KeyCorp (KEY) 2009 Q1 法說會逐字稿

Good day and welcome to KeyCorp's first quarter 2009 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 of KeyCorp, Mr. Henry Meyer. Mr. Meyer, please go ahead, sir.

Thank you operator. Good morning and welcome to KeyCorp's first quarter 2009 earnings conference call. Joining me for today's presentation is our CFO, Jeff Weeden and available for the Q&A portion of the call are our vice chairs Beth Mooney and Peter Hancock, our Chief Risk Officer, Chuck Hyle and our Treasurer, Joe Vayda. I hope you all looked at slide two which is our forward-looking disclosure statement. It covers our presentation materials and comments as well as the Q&A segment of our call today.

Now, if you turn to slide three, today we announced a net loss of $1.09 per share for the first quarter. As was the case for the fourth quarter of last year, the loss was primarily attributable to a non-cash accounting charge for goodwill impairment and continued building of the loan loss reserve. In light of the prevailing economic environment during the first quarter of this year, we continue to build our loan loss reserve by taking a $875 million provision for loan losses which exceeded our net charge-offs by $383 million. At March 31, 2009, our loan loss reserve stood at almost $2.2 billion and represented 2.97% of period end loans and 126% of non-performing loans. In our earnings release this morning, we announced that the board of directors intends to reduce the quarterly common stock dividend from $0.0625 per share to $0.01 per share commencing in the second quarter. Obviously, no one likes having to reduce the dividend again, however given the current operating environment, I, my management team and our board, believe this action is prudent.

As a result of this decision, the company will retain approximately $100 million of capital on an annual basis. These are challenging times and operating expenses in the form of higher collection costs and deposit insurance, are impacting everyone in the industry. Key is addressing the challenges is by continuing to focus on controlling costs where we can. In the first quarter, we took some additional measures to reduce costs and in the past year, we have reduced FTE's by approximately 1,000. Many of these reductions were associated with businesses we previously announced we were exiting or de emphasizing such as private student lending and the home builder lending area within National Banking. In other areas of the company we are achieving better cost efficiencies by developing new technology. We are also capitalizing on our efficiencies in our commercial mortgage servicing area where we recently bid on and won an additional $3 billion of servicing. Key is continuing to move forward with its business plans to reshape the company and return to profitability as the economy begins to improve. However, we are not sitting around waiting for this to happen on its own. We continue to look for ways to streamline our operations by further eliminating lowered value activities and capitalizing on investments we've made to improve our operations.

At March 31, 2009, our tier 1 capital ratio was a strong 11.16%. Our total capital ratio stood at 15.11% and a ratio that everyone seems to be focusing on these days our tangible common ratio was 6.06%. We have remained focused on the strategic allocation of our capital during these economically challenging times. As a result, we continue to make progress on our efforts to reshape our business mix by exiting low return and indirect portfolios. However, progress here has been slower than we would have liked simply because of the malaise hanging over the economy for the past several quarters. We have also focused our people on working with our clients to meet their funding needs while getting fairly compensated for the capital and funding we put to work. As highlighted in our earnings release in the first quarter we entered into new extensions of credit with clients representing approximately $7.8 billion in new or renewed loan commitments. We remain encouraged by the results we have -- see coming from the community bank from the investments we are making in technology, branch modernization and de novo branches. As of March 31, we have completed our roll out of teller 21 across the company, modernized over 100 locations and we have plans to complete between 35 and 40 DeNovo branches in 2009.

Last week and yesterday again we announced internally additional changes to our organization. Within our real estate capital business we have announced we are consolidating several of our national sales locations within the income property segment and reassigning additional resources to work on more challenging credits. Within the Community Bank, we are making a series of changes that will help build greater consistency across our districts in order to have better alignment to the clients we serve and do so in a more cost effective way. And as always, we will continue to keep our clients at the center of everything we do in order to provide the great client experience that earned KeyCorp recognition as the top rated bank in customer service by Business Week and as customer service champion, 2009 edition. We are honored to receive this recognition which had Key ranked eleventh out of the top 25 companies that include many who are well known for their customer service acumen. As you will also see in the appendix of our materials today, we have combined our northwest and Rocky Mountain regions under one leadership team in order to optimize our efforts and focus on these attractive growth markets. We now have approximately one third of our companies deposits located in each of our regions. Now, I will turn the call over to Jeff for a review of our financial results. Jeff?

Thank you, Henry. Slide four provides a summary about the company's first quarter 2009 results, as Henry mentioned, we incurred a net loss of $1.09 per common share for the quarter. Impacting the first quarter results were the continued building of the reserve for loan losses in excess of net charge-offs and the $223 million or $0.38 per share, non-cash charge, we took for intangible asset impairment in our National Banking operations. With this latest impairment charge we have now written off all of the remaining goodwill assigned to this business unit as of March 31, 2009. This charge did not impact our regulatory or tangible capital ratios. We included a more extensive list of items impacting our first quarter results on page 2 of today's earnings release.

Turning to slide five, the company's net interest margin was 2.77% for the first quarter of 2009 compared to an adjusted 2.84% for the fourth quarter of 2008. As the first quarter progressed, we experienced an improving margin in the back half of the quarter as lower spread assets matured and repricing for deposits began to ease somewhat in our markets. While higher levels of non-performing assets will keep pressure on the net interest margin, we believe we will see greater stability in the margin and possible -- and the possibility for expansion in coming quarters as assets continue to reprice to improve credit spreads.

Turning to slide six. The loan categories on this slide have been adjusted for the exit portfolio shown. For example, the marine RV floor plan loans on this slide, have been removed from the commercial, financial and agricultural loans, CF&A totals, for all periods and are reflected in the exit portfolio details. As we discussed in our fourth quarter earnings call, Key experienced an increase in loan draws in the Summer and Fall of 2008 as the credit markets froze up. As these markets began to show improvement late last year and continuing into 2009, corporate customers began returning to the commercial paper markets as well as holding less excess liquidity on their balance sheets, due to the uncertainty surrounding the debt capital markets. As a result, during the first quarter, the company experienced a $1.6 billion decrease in average total loan balances compared to the fourth quarter of 2008. Compared to the first quarter of last year, average total loans are up $2.6 billion or 3.6%. The company continued to experience growth in our community banking home equity loans with average balances up $236 million or 2.4% unannualized from the fourth quarter and $580 million or 6% from the first quarter of last year.

Turning to slide seven. Average domestic deposits increased $800 million or 1.3% unannualized from the fourth quarter. Average deposits are up $3.7 billion or 6.1% from the same period one year ago. During the first quarter we continued to see a shift out of MMDA into certificate of deposits as consumers moved out on the yield curve to lock in higher deposit rates. In addition, we also experienced an increase in DDA balances primarily from our corporate client based businesses off set some of their -- as corporate customers offset some of their transaction service charges by maintaining higher amounts on deposit.

Slide eight shows a number of asset quality measures and the trends we have experienced over the last five quarters. As we continue to move further into the credit cycle, we are also seeing additional increases in NPAs, net charge-offs and the reserve for loan losses. Net charge-offs in the first quarter were 2.65% of average total loans which is up from 1.77% experienced in the fourth quarter of 2008. This increase primarily occurred in our CF&A and our CRE portfolios within our National Banking reporting unit. The increase in CFNA loan net charge-offs was related to businesses tied to commercial real estate within the commercial real estate line of business. Net charge-offs related to floor plan lending in our consumer finance business line and small ticket commercial loans within the equipment lease -- equipment finance line of business also remained elevated in the first quarter and are expected to remain elevated until the customer spending increases resulting in an improved outlook for the economy. We also experienced an increase in non-performing loans and non-performing assets in the first quarter. Non-performing assets were up $533 million in the first quarter following an increase of $225 million in the fourth quarter of 2008. 86% of the increase in NPAs came from our National Banking business units. As of March 31, 2009 non-performing assets represented 2.70% of total loans, other real estate owned and other non-performing assets. As we discussed earlier, we continued to build reserves during the first quarter. At March 31, 2009, our reserve balance stood at $2.186 billion and represented 2.97% of total loans and 126% of non-performing loans. In the past year we have increased the reserve for loan losses by approximately $900 million.

On slide 9 we provide a breakdown of our credit statistics by portfolio for the first quarter. This slide provides additional information with respect to our various portfolios by classification type. We have also included in the appendix section of our materials today additional information with respect to our home equity loan portfolio and our residential property segment and retail property segment within the commercial real estate portfolio. As I mentioned when discussing the previous slide, the two areas where we experienced the majority of our increase in net charge-offs and NPLs in the current quarter were in our CF&A and our CRE portfolios. Here again we have provided additional information with respect to these portfolios in the appendix. During the first quarter we experienced an increase in net charge-offs from the fourth quarter of in our CF&A portfolio of $113 million, $232 million or 3.56% annualized of average balances. $106 million of this increase was related to commercial real estate exposures in our commercial real estate business unit. In addition, commercial real estate construction loans experienced an increase in net charge-offs for the first quarter versus the fourth quarter of last year of $55 million. All other categories of loans showed little change from the prior quarter levels.

Slide ten provides an updated view of our commercial real estate portfolio at March 31, 2009, by property type, by geographic location. For more than a year now we have been reporting on the detail surrounding the residential property segment of commercial real estate and we'll continue to provide more detailed breakdown of the property types and geographic locations of the projects in the appendix materials. One thing I would mention here, is that our outstanding balances in the residential property segment have been reduced by approximately 50% over the past 12 month and now represent 10% of total outstanding balances compared to 19% of total commercial real estate outstanding balances one year ago. As we have moved further into the economic cycle and presumably closer to the bottom of the decline in GDP, we are experiencing deterioration in other segments such as the retail property group, which is dependent upon consumer spending to generally support rents. We are working with our customers in this segment as their projects come to completion to find solutions for their permanent financing needs. In a number of cases where permanent financing is simply not currently available in the market we are structuring interim financing on our balance sheet and obtaining additional equity from the developer to re-margin and extend the loan. As I mentioned earlier we have provided a more detailed breakdown of the retail property segment portfolio in the appendix.

Slide 11 is an overview of our exit portfolios at March 31, 2009. These portfolios which totaled $9.1 billion at March 31, represented 12.1% of total loans, loans held for sale -- and loans held for sale and accounted for 28.3% of first quarter net charge-offs and 25.1% of non-performing assets. These portfolios continue to be worked down during the first quarter and overall asset quality remains stable with the fourth quarter level, albeit at elevated levels.

And finally, turning to our capital ratios on slide 12 we remain well capitalized by any regulatory measure. In our tangible equity to tangible asset ratio was a strong 9.23%. Excluding the TARP capital from this ratio our tangible capital ratio was 6.74% and our tangible common equity to tangible asset ratio was 6.06% at March 31, 2009. We believe these ratios and the quality of the capital will compare favorably to our peers at March 31, 2009. That concludes our formal remarks and now I will turn the call back over to the operator to provide instructions for the q-and-a segment of our call. Operator?

Thank you. (Operator Instructions) Lets begin with Brian Foran with Goldman Sachs.

Good morning guys. How are you?

Good.

Good morning.

I guess, you have this $675 million convertible preferred outstanding and the credit environment is obviously becoming increasingly tough and then I guess as a third moving part you obviously have the stress test results coming up. Is that security, in your mind, one that's likely to be proactively converted to further strengthen the common equity component of your capital base?

Brian, this is Jeff Weeden. We are certainly looking at all of the different opportunities that may be out there, and that is one that we have had discussions on with respect to the conversion of that particular security.

And then I guess as a follow-up, when we look at some of the deterioration in NPAs one of the issues you've highlighted in the past is the liquidity issue on the commercial real estate side both commercial construction and commercial mortgages and the need to I guess re-underwrite some of these loans and keep them on your balance sheet. When we look at the jump in construction in commercial mortgage NPAs, can you give us a sense of how much of this is loans that otherwise would have rolled off your balance sheet in a normal credit environment and maybe are moving to non-performing because of that and how much of it is just term loans on your balance sheet that would have gone bad no matter credit environment -- you know no matter what liquidity environment we were in?

This is Chuck Hyle. I think that it's not -- its -- its a bit of a split. Some of the larger names, we have a couple in particular that show up on the CF&A category that are clearly impacted by liquidity. These are major names that have access to the capital markets or at least used to have access to the capital markets. But I think those are loans that would have, not be in the position they're in as an NPA if we had better liquidity in the business. I think most of the others in the CRE category where we are able to refinance the asset in a logical way by either remargining or dealing with the developer in an appropriate way, those we are getting refinanced. Those that clearly are impaired are moving into the NPA and charge-off categories. So, it's a bit of a split.

Thank you

(Operator Instructions) We'll go next to Jeff Davis with Howe Barnes.

Good morning.

Good morning, Jeff.

Good morning.

Chuck, maybe if you -- if -- I know loss rates in the (inaudible) book out of the community bank are almost de minimis relative to where we are in the cycle, maybe if you could comment on how you would expect that to play out over the next four, five quarters and if not unemployment -- rising unemployment impacts -- it will not impact that for Key and maybe the industry. And then secondly as it relates to the exit portfolio and then maybe liquidity generally, are things loosening up here in the last month or so that the ability to monetize assets is -- looks like it's going to get better going forward?

Jeff, on the first point, I would say our home equity portfolio is continuing to perform as we have expected. We've seen a little bit of an increase in deterioration, although our early stage delinquencies in that category have actually improved. So, I think that March was a better month, and our LTVs, while they've deteriorated a little bit from underwriting time frame where we're normally sort of 70% LTV, those have probably moved up to sort of 74%, 75% across our entire portfolio. We're clearly as we've reported in previous quarters, seeing more deterioration in Ohio and the Midwest than in some of the other geographic locations. But our expectation is that this portfolio which as you know is pretty seasoned, originated over a long period of time, we don't have the LTV issues as some of the other regions do have and our expectation is that we will carry on pretty much in the range we've talked about in the past. You've seen a little bit of an uptick in utilization, but its fairly minor and overall we are relatively happy with that portfolio. As far as your second question is concerned, we haven't seen much change in liquidity in the held for sale side. We are very happy to have put our commercial real estate portfolio out last Spring. We got good activity through the Summer and into the Autumn, but in the first quarter I would say that liquidity was de minimis. I think we may have sold one transaction and we don't see a lot of thawing -- particularly in the residential space, we don't see a lot of thawing in that through the end of the first quarter.

Chuck, let me ask one quick follow up. Is that a function of just pricing that is not acceptable to you all, or is it a function of markets are still locked up and we now have the overlay of whatever the treasury's legacy security purchase program is going to do to the markets?

A bit of both, Jeff. I would say that in the residential single family home space, there's just no market. Everybody is waiting. And one or two of the other real estate spaces there's some activity and then it gets down to whether we like the price and we think it's better to hold on to them. But I would say overall, that liquidity looks pretty sparse.

Thank you.

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

Thank you. Good morning guys. Can you tell us -- you mentioned I think that some of the construction loans can not find permanent financing and you've issued many perms when you rewrite the loan to put it into the commercial mortgage portfolio. About -- what was the dollar amount of that in the quarter? And do you continue to see that as a source of funding these construction loans throughout the year if they cannot find financing?

Gerard, this is Jeff Weeden. At the end of the quarter we'd moved approximately $1.3 billion of loans that went out of -- that completed construction and moved into the mortgage portfolio at that particular point in time.

Okay. And could you give us a little color on what types of property types? Was it mostly in retail or mostly in office or whatever?

Well, it was spread across a range of properties. Certainly some retail, some office, some warehouse. So, it's pretty much a mix of out of asset classes.

I see. And are all of the loans that have been moved over, they would stand your credit underwriting test so that these aren't trouble debt restructurings or anything like that? These are legitimate new mortgages that you are comfortable with?

Absolutely. We wouldn't do it otherwise and these tend to be with your larger and better developers that have other assets and if it doesn't underwrite to our standards, we don't do it.

Okay. The other question was I think you guys in the non-performing asset slide that you have given us, I think it was on page 25, you mentioned that you've got some loans held for sale to dispose of. Can you tell us, are those mark-to-market the ones that are held for sale? And if so, what have you marked them to market to relative to original balance?

Yes. They are mark-to-market. Most of those, the $72 million that's in that particular outstanding balance at the end of the first quarter, were from the original sale that we announced last year in the second quarter, and there's a schedule if you look at -- on page 27, it actually does the roll forward of that particular balance amount. But we've continued to mark those down and they're basically mark down to around the $0.40 on the dollar on average.

And are you finding that at those levels they're readily salable -- that's a pretty good mark at this point in time?

Well, we continue to take write downs on them each -- you know. You can kind of follow the progression on that slide 27, but we continue to work those and I know Chuck and his team work them very, very hard each and every quarter, but again it's a matter of how much liquidity is actually in the marketplace and what are we seeing for indication of values.

And again Gerard, because this -- most of those assets are in the residential space, as I said earlier, we don't have a -- we're not seeing a lot of liquidity there.

I see. And regarding the exit portfolio, what are you guys -- I mean, you're making steady progress obviously in reducing that portfolio. What seems to be a constraint to see even better progress? Is it pricing or is it the lack of financing that the potential buyers would need to find to buy these loans? What would accelerate it, I guess?

Well, Gerard, it's Henry. You know, we have -- I have been a little disappointed in the progress there, and I think in almost every case, it's the lack of ability by the current borrower to find another takeout. Still as you can see a lot of, you know, these are performing loans. It's a strategic decision, but there aren't a lot of alternatives for these borrowers. Most of the reductions are the -- you know, the scheduled paydowns, but we had hoped that getting out of the business would send some of those borrowers to an institution that was actively in that business, and we haven't seen as much of that as we would have liked.

Great. And then one final question. Thank you for giving us the detail on the commercial real estate retail properties that you did this quarter. Could you -- two questions. One, just define for us power center -- what type of retailers are in the power center and second you've done it in the past with your resi-exposure, pointing out that the California and Florida markets were weaker than most parts of the country. Where are the weaker spots regionally that you guys have seen in the commercial retail properties? Is it California and Florida again, or is somewhere else?

Gerard, the power centers are going to be your big box shopping centers. So, if you go in and see some of the larger -- you know, like a Wal-Mart, Target, Best Buy, you see a number of those very large retailers that are located in those particular centers. And clearly what we see is this -- the -- if you look at the schedule, obviously on page 23, you'll see that the Southeast has some of the softer areas. It doesn't appear to be in Florida. It's more within the Carolina's and Georgia.

And a bit in the southwest as well, I think.

I see. Thank you.

(Operator Instructions) We'll go next to David Knutson with Legal and General.

Hello, good morning. With Timothy (inaudible) comments regarding the loan underwriting standards being part of the criteria, what would be your company's view towards a shared national credit -- Key traditionally has had a relatively higher percentage of loan assets in the shared national credit program. Someone said that it's not direct origination or the underwriting is somewhat different?

This is Chuck Hyle. Our percentage of our wholesale portfolio that is shared national credit really hasn't changed much in the last several years. I would say that we've got something like $7 billion -- a little over $7 billion where we are a participant in shared national credit and we lead about $1.3 billion. So, that's about a third of our wholesale CNI portfolio and that percentage really has not changed in two or three years. So, that's been pretty consistent.

The follow up would be on the student loan portfolio, the delinquencies are increasing relative to the recent past especially in private student lending. What's your company's view regarding reserve or provision requirements for that portfolio?

Well, I think you see the reserve build up on the portfolio just simply looking at slide nine, we break everything out by portfolio. So, you'll see that the reserves are currently on that particular book of business standing at $170 million and represent 4.59%. Charge-offs are running, on that entire book, at about 3.5% right now and they've actually been relatively stable the last couple of quarters. We do believe that student loans in the lending portfolio will track basically with the overall health of the consumer. So, it's not unexpected that you would see a rise in delinquencies if unemployment, et cetera, continues to increase.

Thank you.

We currently have no further questions at this time. I would like to turn the call back over to Mr. Henry Meyer.

Thank you operator and I'd like to thank all of you for taking your time from your busy schedules to participate on our call today. If you have any follow-up questions on the items we discussed please call Vern Patterson, our head of Investor Relations, at (216) 689-0520. That concludes our remarks and I hope everyone has a great day.

This does conclude today's conference call. We thank you for your participation.