KeyCorp (KEY) 2003 Q3 法說會逐字稿

Please stand by.

We are about to begin.

Good morning and welcome to KeyCorp's third quarter 2003 earnings results conference call.

This call is being recorded.

At this time I'd like to turn the call over to the Chief Financial Officer, Mr. Jeff Weeden.

Mr. Weeden, please go ahead.

Thank you, operator.

Good morning.

And welcome to KeyCorp's third quarter earnings conference call.

We appreciate you taking some time to be part of our discussion.

Joining me today for our presentation is our CEO, Henry Meyer.

Henry has family obligation that has taken him out of the office, but he wanted to be part of the call.

So we're going to rely on technology to make this as seamless as possible.

Also available for the Q and A portion of today's call is our Chief Accounting Officer, Lee Irving, Chief Risk Officer, Kevin Blakely, Treasurer Joe Veda, the head of our commercial Investor Team Tom Bun and our Investor Relations team.

Before I turn the call over to Henry for comment, I would like to refer you to our forward looking disclosure statement on slide two.

It covers our presentation and the Q and A portion of our call.

Now let me turn the call over to Henry for some overview comments.

Thanks, Jeff.

As you saw on our press release, Key earned 53 cents per share in the third quarter.

Revenue and expense trends were generally consistent with our expectations and with the exception -- with the exception of net-interest income.

As we previously communicated to you, our net interest margin was adversely impacted by higher levels of prepayments in the loan and investment portfolios, narrower deposit spreads, and interest rates that remains near their historical lows.

Average earning assets were also down slightly from last quarter, despite continued growth in commercial leasing and home equity.

There were a number of positive developments worth noting.

First, we continued to see improvement in Key's asset quality with non-performing loan's falling for the fourth consecutive quarter and net charge-offs declining to their lowest level since the first quarter of 2001.

Average core deposits grew 13% from the year ago period and were up an annualized 8% from the second quarter.

And new [DDA] account openings year to date were up 48% compared to the year ago period.

Obviously, free checking continues to play a major role in our ability to attract new customers.

Our lead [with] leasing campaign also continues to post some very strong numbers.

Since its launch earlier this year, our commercial lease volume and outstandings have been the strong point of our commercial lending activities.

Another important area for us at Key is expense management.

Through the first nine months, expenses were up 3% from the year ago period.

Included in this year's number are higher employee benefit costs related to pension and stock option expense and will also -- and we also have some higher expenses for marketing and for the professional fees in connection with our initiative to upgrade our sales management systems.

While we continue to make progress on the expense front, there is more that we can do.

We will continue to examine staffing levels and non-personnel costs.

I know we can achieve more savings, some of which will be reinvested in our higher return businesses and activities that will benefit us in the future.

Key also completed the acquisition of New Bridge Partners in the third quarter, which increased our assets under management and added a new style, large cap growth, to our product mix.

And finally, Key's board authorized a new repurchase program of 25 million shares including the shares remaining under our prior authorization.

This will give us added flexibility in managing our capital.

With that, let me turn the call over to Jeff Weeden for a financial review of the quarter.

Jeff?

Thanks, Henry.

Turning to slide four, as Henry said, we earned 53 cents in the third quarter.

Total revenue increased $10 million from the previous quarter, with a $19 million decline in net-interest income and a $29 million increase in non-interest income.

Average core deposits were up again this quarter, and as Henry mentioned, net chargeoffs and non-performing loans continued to show nice improvement.

And our capital ratios remain strong, giving us the flexibility to repurchase 2.5 million shares in the third quarter.

Turning to slide five, the company's net interest margin declined by 12 basis points in the quarter from 3.85% to 3.73%.

Turning to slide six, I will cover a number of the changes leading to this decline.

As we have listed on this slide, prepayments on mortgage backed securities and consumer loans including loan sales contributed six basis points to the decline.

In addition, tighter spreads on deposits resulting from the last Fed rate cut cost the company approximately four basis points.

Finally, implementing [FIN] 46 contributed two basis points to this decline in the quarter.

Looking forward in the fourth quarter, we expect the margin to hold in the current 3.70 range.

Slide seven shows the trend in average loans outstanding.

Commercial loan demand continues to be soft.

And the non-exit commercial loan portfolio was down an annualized 1% in the quarter.

The non-exit consumer loan portfolio continued its positive trend, up an annualized 6%, reflecting the continued healthy demand we have experienced in home equity lending throughout our retail network.

Slide eight shows that we are still having success in growing our deposits.

Average core deposits increased an annualized 8% versus the prior quarter, and 13% versus the third quarter of last year.

As Henry mentioned, new client additions have contributed to this success.

Slide nine highlights the changes in non-interest income, from the last quarter to the current quarter.

Non-interest income on a sequential basis increased $29 million.

The improvement was primarily attributable to a $25 million increase in net gains from loan securitization and sales, including a $10 million gain from securitization of educational loans, which is typically completed in the third quarter of each year.

Trust and investment management services were also up $8 million as a result of stronger financial markets.

Included in the all other category were $16 million of gains from principal investing activities compared to $20 million for the prior quarter.

On the expense front on slide ten, our costs increased $11 million in the third quarter.

The increase was primarily attributable to higher incentive compensation accruals and the effect of expensing stock options granted in July.

As previously announced, we began expensing stock options this year.

Slides 11 through 16 highlight our asset quality trends.

Slide 11, you can see, the improvement in net charge-offs.

Net charge-offs declined to 77 basis points in the third quarter, a 13 basis point improvement from the second quarter.

This is the lowest level since the first quarter of 2001.

Slide 12 breaks down the trend by business line.

As you can see, most of the improvement has come in the commercial portfolio.

The consumer portfolio has generally stayed in a fairly narrow range during this time period.

On slide 13, our allowance to total loans at the end of the quarter stood at 2.24%, up two basis points from the prior quarter.

Looking at slide 14, you can see we experienced a nice improvement in NPAs in the quarter.

NPA's declined to 1.37% of loans and ORE, a reduction of five basis points.

While still above the pure median, our overall trend has been positive the last four quarters.

The next slide shows NPL activity for the quarter.

While the inflow of new NPLs increased from the prior quarter, cash flow from collections of loan sales were strong, bringing down the total NPLs at the end of the quarter by $42 million to $795 million.

Turning to slide 16, our allowance to NPL coverage improved to 177% at the end of the quarter.

This is the highest level since the fourth quarter of 2001.

Looking at slide 17, the company's tangible equity to asset ratio improved over the last three years.

And stood at 6.94% at September 30th.

As I mentioned in my opening remarks, we repurchased 2.5 million shares in the current quarter.

And with our new board authorization, we have the authority to repurchase up to an additional 25 million shares.

The company intends to continue to execute share repurchases in the open market in the coming quarters under this authorization.

Now turning to slide 18, our fourth quarter earnings outlook.

While we are seeing signs of improvement in the general market conditions, we believe the near-term environment will remain challenging for revenue growth.

Loan sales and securitizations contributed to the current quarter's increase in non-interest income, and will not repeat in the fourth quarter at these same levels.

Trust and investment management revenue should continue to show signs of improvement given current market conditions.

And investment banking revenue opportunities remain favorable.

Consistent with our prior comments, we expect the net interest margin will remain in the 370 range and loans will be flat to up modestly adjusted for third quarter sales.

We will continue to focus on our costs, spending where we believe we can have a positive impact on future earnings, and overall, our asset quality trends should continue to be stable to improving for the remainder of the year with the above in mind, we look for fourth quarter earnings per share to be in the 52 to 55 cent range.

That concludes our remarks.

And now I'll turn the call back over to the operator to provide instructions for the Q and A portion of our call.

Operator?

Thank you.

A brief reminder, the question and answer session will be conducted electronically.

Anyone wishing to ask a question may signal us by pressing the star key followed by digit 1 on your touch-tone telephone.

We will take as many question as time permits and will precede in the order as your signal is.

As a reminder there may be callers waiting to ask a question at one time.

We appreciate your patient.

Let's begin with John McDonald of UBS.

Hi.

Good morning.

I was wondering if Kevin could give color as on the inflow into NPAs this quarter

Sure.

We had a little increase over the second quarter.

The -- I would say that about half of the increase was driven by one credit in particular, and we are carrying that credit on our books at a value that we could sell it in the distressed market for right now.

So that was part of it.

The other part of the increase was due to some normal seasonality that we see in the consumer portfolio.

But as Jeff mentioned in his comments, we also had some pretty strong payments through the quarter.

And so that helped bring the number back down.

As we sit here today and look out into the fourth quarter we think that our overall level of non-performers will probably be flat to down.

Okay.

Thanks, Kevin.

And Jeff, question on interest rate sensitivity, could you update us on where you are there?

Yes.

We are still in a slightly negative position, slightly liability sensitive.

We believe that that's an appropriate position for us to be in.

We're approximately a negative 1.4%.

With short rates staying steady over the next couple of quarters as you head into '04, would you expect the margin to move up a little or just hold steady from the fourth quarter level?

Well, our guidance right now for the -- it's strictly, John, what we're getting is for the fourth quarter guidance is for it to remain relatively stable.

At its current level.

Right around the 370 range.

Okay.

You don't want to look past that right now?

We're not really providing any guidance yet on 2004.

We'll provide some additional insight in January in our conference call at that time.

Okay.

Thanks.

And our next question will come from Mike Mayo with Prudential.

Hi.

Good morning.

Just a little bit more color on efficiency.

It seems as though if you take out the gains on the loan and securitizations and you take out the impact of the acquisition of the asset management firm, fees were kind of flat.

Spread revenues were down, and expenses, even taking out the increased stock option expenses, were up.

So it looks like core negative operating leverage.

How are you thinking about that?

When do you think you'll get to flat operating leverage?

What else are you doing?

Thanks.

Well, Michael, this is Jeff Weeden.

We are continuing, as we go into our planning cycle here, and are aggressively looking at costs throughout the organization.

And, you know, on the fee revenue side, we see, I think, positive trends in the asset management side, and again as we go into the fourth quarter and look out, we typically have a good quarter from our commercial banking operations that happens, just as a result historically.

But the expense front is something we are very focused on.

As Henry made mention in his opening comments, we do have to continue to look at our cost structure.

And we are, in fact, doing that throughout the organization as part of our normal planning cycle here.

We have been making some investments to upgrade our infrastructure with respect to our data marketing capabilities to position ourselves to compete in the marketplace.

Okay.

On the acquisition front, any update there?

Other than what we commented about with respect to completing New Bridge, that's the only thing that we would offer at this point in time.

Again, we continue to have interest in -- and I think we've commented before in the past -- on transactions that would be in market or significant overlap within our respective markets that would be of the size of, say, 500 million to 5 billion in assets would certainly have some attractiveness to the organization.

But there's nothing that -- other than that general comment that we would be looking at.

Okay.

And lastly, any specific efficiency target?

Internally, we do have specific efficiency target, but we have not published one outside.

And it's lower than where we are now, Michael.

Okay.

All right.

Thank you.

Next we'll go to Scott Sifers with Sandler O'Neill.

I apologize if you mentioned this already.

I was hoping you could just refresh our memories on how much exactly did the New Bridge deal add to both the revenues and expenses in the third quarter?

We haven't disclosed the, you know, the amount of revenue or expenses.

It was fairly immaterial with respect to any kind of, quote, bottom-line impact in the current quarter.

What you would have to look at is net assets that were added under management would be in the $1.4 billion range at the end of the quarter.

All right.

Thanks.

And next we'll go to Jason Goldberg with Lehman Brothers.

Thank you.

Good morning.

Morning.

Henry, you've been pretty vocal about not wanting to under-provide loan losses and release reserves back into earnings that way.

However, if you look, a lot of other banks have been doing that this quarter citing what the regulators have asked them to do or suggested they do.

Any kind of updated thoughts around that?

We're not -- I'm not unaware of the fact that a number of other companies are under-providing.

As we continue to make progress on our non-performers and the less than stellar asset quality that we've been working on for the last two years, that may be an issue that we will readdress in 2004, but I was in a position that I didn't want to make our earnings per share by virtue of under-providing.

What we're going to take a look, as we go into planning for 2004, because clearly we are becoming, as our non-performers decrease, one of the higher reserves in terms of almost any other ratios, so it may be something that we look at it in 2004, but not in 2003.

And secondly, have you looked at the tangible equity tangible assets slide, you guys are above your peers.

Any particular targeted capital ratio in mind?

Our targeted capital ratio, we continue to run in the 6.25 to 6.75 on the tangible equity.

Total equity came down slightly in the second -- or the third quarter versus the second quarter.

But asset levels overall were also down slightly, which had a slight increase in that ratio.

But in general, 6.75 down to 6.25 would be the range.

We've been at the upper end of that range simply because of where we've been in the business cycle.

Okay.

And then lastly, in the last two quarters you've had healthy venture capital gains.

Any update - maybe update us in terms of where that portfolio stands and your outlook for future gains?

I don't -- you know, the last time, Jason, we made our comment on the venture capital portfolio we stated that, you know, not to count on -- we don't count on gains coming from that portfolio or plan for them.

We've been in -- very pleased, obviously, with the developments that have happened in that portfolio on a year to date basis here.

And I think the overall climate for venture capital investing, principal investing, has improved as well as just the general direction that we've headed in the company with that particular portfolio.

There's much less risk in the portfolio now than there was two to three years ago.

So I think the management team that runs that has done a good job, and there are certainly taking the portfolio in the right direction.

And while we don't count on it, we certainly look for future benefits coming from that portfolio.

Sounds good.

Thanks.

Certainly.

And we'll move next to Steve Gresto with Satellite.

Hi guys good morning, Kevin Was there any reason for the up-tick in consumer net charge-offs in the quarter?

You might have mentioned that, but I missed it.

Thanks.

In the net charge-offs, it was a combination of a few things.

First of all, the second quarter performance was an unusual good quarter for us.

But then during the third quarter, we did a couple of things.

We sold some home equity loans.

When you sell a portfolio, it tends to accelerate the charge-offs.

We had a little increase there at the time of sale.

We also had the marine portfolio kick up a little bit during the quarter.

That's seasonal, you know, when people are on their boats, they remember to make their payments.

When they dock them for the Winter, they forget to make the payments from time to time.

We also had a little bit of an up-tick in our sub-prime auto area which is not surprising, given the continuing lackluster economy.

But it wasn't any one thing in particular, but it was a couple of things combined.

Great.

Thanks a lot.

Sure.

And Mr. Weeden, there are no further questions.

I'll turn the conference back over to you.

Well, thank you, everyone, for joining us on our conference call today.

And we appreciate you taking time out of your schedules.

And we look to seeing you at future conferences, and talking again on this call in January.

And that does conclude today's conference.

Again, we thank you for your participation.