarding the capital plan that's being submitted, can you just help us understand the timing of when we should expect to see the outcome from this?

Jeffrey B. Weeden

Well, we really -- we don't know when the outcome is going to take place because we haven't received the instructions yet from the regulators. As I commented on, all of us in the industry are really waiting for the process to be further articulated by the regulators. Once we have that, then we'll be in a better position to give some type of indication as to when we would expect to see things coming out, but I would assume that the regulators would make that public as to what their timing would be.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay, but we shouldn't expect you to move forward for any type of buybacks or anything this year then. We won't know until early next year?

Jeffrey B. Weeden

That is correct. It will be a 2012 event.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Okay, and just one follow-up on the margin guidance you just gave. How sensitive is that to you delivering loan growth to see that margin stabilized or be up slightly in 4Q?

Jeffrey B. Weeden

Well, I think if you look at our ending balance basis, we think that average balances will be up in the fourth quarter and it does have some degree of sensitivity associated with it, using our short-term liquidity. So we have 2 things in the guidance that were provided. One is that we have debt that matures here in the fourth quarter. And the second item that we have provided is that we expect to have loan growth, so there is some degree of sensitivity associated with that. The thing that would be negative against that is just that we have a much larger inflow of deposits, and we'd still end up with some short-term investments. But net interest income should be up in the fourth quarter.

Operator

Our next question comes from Matt O'Connor with Deutsche Bank.

Matthew O'Connor - Deutsche Bank AG, Research Division

Sorry to ask another capital question since we don't necessarily know the answer at this point. But would you hope that when you submit your capital planning process

that you can draw down on some of your capital versus just use projected earnings power to deploy capital? Because obviously your Tier 1 comment of -- it's about 12% quite high -- or sorry, 11% and probably 2%, 3% above where you'll need to be. Is there hope that you can draw that down? Again, I realize you don't know, but would that be the hope?

Jeffrey B. Weeden

I think that you answered it. We don't know at this particular point in time. We have to wait to see greater transparency coming out of the process and, of course, ongoing dialogue that we may have as the process unflow -- unfolds here. So we're not able to respond any further at this point in time.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. And then just elsewhere on the expenses. You just finished up an expense initiative a quarter or 2 ago, expenses came in a little bit less than the low end that you've been projecting. And at the same time, the revenue outlook is a little bit more challenging. How should we think about just the investments spend and the expense base heading into, say, 2012?

Jeffrey B. Weeden

Well, we haven't provided specific guidance on 2012 at this point in time, Matt. But suffice it to say that while we stopped reporting on our expense initiative, it is still alive and running in the organization, so we're still focused on expenses. I think both Beth and I commented on it that expenses do remain well managed and controlled. And we're going to have to continue to stay on top of that in this somewhat challenging revenue environment.

Operator

Our next question comes from Ken Houston with Jefferies.

Bryan Batory - Jefferies & Company, Inc., Research Division

This is Bryan Batory from Ken's team. My question is on your pre-provision near-term outlook. It looks like it came in around 3.33% this quarter. And if we assume, I'm just wondering what your outlook is in 4Q. If we assume we got a little bit of growth in NII, and you have the Durbin impact hitting, but then on the flip side you also, typically, get a pickup in 4Q in investment banking fees. So could you give us kind of a sense of what pre-provision could have looked like next quarter?

Jeffrey B. Weeden

Well, we've talked about in the past a range of around $300 million to $340 million. That's been the prior range that we provided. I think in terms of looking at the fourth quarter, we do expect to see a little bit of an increase in our net interest income. I think in terms of expenses, they'll still be very well controlled. I think on the fee revenue side of the equation, there are a couple of things there that just looking at the gain that we had on the redemption of the trust preferred securities, as well as principal investing was very strong here in the current quarter. So those would probably be not as strong -- principal investing won't be as strong in the fourth quarter would be the expectation. And then also, we wouldn't have the gain on the trust preferreds that we had in the third quarter. So if I were to guide in that particular level, it would be most likely below what we experienced just because of those 2 items that we had during the current quarter.

Bryan Batory - Jefferies & Company, Inc., Research Division

Okay, and one follow-up. You guys mentioned last quarter that CRE balances could stabilize or even grow by the fourth quarter of '11, is that still the outlook and can you just discuss some of the trends you're seeing within that portfolio?

Jeffrey B. Weeden

Well, I think in terms of the CRE, real estate capital line of business itself is actually doing quite well. Some of the clients still are more on the C&I book rather than the CRE book. So the trend obviously if you look at the average balance basis, the trend there is still going to be lower on average balances, simply because ending balances were below the average for the quarter. Chris, do you have anything else you'd like to comment on?

Christopher Marrott Gorman

Sure, Jeff. I mean, Bryan, there's a couple of buckets. There's Key, overall, and I think point-to-point we're probably down something like 3% Key overall. The preponderance of the real estate loans are in the real estate line of business. And that gets a little more interesting in that if you look at our real estate line of business on an average basis we're down, call it $700 million or 8.1%. But on a point-to-point, we're actually up $20 million and we have a pretty decent pipeline. So we feel pretty good about the comment that it was going to stabilize in the third quarter and grow in the fourth.

Operator

We'll go next to Matt Burnell with Wells Fargo Securities.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

One question, I'm sorry if you've already gone over this. I jumped on the call just a couple of minutes late. But in terms of commercial-industrial loan yields, it looks like those were down about 15 basis points. I'm curious as to what was driving that. What the effect of the swaps in that portfolio might have been? But I guess in the bigger picture, are you seeing greater competition in that business? What are the pricing of commitments in that business? And did the increase in LIBOR over the quarter actually helped, in terms of the yield of the loans that you put on in the balance sheet in the third quarter?

Jeffrey B. Weeden

This is Jeff Weeden. I'll ask my colleagues to comment on that in just a second. But with respect to the swap book, it had very little impact, very little during the current quarter. Almost 0 impact there, so only a minor drag on that. I think the overall yield as you have pointed out was down but at 3.98% is certainly in line, as we looked at the pure comparisons. And it's also a remixing of the book. You have older loans that are rolling off. You have newer loans that are coming on. But I know that the rest of the team could comment on what they're seeing from the competitive front.

William R. Koehler

Matt, this is Bill Koehler. I would say the market is competitive, but I wouldn't say it's any more competitive today than it was a quarter or two ago. We do see pressure on pricing in any given situation on any given day. It has been more in the form of pricing and at least in the middle market less on structure, but we are seeing some pressure on structure in any given situation. Our yields and spreads have held up, by and large, and we think that's an indication of the strength of our relationship strategy.

Christopher Marrott Gorman

So Matt, it's Chris Gorman. Just to augment Jeff and Bill's comment a bit. I think Jeff is spot on. Because we are winning a lot of new clients, we have a lot of newer loans that are replacing older ones. For example, on the corporate bank on a C&I basis point-to-point we're up about 14% just in the last quarter. And underneath that, there's a fair amount of movement so that's, I think, the biggest factor. In terms of our competitive perspective, we still see C&I book for kind of crossover credits 225 bps over LIBOR or so. We see that holding. And in terms of structure, I would say with spreads blowing out in August and September, I think, structure has actually become more favorable and pricing on the margin is more favorable during the last 60 days.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And Jeff just a very administrative question. In terms of the FDIC expense, should we expect that to continue to be at sort of a high single-digit number on a quarterly basis going into 2012?

Jeffrey B. Weeden

Well, for the time being, I think that's a reasonable expectation, given our overall risk profile of the company. Our FDIC insurance certainly has come down significantly.

Operator

[Operator Instructions] We'll go next to Mike Turner with Campas Point Investment.

Michael Turner - Compass Point Research & Trading, LLC

Most of my questions have been answered. Just two ones in the -- other income line item, was there anything unusual in there? I know it's a little higher last quarter and then it was even higher yet again in the third quarter.

Jeffrey B. Weeden

We did have a $13 million gain that we identified, associated with the redemption of our trust preferred securities.

Michael Turner - Compass Point Research & Trading, LLC

Okay, thanks. That's right. You pointed that out earlier. And also separately, what's kind of just from the 10,000-foot view, what's gross loan yields originations? What did they look like for the third quarter? I know there's a number of different products to wait that across. But at least relative to kind of your overall loan portfolio at $450 million?

Jeffrey B. Weeden

Well, I think what we would talk about here. We have several other books that are in exit. So if you look at the Marine book and some of the national home equity book, those are higher yield and those are in exit, but there's no new originations that are taking place. I think Chris Gorman just commented on a lot of them are in the LIBOR plus 2 in the quarter range that for new originations on the commercial side of the equation. I don't know, Bill, what you...

William R. Koehler

I would say in the Middle Market, again, you got -- it depends on the risk profile, but we'll see LIBOR plus 2 in the quarter and some of the more leveraged credits and you could be down in the LIBOR plus 150 and some that are stronger. So that's probably a decent range.

Jeffrey B. Weeden

And even higher than LIBOR plus 200, 300, 400, too. It depends on -- everything depends on a risk profile.

Christopher Marrott Gorman

I would add as you look at our real estate book which we just chatted about, the new originations there would look to be kind of 275, 280 over LIBOR.

Operator

We'll go next to Russell Gunther with Bank of America Merrill Lynch.

Russell Gunther

Just quickly on the reserves. If you could widen your comments for net new loan growth going forward and the provision to be below NCOs. Could you give us a sense in terms of the magnitude that you might draw down the reserve and where you're comfortable as a floor?

Jeffrey B. Weeden

Well, it's difficult to give you that exact amount until we see kind of how the ending credit balances end up. So there still -- the expectation is the charge-offs will exceed the amount of the provision and that we are in a longer-term cycle coming down here, in terms of overall nonperforming loans, criticized or identified in the materials today also continue to decline. So I think in terms of how we're going to have to look at this charge-offs now for the third quarter on an annualized basis were at 90 basis points. The reserve is at 235. So depending on how that outlook continues to look, which still seems to be a favorable trend in place. It will be coming down, but I can't tell you what the floor may be. I don't think that there's -- In GAAP, I don't think there is "a floor that would apply." So you have to kind of look at how it builds up each and every quarter.

Operator

We'll go next to Nancy Bush with NAB Research.

Nancy A. Bush - NAB Research, LLC, Research Division

Beth, kind of a strategic question for you. I mean, I think you would agree that in the past, KeyCorp has been sort of a deposit and liquidity-challenged company. Do you see that having permanently changed right now? And has that, if it has, has that impacted your thinking on what you might be doing in terms of shaping the company, geographically, in the future?

Beth E. Mooney

Yes, Nancy, that's a great question. And I do think as we talk about the fact we have fundamentally repositioned our business mix, our risk profile and our company, part and parcel of that was to become a core-funded institutions. It's been 1 of our 5 path to progress to the future as we've identified the things we need to do. I consider that a permanent repositioning that we are now a core-funded company. As we think about what that means for shaping our geography, we clearly have found our way to become core-funded through the strength of our Community Bank franchise and our enhancements to our deposit network, as well as our business strategy around customer service and serving the clients in our market. We continue to invest in certain growth markets, primarily Portland, Seattle and Colorado. But given the economics of our industry, we're also continuing to look at productivity, where clients are using us in channels and making sure we're as efficient as we can be and our strategies in many ways around our branches are maturing, so we will continue to selectively invest in order to support our relationship strategy, but we are pleased with where our franchise is.

Nancy A. Bush - NAB Research, LLC, Research Division

And I would just ask as a follow on and I apologize if you address this already, I kind of in and out of the call. Did you address debit fees and what your philosophy is, given all the controversy in the industry?

Beth E. Mooney

Yes, on that question, I'll ask Bill Koehler the President of our Community Bank because we have done some things to reposition our product and differentiate ourself.

William R. Koehler

Nancy, our focus with respect to debit in the regulatory environment is to acquire and retain engage clients. And when we say engage, we mean people who are choosing to use us as their primary bank. In that regard, you may have seen Key relationship rewards and the offering we announced about 2 weeks ago and what that is focused on is clients who want to build a relationship with us and rewarding them for that loyalty. Key relationship rewards promotes choice. It promotes control. And we think it's fair and the response we've gotten from our clients who have asked us about it and others out there in the market has been very, very good.

Nancy A. Bush - NAB Research, LLC, Research Division

So this will be just basically a relationship strategy that you may be doing more with debit fees sort of after this kind of shakes out or you just haven't said anything yet?

William R. Koehler

We have chosen not to move forward with debit fees.

Operator

Our next question comes from Mike Mayo with CLSA.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

I'm going to ask what might be a little sensitive, but I wanted to understand a little bit more about the say-on-pay vote and I guess you're one of the few companies, or at least banks, that got a no vote. And I didn't really understand what that means and how you might change the incentive compensation.

Beth E. Mooney

Mike, this is Beth Mooney, and that was not in this year's vote. That would be 2 years ago that we were a company that did receive a no on say on pay. And this year, that was not the case. And our board who manages our compensation and our Executive compensation programs took that vote very seriously, made a number of improvements that they announced and shared in the spring, and we were successful with our say-on-pay vote this year.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

So as you're the CEO and you work with the board, what's the main incentive-based compensation that you're hoping to use to motivate the management team?

Beth E. Mooney

Our board sets our incentive plans and does so in conjunction with outside consultants, as well as counsel and those are disclosed, the terms of our incentive compensation programs are described fully in our proxy done by the board in their role and oversight of the organization.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

And is Henry Meyer still a consultant? And if so, what's his pay arrangement?

Beth E. Mooney

Henry Meyer is not an employee nor an Executive Officer of the corporation. We did, upon his retirement, ask him to remain for a period of a year. His primary role as a new CEO, you can only imagine the challenges of our industry, as well as the time as well as establishing our story with our investors is in a community role, where he has helped transition community and client relationships. And has specifically aided me in that regard.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

And what is his compensation for that one year?

Beth E. Mooney

Again, it's disclosed in our proxy and I will apologize I don't remember on the top of my head, but it is disclosed and it was subject to an 8-K filing at the time.

Operator

Our next question comes from Paul Miller with FBR Investment Bank.

Kevin Barker - FBR Capital Markets & Co., Research Division

This is Kevin Barker filling in for Paul Miller. A quick question on the $5.7 billion worth of CDs that are maturing next year at 2.44% how -- can you lay out when the maturities of those at the beginning in the first quarter all the way down through the fourth quarter? And where you see those repricing or whether you're actually go at -- continue to hold on to those deposits?

Jeffrey B. Weeden

Well, Kevin, this is Jeff Weeden. What we experienced in the third quarter with the rollover of the CD book, we actually saw about 65% to 70% remaining in the CD book and then an additional 10% or so that went in to other transaction deposit accounts. So we've got a fairly good retention rate at this particular point in time. Fourth quarter maturities that were identified there, but $2.5 billion and, of course, there's a lot of 7-day to 1-month to 6-month types of CDs that just continue to roll over. I think as you look out into 2012, we have about $1.7 billion that would mature in the first quarter, $1.6 billion in the second quarter, $1.5 billion in the third quarter and then it drops off to about $800 million. But I think the real point here is that, in the third quarter of next year, which goes back to those CDs that were put on in the financial crisis when things kind of dried up at that point in time. We have $1 billion worth of CDs in the third quarter of next year that have an average yield or cost of money of about 5%, 5.06%. In total, between what we have that matures between the October 1 and December 31 next year, of prior to 2009 CDs. So 2008 and prior, is about $2.8 billion of that total and those have an average yield of 4.87%. So if we think about that particular book of business as that rolls off and we have repricing opportunities, it gives us a little bit more confidence as we look at our forward margin. Now, of course, it is asset/liability management so you also have to look at the asset side of the equation, too, for repricing that exist there. But it does give us more confidence. I just wanted to leverage that we have here a Key to continue to show some positive momentum in our margin going forward.

Kevin Barker - FBR Capital Markets & Co., Research Division

So would you argue with the rates where they are right now, I should say they'll stay static or stable from this point on. Do you actually see a tailwind to net interest income over the next several quarters?

Jeffrey B. Weeden

Well, it is a dynamic process, so I think you have to look at both on the asset side, as well as the liability side. And I think in terms of if we have continued loan growth and we have some degree of expansion, I think that gives us some confidence there. But we haven't provided yet our 2012 guidance with respect to where we see various things playing out. But certainly it is a more of what I call a positive tone, which is why I said I believe that what we have in -- for the fourth quarter reversing some of the trends that we've had over the last several quarters. We see it as a more positive forward view at this point in time.

Kevin Barker - FBR Capital Markets & Co., Research Division

Okay. And then finally, would you allow the percentage of your interest earning assets to increase, as far as like securities, as a percentage of these assets, if the loan growth was not there or was not sustainable?

Jeffrey B. Weeden

Well, I think we have to look at the liability side of the equation and the duration of the deposits that we would be taking in. So certainly in some cases, you can do various things besides putting on investment securities. You could always look at extending the duration through the swap book at that particular point in time, but swap rates aren't what I call overly attractive. But it does give you an opportunity to extend some of the duration while maintaining the liquidity that may be necessary, in the event that loans do pick up even further and faster. So it's possible the investment book could show some new growth, but that is not the -- that's not the current vision that we would have. It would be used upon the loan growth.

Operator

We'll go next to Gerard Cassidy with RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

I was on some other call so I apologize if you answered this question. But Jeff, when you guys look at your capital levels under the Basel III, can you share with us, obviously, your SIFI -- so there's going to be a SIFI buffer that you're going to have to carry. But are you going to need to carry capital above -- I'll change my comment on this, above that level or if your SIFI buffer, let's say, is 100 basis points so you're required to carry 8%. Do you think you'd be comfortable staying around 8%, 8.25% in the quarter or would be something even higher than that?

Jeffrey B. Weeden

Gerard, we would in all likelihood once we find out what the SIFI buffer would be. We would look at our overall risk profile. But in all likelihood, we would carry something in excess of that and have that as an internal trigger. So we don't want to carry things just that they're regulatory minimums. We're going to operate in a safe and sound fashion going forward and maintain flexibility. Certainly, we have considerable amount of capital right now that provides us a great deal of flexibility, I think, as we look at Basel III implementation into the future.

Operator

We'll go next to Eric Anderson with Hartford Financial.

Eric B. Anderson - Hartford Financial Management, Inc.

Could you just briefly review for us sort of your current thoughts about the dividend and where that fits into your capital planning equation?

Beth E. Mooney

Yes, Eric, this is Beth. We are -- as we indicated, we are in the process of doing our 2012 Budgeting and Planning cycle which would also include looking at a potential dividend increase. I think the best way I could frame how you could think about that is we do have a board-approved dividend policy that indicates that the range with which we would look at a dividend payout would be somewhere between 20% to 30% of income. And while we have not finalized, obviously, those 2012 plans, that is sort of approved policy.

Eric B. Anderson - Hartford Financial Management, Inc.

And do you have regulatory approval to do that or would that be the second step?

Beth E. Mooney

The regulatory approval, as we have discussed earlier, we would submit our capital plan which would include a dividend recommendation from the company and the board as well as other capital actions and that would all be subject to regulatory approval.

Operator

[Operator Instructions] We'll go next to Jeff Davis with Guggenheim Partners.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Question, I think, for Chris. Any read-through on the auto industry? I know you guys are not huge into the supplier manufacturer base and the like, but any read-through in terms of strength of that sector as it forward looking and what it might mean for the industrial part of the Midwest, more generally?

Christopher Marrott Gorman

The only insight I could give you on that is as you look at the annualized build and you look at the last couple of months, there has been an increase in the last couple of months as you annualize it. And we're seeing -- and as you know, Jeff, we don't have a whole lot of exposure to the automobile industry, but we do have some clients, obviously, that have secondary and tertiary exposure. And almost without exception, those companies are doing pretty well. So I would say it's coming off a low base, but it continues to increase.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

All right. As best as you can tell, though, not necessarily transitory?

Christopher Marrott Gorman

No, I think, my personal opinion is as you look at the annualized builds, I don't think it looks transitory. I think it looks like a very slow return. But keep in mind this is an industry that at one point was what? 17.5 million units a year, so there's a long way to go.

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Sure. And then as it relates to the industrial footprint, Chris, any indication for manufacturers that are big into export? Has there been any data points that would say their Export business is slowing?

Christopher Marrott Gorman

We don't, Jeff, see their Export business slowing in our discussions and looking at their backlogs. But clearly, as a result of the stronger dollar, the profitability from that activity is, in fact, slowing.

Operator

It appears there are no further questions at this time. Ms. Mooney, I'd like to turn the conference back to you for any closing remarks.

Beth E. Mooney

All right. Thank you, operator, and again we thank you for taking time from your schedule to participate in our call today. We believe we are well positioned and we will focus on and manage that which we can control, as well as the execution of our relationship strategy. And if you have any follow-up questions, you can direct them to our Investor Relations team. Vernon Patterson or Kelly La Mer at (216)689-4221, and that concludes our remarks today. Thank you.

Operator

This concludes today's conference. Thank you for your participation.

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