KeyCorp (KEY) 2006 Q1 法說會逐字稿

Good morning, and welcome to KeyCorp's first quarter 2006 earnings results conference call.

This call is being recorded.

At this time I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.

Mr. Meyer, please go ahead, sir.

Thank you, operator.

Good morning, and welcome to KeyCorp's first quarter earnings conference call.

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

Joining me for today's presentation is our CFO, Jeff Weeden and we also have several members of our executive team available for the Q&A portion of our call.

I would like to turn your attention to slide 2, which is our forward-looking disclosure statement it covers both our presentation and the Q&A period that follows.

Now if you would turn to slide 3.

Let me start with a few comments on our financial results.

Overall it was a solid quarter for Key.

Compared with the first quarter of last year, tax equivalent net interest income was up 42 million, reflecting a better net interest margin, solid commercial loan growth, and an increase in core deposits.

Asset quality also remains solid with non-performing loans down slightly from the year ago quarter and net charge offs of 23 basis points.

We have also continued to make progress in the realignment of our Community Bank.

I was especially pleased to announce the addition of Beth Mooney as our new Vice Chair.

Beth brings nearly 30 years of banking experience to Key, including a deep understanding of retail banking, commercial lending, and real estate financing.

Beth will be starting with us on May 1.

I would add that Beth's addition completes the rebuilding of our senior management team.

I'm extremely pleased with the extraordinary talent that we have been able to attract over the past 5 years, and the leadership that is now in place to grow the Company.

We continue to make progress on our AML and bank secrecy act initiatives to implement new systems and processes throughout our company.

I'm pleased with the hard work and attention our people have shown in this area to help put Key back at the top with respect to regulatory compliance.

Finally, we continue to look for opportunities to grow our franchise and national businesses.

On April 1, we closed the acquisition of Austin Capital Management.

Austin is a great fit with our asset management business by adding additional talent and broadening our product line.

Slide 4 shows our current organizational chart, including and Beth Mooney, who will head up our two major business groups.

One of my priorities have been to strengthen Key's management team.

Once Beth joins us at the end of this month, May 1, four out of five of my direct reports will be new to the Company since 2002, and we have also been able to upgrade our leadership in other key roles such as our regional and district presidents.

I feel very positive about the way we have positioned our company and the team that we have in place to drive that performance.

Now turning to slide 5, this slide shows our new line of business structure we announced in August of last year.

At that time we told you that beginning the first quarter of 2006, we would change our line of business reporting to match this structure.

On the left hand side you can see we have placed our branch-based field operations under the geographic management within the Community Bank.

This includes our regional banking activities as well as our commercial middle market segment which serves companies with sales up to 250 million.

The right-hand side covers our national businesses, included in this group are commercial real estate, equipment finance, our leasing business, institutional and capital markets and consumer finance.

This line of business realignment is consistent with our strategic focus of getting closer to our customers.

Now I'll turn the call over to Jeff Weeden for a more detailed review of the quarter.

Jeff?

Thank you, Henry.

I'll begin with the financial summary shown on slide 6.

We earned $0.70 per share in the first quarter versus $0.72 in the fourth quarter and $0.64 for the same period 1 year ago.

Our taxable equivalent revenue was up 23 million or 1.9% from the year ago period, reflecting an 11-basis point increase in our net interest margin and a 2.2 billion increase in average earning assets.

Average asset growth was driven by an increase in average total loans outstanding.

The company's average total loans grew by 4.6% from the year ago period.

Commercial loans increased by 8.4% and consumer loans declined by 3.5%.

Average core deposits grew by 10% compared to the same period 1 year ago.

The growth in core funding and specifically non-interest bearing deposits in a rising rate environment helped our net interest margin.

Asset quality remained very solid with Key's net charge-off ratio for the first quarter at 23 basis points.

I'll discuss our outlook for credit quality later in our comments.

Finally, as Henry mentioned, our first quarter line of business results included in our earnings release and the appendix of this morning's material reflect the organizational realignment that we announced last year.

Turning to slide 7, the company's net interest income increased 1.1% from the fourth quarter and increased 5.9% from the year ago quarter.

Our net interest margin increased 6 basis points from the fourth quarter to 3.77% and increased 11 basis points from the same period last year.

During the first quarter of 2006, net interest income benefited from the call of certain securitization trusts which added approximately 3 basis points to the net interest margin.

The improvement from 1 year ago was primarily due to an improved funding mix.

We have been successful in increasing our core deposits and the mix of these deposits over the past couple of years.

As we stated in our January conference call the ORIX Capital Market servicing portfolio we acquired in December would add to our DDA balances.

In addition, growth in personal DDA balances has also helped our margin.

As of the end of March we remain in a slight asset sensitive position to a 200 basis point increase in interest rates over the next 12 months.

For the remainder of 2006 our outlook is for the net interest margin to be in the low 3.70% range.

On slide 8, you can see that Key's average loans grew by 2.9 billion or 4.6% from the year ago level, and average loan balances were up .6 billion or .9% unannualized from the fourth quarter of 2005.

The increase was the result of growth in our commercial loan balances.

Average commercial loan balances were up 8.4% in the current quarter versus 1 year ago.

And up 2.1% unannualized versus the fourth quarter.

Our expectation for future commercial loan growth is to be in the mid-single digit range as a result of tapping on the brakes last year with respect to certain commercial real estate projects.

Average consumer loan balances are down from both the same period 1 year ago and the prior quarter.

We believe until we see more of a return to a positive slope in the yield curve that consumer loan demand will remain relatively flat as consumer preferences is more towards the longer dated fixed rate maturities versus the variable rate home equity product offering we have historically retained for our portfolio.

Turning to slide 9, our first quarter average core deposit balances were up 10% compared to the same period 1 year ago and increased 1.8% unannualized compared to the fourth quarter of 2005.

Versus the prior year DDA balances were up 10.2% with growth coming from both personal checking accounts and escrow balances in our commercial mortgage servicing area.

NOW and MMDA balances were also continuing to show good growth.

As longer term rates have increased over the past couple of quarters, we have also begun to see consumers shifting some of their money into our CD product offering.

Slides 10 through 13 show our asset quality trends.

On slide 10, net charge-offs for the current quarter were 39 million or 23 basis points compared to 54 million or 34 basis points in the year ago period.

Net charge-offs in the first quarter were relatively stable with the fourth quarter level excluding the charge-offs taken in our last quarter with respect to our commercial passenger airline lease portfolio.

We currently expect net charge-offs for the remainder of 2006 to be in the range of 25 to 30 basis points.

As shown on slide 11, NPA's at March 31, 2006 totaled 320 million and represented 48 basis points of total loans and other real estate owned.

This is down 51 million from the prior period 1 year ago and up 13 million or 2 basis points from the fourth quarter.

Turning to slide 12, our loan loss reserve at March 31, 2006 represented 1.44% of total loans.

And on slide 13, our coverage ratio of our allowance to non-performing loans stood at 327% at March 31, 2006.

Looking at slide 14, the company's tangible capital to tangible asset ratio was 6.71% at March 31, 2006.

Which is within our targeted range of 6.25 to 6.75%.

During the quarter, we repurchased 6 million of our common shares and reissued 4.6 million shares under employee benefit and dividend reinvestment plans.

As of March 31, we had 16.5 million shares remaining under our current board repurchase authorization.

We will continue to use share repurchases as a tool in the management of our total capital levels.

Finally, turning to slide 15, which provides our second quarter and full year 2006 earnings out look.

Our guidance for the second quarter is for earnings per share to be in the range of $0.69 to $0.73, and for the full year 2006 earnings in the range of $2.80 to $2.90 per share.

That concludes our remarks and now I'll turn the call back over to the operator to provide instructions for the Q&A segment of our call.

Operator?

Thank you.

The question and answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS] We'll take as many questions as time permits and we'll proceed in the order that you signal us.

We appreciate your patience and we'll pause for just a moment to allow everyone a chance to signal.

We'll go first to John McDonald with Banc of America Securities.

Hi, good morning.

Jeff, I was wondering if you could remind us of the typical seasonality that you see in some of the fee income items, particularly the service charges on deposit accounts, and also in the capital markets area in general, if you could just comment on the typical seasonal trend there.

Certainly, John.

Service charges on deposit accounts in the current quarter-- it is pretty seasonal to what we saw a year ago.

I think we had about a $7 million decline a year ago.

This year we're down around $4 million from the fourth quarter level.

The change that we are continuing to see obviously as interest rates go up, annualized deposit service charges continue to decline as companies are able to cover more of their charges through the balances they have on deposit with us.

We did see just some normal downturn in some of the overdraft fees, and NFS fees, which is very seasonal in nature.

The other question was with respect to the capital markets activities.

I think year-over-year, we're very pleased with the increase that we actually saw in investment banking and capital markets-related activities.

There is some fourth quarter to first quarter seasonality that we did experience and you can see that in the details that we've included in our press release.

Okay.

Any-- anything else in terms of the fee income trends this quarter?

I think with-- you know trust investment management services fees were very-- very stable quarter to quarter.

As far as other fees that are highly-- more highly seasonal, we did complete a securitization in the fourth quarter, which added about $16 million to the fourth quarter, which we didn't have in the-- in the first quarter, and then just a higher degree of activity surrounding loan-related fees that occurred in the-- in the fourth quarter.

We had a number of transactions that were taken to market, the capital markets during-- during the fourth quarter, and lesser activity here in the first quarter.

And any comment on the loss in principal investing and outlook for the year on principal investing?

Yes, the loss in principal investing in the current quarter was the result of going through and taking some marks on some investments that we had within your respective portfolios and some of the funds that-- that we have.

I think as we look forward here, we would expect that principal investing would return to more of the levels that we have experienced in the past of maybe, again, say $10 million or so a quarter as we look forward.

It's very difficult obviously to project that with any degree of accuracy, but that would be a guesstimate.

Last thing on this topic.

Victory's performance seems to be doing very well, we have had a good market environment this quarter.

Why don't we see any more lift on the trust investment services income and do you expect some of that to start falling to the bottom line and what is going on with Victory and the market trend?

I think with respect to Victory, Victory continues to build out its distribution and product offering.

We just completed the Austin capital acquisition here as of April 1.

In the particular area where Victory is continuing to compete is more on the institutional side of the equation.

If you look at the total trust investment management revenues, it's showing relatively flat from quarter to quarter, and a lot of that is coming also from the brokerage side of the equation, fee income in that particular line item.

We're pleased with the position that Victory is in.

I think the funds that Victory manages, are ranked at some of the highest the country, and the performance there has really turned around.

So our-- our future look is very positive on that particular business.

Okay.

Thanks.

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

Thank you.

Good morning.

I guess with the $25 million gain on the NYSE IPO in this quarter's numbers?

Yes.

And then were there, I guess specific off-sets to that?

There weren't specific offsets to it Jason, unless you look at the fact that principal investing was down year-over-year or link quarter-- down on a linked quarter basis about 19 million year-over-year down about 15 million.

Okay.

And then secondly, you mentioned pulling back in commercial real estate lending.

Can you just maybe be a bit more specific in terms of-- are there particular geographies or product types that you are relatively more concerned about, or it is by that asset class in general, and secondly are, the regulators driving that decision or is that a key internal decision.

I'll turn this over to Chuck Hyle, I would say that it's internal decision that we have made.

It's not from a regulatory standpoint.

You have probably looked at the regulatory numbers as far as our commercial real estate exposure, we are in no problem within those particular guide lines.

So I'll Chuck comment on some of the specific properties but we have commented on this in the last couple of quarters.

Jason, we have been focused a little bit on some of the condominium financings, and I think probably 6 or 7 months ago, we were looking at certain markets particularly in the south where we thought the markets were getting a little heated.

So we started tapping the brakes back then, particularly again on condominiums.

And while we still do some selectively we have focused, and always have focused more on condo conversions rather than new build, but that's pretty much where we have pulled our horns in a little bit.

We continue to be very selective in the commercial real estate area, but as Jeff said this is internally generated, rather than regulatory generated.

Good.

Thank you.

We'll go next to Matt O'Connor with UBS.

Good morning.

It seems like you all have quite a bit of capital flexibility going forward given your outlook for the loan growth and you are at the high end of your targeted capital range right now.

Do you expect similar buy backs as to what we saw in 1 Q.

Matt, this is Jeff Weeden, we will continue to use buy backs in our overall management of our capital, we are towards the upper end of our capital range at the 671 on the tangible at the end of March.

So we do have flexibility.

We will continue to use share repurchase activity in future periods to manage that capital level.

Okay.

And then separately, I think you mentioned the net interest margin forecast in the low 370s, versus the 377 this quarter.

Correct.

Is that-- I might have missed it but is the securitization benefit 3 basis points, does that go away going forward?

It does.

It does.

That was a cleanup call on some old securitization trusts that benefited the margin by about 3 basis points in the first quarter.

Okay.

All right.

Thank you.

And we'll go next to Gerard Cassidy with RBC Capital Markets.

Thank you.

Good morning.

You guys have given some good outlook numbers for different loan categories and such, and I believe your net charge-offs for the remainder of the year, thinking 25 to 30 basis points, would you venture out to give us some guidelines or guidance on what you think non-performing assets might do between now and year end?

We have not typically provided much in the form of-- of forecasting for non-performing assets.

I believe if you look at our non-performers they have been relatively stable here in the last few quarters with the exception of the commercial passenger airline leases we put on in the third quarter.

We would expect that we are at the low point of the cycle, and that non-performers will in fact start to trend upward here.

It's hard to tell exactly when we will see any type of significant increases.

Commercial non-performers in the current quarter were flat to down slightly from the prior quarter.

Consumer were up in the current quarter part of which are in the home equity portfolio.

So that may be a delayed factor related to the bankruptcy law change that happened last fall.

How about your guys that are on the ground out in the Midwest markets that might be impacted by what is happening in the automobile industry?

Are they seeing any pull backs on loan demand by people that are derivative of the auto industry?

Not somebody specifically supplying a part to the industry, but may have businesses that are supported by the growth of the auto industry.

I would say the Midwest was probably one of the softer areas with respect to loan demand, particularly in the middle market during the current quarter.

So it's not an area that we saw expansion.

Circling back to the $25 million gain you reported from the New York stock exchange [Acopellogo] merger, do you guys have any left-- I assume that was from the seats that McDonald owned.

Did you sell the stock to record the gain, and second, do you have any stock left for later quarters?

It is from the seats that McDonald owned and it was a mark-to-market.

There was some cash that was received as part of the distribution on the-- on the IPO so we ended up with some stock as well as some cash, but we still have stock as of the end of March 31.

Great, and one last question could you comment about in your line of business reporting the equipment and finance segment that seemed to have lower net income in the first quarter relative to both the fourth quarter of '05 and first quarter of '05.

Any-- what was the reason behind the weaker numbers?

Well, I think if you look at the-- the net income number was relatively-- it was down from the first quarter of last year, but look at the provision.

This year we also had a provision of $8 million in that particular line item versus a credit in the fourth quarter and a credit in the first quarter of last year.

So that's driving a part of that respective change there.

Thank you.

We'll go next to Ed Najarian with Merrill Lynch.

Good morning.

Most of my questions have been answered.

I guess this is just really a follow-up to Jason's question.

The $25 million gain on the NYSE that's in the investment banking line item, correct?

That's correct it is under other investments.

So if we pull that out of investment banking and it's out of the investment banking and capital market income.

I mean it looks like the remainder was pretty low relative to prior quarters, can you give us any color on that?

A) Am I looking at that correctly?

I'm looking at the $60 million investment banking number and pulling out 25 and getting 35.

Is that the correct look and secondarily why is that 35 so low relative to prior quarters?

That is correct, Ed.

It is in that particular area.

If you look at the components that were on page 14 of our press release, you'll see the break out of the various line items, some of which is seasonal in nature that we talked about earlier.

Investment banking is typically down from the fourth quarter.

Dealer trading and derivative income was down from the fourth quarter as well as a year ago.

If you recall in the press release, we put that last year we-- in essence ended up recognizing in total about $30 million worth of gains from the disposition of our indirect auto portfolios.

There was $11 million of gain that was recorded in the derivative line item in the first quarter of a year ago.

And $19 million of gain recognized in the loan sales and securitizations.

The first quarter was-- was down with respect to other income.

We also changed the accounting with respect to how gains-- how interest income was recognized from the private equity group on their investments that we have embedded within the commercial real estate division.

Those particular-- that particular line now is reported up under other investments in the-- in the net interest income.

And so that had a positive impact on the margin up above under net interest income.

That's a recurring item up there that was not restated in prior periods is handled on a go-forward basis.

So that had about a 10 million or so impact on that particular line item.

Okay, so there was a bit of an off-set then it sounds like?

Yes, there was an off -set to that, so net interest income benefited at the cost of the -- other income from income of other invest investment line item.

That's helpful.

Thank you.

Certainly.

We'll go next to Gary Townsend with Friedman, Billings, Ramsey.

Good morning.

My questions have be asked and answered.

Thank you.

And we'll go next to Brent Erensel with Portales Partners.

Good morning.

I have a specific question on the home equity loans on that accounted for the rise of the NPAs.

Can you describe-- are these seconds that you have first on?

And how difficult will it be to collect on these?

And what do you think the loss content is?

Since this seems to be a relatively new phenomenon.

Yes, I think if you look at some of the information we provided in our line of business with respect to the home equity portfolio.

There's a high degree of [firsts] that are embedded in those particular positions.

We have a loan to value in the branch-based home equity portfolio that's in the 70% range, loan to value, and the percent that are first liens are around 61%.

With respect to the national home equity portfolio we have about 64% on the value and about 62% of first liens.

Specifically with the increase in the current quarter that-- that we experience which was up 18 million from the fourth quarter half of that was in our national home equity business.

Half of it was in our branch-based business, so it is split between those two bigger lines.

Embedded in the national one, part of which came from-- or the majority of which the increase of the $9 million came from the securitization trusts that were back to the very end of-- of-- their clean-up call provisions.

And we expect that we'll work through those particular items over the coming quarters.

So the loss content sounds fairly low.

We don't expect loss content in terms of what I would call charge-offs what we would expect is it does cost money to go through the process of collecting and curing those particular loans as they go into other real estate.

Do-- do you expect this trend to continue in terms of rising non-performers in this category?

We wouldn't expect the trend to go the way it did this particular quarter, because we have no more securitization trusts out with respect to-- anything in the home equity area.

Plus as we look forward here, the-- the past-due credits we're not seeing continuing trends, so this is really related to, we think, the bankruptcy provisions that happened in the third and fourth quarter of last year.

Okay.

Thank you.

We'll go next to Christopher Chouinard with Morgan Stanley.

Hello, good morning.

Good morning.

I had a question on deposits, and I-- forgive me if you have already answered this.

I got on the call a little bit later.

It looks like non-interest bearing deposits on average were up sequentially, but when you look at the segment data for Community Banking it looks like Community Banking was down quite a bit about $350 million or so, which implies that there was some real growth in non-interest bearing somewhere else.

Could you talk a little bit about the dynamics between sort of the consumer and businesses today when it comes to non-interest bearing and maybe what was happening this quarter?

Certainly.

What we experienced in the-- in the first quarter versus the fourth quarter and typically it's a seasonal low period for financial institutions it has been for us for the last several years.

What has impacted on the consumer side we experienced an increase in non-interest-bearing deposits in the first quarter versus the fourth quarter versus the year ago first quarter.

With respect to corporate deposits, and now in the Community Bank you also have middle markets, so corporate deposits were down, which, again, is pretty seasonal, compared to last year, corporate deposits are only down slightly and that's a result of just increases in interest rates as you have analyzed deposit service charges they need to keep less on deposit to cover their transactional related costs.

Where we saw the largest increase, and we spoke about this in the fourth quarter call as well as earlier in the call is with respect to the ORIX transaction that closed in December, and the escrow balances that came on, so we only had a few weeks of experience in the average balances in the fourth quarter and we had the full impact in the first quarter of this year plus our overall mortgage servicing portfolio continues to show very solid growth both through this acquisition and organically.

So those particular deposits were up in the $500 million range on average in the current quarter versus the fourth quarter.

I see so what you are saying is seasonally first quarter is lower than fourth quarter?

Seasonally first quarter in-- in terms of DDA balances -- non-interest--

Right.

-- would be lower than the fourth quarter, that's correct.

Right.

Okay.

Thanks.

Once again, if you would like to ask a question, please press star 1 on your touchtone telephone at this time we'll go next to Kevin Timmons with C.L. King.

Thanks, most of my questions are answered, two specific things though, securitization activity any guidance there for the next couple of quarters?

With respect to securitization we typically have done one securitization a year with respect to our Ed-lending portfolio and that held-for-sale category.

We may conduct another securitization before our typical time period, which is either the third of the fourth quarter.

Last year we did it in the fourth quarter, the year before it was in the third quarter.

Typically it's the second half of the year of securitization.

Would that be sort of the same volume just split it to two transactions or because of higher volume.

we would typically look at-- Again, our historical pattern is one transaction a year but because of the volume that we do have we may in fact look at doing more than one.

No decision has been made at this time.

Okay.

Good.

On the incentive comp 79 million for Q1 which was fairly consistent with a year ago but down from Q4 as expected.

Is 79 a reasonable base run rate. ?

I know it can fluctuate depending on results.

I think you answered it fluctuates depending on results, so--

Thank you.

It appears there are no further questions at this time.

Mr. Meyer I would like to turn the call back over to you for additional or closing remarks.

Thank you, operator and I would just like thank all of you for being a part of our call today, if you have any additional questions, don't hesitate to give Vern or the team a call.

And with that, operator, we will adjourn.

Thank you that does conclude today's call.

We appreciate your participation.

You may now disconnect.