KeyCorp (KEY)

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KeyCorp. (KEY)

Q2 2013 Earnings Call

July 18, 2013 9:00 am ET

Executives

Beth E. Mooney - Chairman, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee and Chairman of Enterprise Risk Management Committee

Donald R. Kimble - Chief Financial Officer and Member of Executive Council

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

William R. Koehler - President of Key Community Bank

Analysts

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

Bob Ramsey - FBR Capital Markets & Co., Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Josh Levin - Citigroup Inc, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Michael Mayo - CLSA Limited, Research Division

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

Marty Mosby - Guggenheim Securities, LLC, Research Division

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

Alan Straus

Brian Foran - Autonomous Research LLP

Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

John V. Moran - Macquarie Research

Presentation

Operator

Good morning, and welcome to the KeyCorp's Second Quarter 2013 Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to Ms. Beth Mooney, Chairman and CEO. Please go ahead, ma'am.

Beth E. Mooney

Thank you, operator, and good morning, and welcome to KeyCorp's second quarter 2013 earnings conference call. Joining me for today's presentation is Don Kimble, our Chief Financial Officer. And available for the Q&A portion of the call are the leaders of 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, Bill Hartmann; and our Treasurer, Joe Vayda.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call.

Turning now to Slide 3. Our results in the second quarter reflect the clear progress we have made in implementing our growth initiative, improving our cost structure and executing on our capital priorities. Year-over-year, revenue grew for the fifth consecutive quarter with current period results benefiting from our branch and credit card portfolio acquisitions, loan growth and lower funding costs.

Revenue trends compared to the first quarter were relatively stable with flat loan balances, with stronger fee income from commercial clients who are taking advantage of favorable capital market conditions. And because of our distinctive model, we were able to capture the economics from these transactions while doing what was right for our clients.

During the second quarter, we also continued to invest to drive future revenue growth. We acquired a commercial servicing portfolio and added to our special servicing business. This allows us to leverage our existing platform and meaningfully changes the competitive profile of our commercial loan servicing business, positioning us as the third largest servicer of commercial and multi-family loan and the fifth largest special servicer of CMBS in the United States. The first phase of the transaction closed as expected at the end of June.

We've also continued to invest in our online and mobile offerings. In the second quarter, we launched new remote deposit capabilities for both our commercial and consumer clients, which add value and convenience, consistent with changing client preferences. Reducing our cost structure and improving efficiency also remain among our top priorities. From the launch of our expense initiative 1 year ago, we have achieved annual run rate savings of $171 million, a substantial portion of the $200 million target we committed to reach by December of this year. Importantly, reaching our target will be a significant milestone but not an endpoint. We are already identifying new opportunities to both grow revenue and reduce and variabilize our expenses. And as we previously communicated, we expected this quarter to be the high point in terms of charges associated with our efficiency plans. Consistent with our guidance, we incurred charges of $37 million, with a large portion related to the realignment of our Community Bank and the consolidation of 33 branches.

In the second half of the year, we have another 14 branches identified for closure, which will bring our total to approximately 7% of our total branch networks. As a result, noninterest expense was down $45 million from the prior year, excluding the charges for our efficiency initiative, as well as costs related to our recent acquisitions of credit card in the Western New York branches. And as Don will discuss, our cash efficiency ratio adjusted for the efficiency charges was 65.4% this quarter, just above the upper end of our near term goal of 60% to 65%.

And finally, we continue to manage our capital consistent with our stated priority. During the second quarter, our board approved a 10% increase in our common share dividend, and we executed on our share repurchase program by buying back $112 million in common shares. This is consistent with our 2013 CCAR submission, which places us among the highest in our peer group for estimated payout ratio.

And as we look forward, capital management will remain a clear priority. Along with improving our operating leverage, we're both executing on our revenue initiatives and improving our cost structure. Now let me turn the presentation over to Don for some details on our financial results. Don?

Donald R. Kimble

Thank you, Beth. Slide 5 provides highlights from the company's second quarter 2013 results. This morning, we recorded net income from continuing operations of $0.21 per common share for the second quarter, compared to $0.21 for the first quarter of 2013 and $0.23 for the second quarter of 2012. And importantly, as Beth pointed out, we incurred $37 million or $0.03 per share of costs associated with our efficiency initiative this quarter. I'll cover many of these results in my remarks, so I'll now turn to Slide 6.

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