KeyCorp

Good morning and welcome to Key Corp's second quarter 2021 earnings conference call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead, sir.

Well, thank you for joining us for Key Corp's second quarter 2021 earnings conference call. Joining me on the call today are Don Kimball, our chief financial officer, and Mark Midkiff, our chief risk officer. On slide two, you will find our statement on forward-looking disclosures and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question and answer segment of our call. I am now moving to slide three. We delivered another strong quarter with earnings per share of 72 cents. This is an increase of 18% from the first quarter and up significantly from the year-ago period. Our results reflect our success in acquiring and deepening relationships across our franchise, further improvement in credit quality, and contributions from targeted investments. We generated positive operating leverage on a year-to-date basis and remain on track to deliver positive operating leverage for the full year. We generated record second quarter revenue driven by an 8% year-over-year increase in non-interest income. In our consumer business, we experienced record growth in new households in the first six months. In every one of our markets and in every age group. Importantly, some of our strongest growth has come from younger clients in the western part of our franchise. Our new client growth over the past six months exceeds our growth in any full year period over the last decade. Additionally, our consumer business generated over $4 billion in loan originations for the quarter. Mortgage originations reached another all-time high, and we expect to exceed last year's record level of $8.3 billion for the full year. Laurel Road also had another strong quarter, despite the federal student loan holiday. Since the launch of our national digital bank, Laurel Road for Doctors, we have added over 2,500 new doctors and dentists. The launch was an important milestone in our digital journey, which brings together several critical elements of our strategy. Targeted scale, digital, healthcare, and primacy. Moving to our commercial businesses, we had another strong quarter. Our investment banking business generated fees of 217 million, a record second quarter level, and the second highest quarterly level in our history. We experienced growth across the entire platform. We have grown this business consistently over the past decade, and we expect to grow it again in 2021. Importantly, this is a business driven primarily by repeat clients. Our pipelines are currently at record levels, supporting our strong growth outlook for the business. This quarter, we raised $21 billion for our clients, of which we retained approximately 20% on our balance sheet. Expenses this quarter reflect higher production-related incentives and the investments we continue to make across our franchise, in digital, in analytics, and in our teammates. Let me highlight just a few of these investments. I've already mentioned Laurel Road and the launch of our National Digital Bank. Not only have we accelerated client acquisition, but our new clients are doing more with us, with approximately half of our new doctor and dentists using multiple products. We also continued to build out our analytic capabilities. Including our recent acquisition of AQN Strategies, we have doubled the size of our analytics team. Year-to-date, we have increased our senior bankers by 5 percent in our targeted growth areas. This has resulted in a 21 percent increase in client pitches on a year-to-date basis. We also consolidated 54 branches this quarter with an additional 14 planned for next quarter. These consolidations will drive future cost savings and support our ongoing investments. Shifting to credit quality. Our trends remained positive this quarter. Non-performing loans, net charge-offs, and criticized loans were all down from the prior quarter, and net charge-offs to average loans were nine basis points. We continue to support our clients while maintaining our moderate risk profile, which has, and will continue to, position the company to perform well through all business cycles. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. Our common equity tier one ratio ended the quarter at 9.9%, which is above our targeted range of 9% to 9.5%. Our strong capital position enables us to continue to execute against each of our capital priorities, namely organic growth, dividends, and share repurchases. Combining our share repurchases and dividends paid this quarter, we have returned capital representing 50 cents a share for an annualized return of capital of approximately 11% at our current valuation. Earlier this month, our board of directors approved a new share repurchase authorization of up to 1.5 billion, beginning in the third quarter of this year and continuing through the third quarter of 2022. The Board will also evaluate an increase to our common stock dividend in the fourth quarter of 2021. Overall, I was very pleased with the quarter, which reflects the hard work and dedication of our team. We grew our top line and we made targeted investments to position the company for continued growth. As always, we remain committed to our disciplined approach to risk management and our commitment to return capital to our shareholders through dividends and share repurchases. I will now turn the call over to Don, who will provide more details on the results of the quarter. Don?

Thanks, Chris. I'm now on slide five. As Chris said, it was a strong quarter with net income from continuing operations of 72 cents per common share, up 18 percent from the prior quarter and four times from the year-ago period. The quarter reflected a net benefit from our provision for credit losses. The reserve release was largely driven by our strong credit metrics and expected improvement in the economic environment. Importantly, we generated record second quarter revenue driven by strength in our fee-based businesses. Our reported return on tangible common equity for the quarter was 22.3 percent. Adjusting for the reserve release, or ROTCE, was 16 percent within our targeted range of 16 to 19 percent. I will cover the other items on this slide later in my presentation. Turning to slide six. Total average loans were $101 billion, down 7% from the second quarter of last year. CNI loans were down $9 billion, reflecting decreased utilization levels. Consumer loans were up 9%, benefiting from continued growth from Laurel Road and, as Chris mentioned, record performance from our consumer mortgage business. Combined, we had over $4 billion of originations this quarter between our residential mortgage and Laurel Road production. The investments we've made in these areas continue to drive results and, importantly, add high-quality loans and relationships. Link quarter average loan balances were relatively flat as commercial loans declined due to the commercial utilization rates, partly offset by growth in PPP loans. Consumer loans grew 2 percent, again related to the continued strength from our consumer mortgage and lower road. PPP average balances were $7.5 billion for the quarter, up from $7 billion in the first quarter. The PPP balances ended the quarter at $5.7 billion, reflecting $2.8 billion of forgiveness and $900 million of new production. Continuing on to slide seven, average deposits totaled $144 billion for the second quarter of 2021, up $16 billion, or 13% compared to the year-ago period. and up 5% from the prior quarter. The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus. The growth was partially offset by a continued and expected decline in time deposits. Total interest-bearing costs came down another two basis points from the first quarter, following a three-basis point decline last quarter. We continue to have a strong, stable core deposit base, with consumer deposits accounting for over 60% of our total deposit mix. Turn to slide eight. Taxable equivalent net interest income was $1.023 billion for the second quarter of 2021 compared to $1.025 billion a year ago and $1.012 billion from the prior quarter. Our net interest margin was 2.52% for the second quarter compared to 2.76% from the same period last year and 2.61% for the prior quarter. Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to the year-ago period. The larger balance sheet benefited net interest income but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income increased $11 million and the margin declined nine basis points. Lower interest-bearing deposit costs and higher loan fees from PPP forgiveness were offset by lower earning asset yields and continued elevated liquidity levels. For the quarter, PPP loan fees, including the impact of forgiveness, totaled $50 million, up $2 million from the prior quarter. The significant build in liquidity continues to be the largest driver of our net interest margin. We are maintaining around $20 billion in excess cash. Cumulatively, excess liquidity has negatively impacted our net interest margin by about 35 basis points, with seven basis points of incremental impact for the second quarter. Moving to slide nine, we've continued to see strong growth in our fee-based businesses, which have benefited from the investments we've made. Non-interest income was $750 million for the second quarter of 2021, compared to $692 million for the year-ago period, and $738 million in the first quarter. Compared to the year-ago period, non-interest income increased 8%. We had a record second quarter for investment banking and debt placement fees, which reached $217 million, driven by broad-based growth across the platform, including strong M&A fees. Commercial mortgage servicing fees increased $32 million. Cards and payments income also increased $22 million related to broad-based growth across product categories including debit, credit, and merchant products. This growth was offset by lower consumer mortgage fees resulting from lower gains on sale margin and also the impact of MSR valuation changes. Lower operating lease income resulted from leveraged lease gains in the year-ago period. Compared to the first quarter, non-interest income increased by $12 million. The largest driver of the quarterly increase was the record second quarter and the second highest ever quarter for investment banking and debt placement fees. Service charges on deposit accounts and commercial mortgage servicing income also showed strength versus the prior quarter. These were partially offset by lower other income due to positive market-related valuation adjustments in the prior period, offset by negative adjustments in the current quarter. I'm now on slide 10. Total non-interest expense for the quarter was $1.076 billion compared to $1.013 billion last year and $1.071 billion in the prior quarter. Our expense levels reflect production-related incentives and the investments we've made to drive future growth. We have highlighted some of the significant investments on the lower left of this slide. We continue to invest in Laurel Road, including the launch of the National Digital Bank, including spend in marketing and technology. We also grew senior relationship bankers by 5% year-to-date in our targeted focus areas, including renewables team that we added in May. We've also continued to invest in our digital capabilities as well as analytics. Our analytics team has grown by two and a half times, including our recent acquisition of AQN. The increase from the prior year is primarily in personnel expense related to higher production-related incentive compensation and an increase in our stock price. Employee benefit costs also increased $16 million as healthcare-related costs were low in the second quarter of last year. Computer processing expense this quarter was elevated related to software investments across the platform. Compared to the prior quarter, non-interest expense was relatively stable. Higher incentive and stock-based compensation was offset by seasonally lower employee benefit costs. Marketing costs were up $5 million, primarily related to the launch of the Laurel Road for Doctors. I'm now on slide 11. Overall, credit quality continues to outperform expectations. For the second quarter, net charge-offs were $22 million, or nine basis points of average loans. Our provision for credit losses was a net benefit of $222 million. This was determined based on our continued strong credit metrics, as well as our outlook for the overall economy. Non-performing loans were $694 million this quarter, or 69 basis points of period in loans. a decline of $34 million from the prior quarter. Additionally, criticized loans declined and the over 90 day delinquencies improved quarter over quarter. Now onto slide 12. Key's capital position remains an area of strength. We ended the second quarter with a common equity tier one ratio of 9.9%, which places us above our targeted range of nine to nine and a half percent. This provides us with sufficient capacity to continue to support our customers and their borrowing needs, and return capital to our shareholders. Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. We repurchased $300 million of common shares during the quarter, and our Board of Directors authorized a second quarter dividend of 18.5 cents per common share. As Chris mentioned, combined, this return of capital represents 50 cents a share this quarter, an annualized return of 11% of our current valuation. Earlier this month, the Board of Directors approved a new share repurchase authorization of up to $1.5 billion beginning in the third quarter of this year and continuing through the third quarter of 2022. The Board will also evaluate and increase the common stock dividend in the fourth quarter of 2021. On slide 13, we provide our updated full-year 2021 outlook, which we've adjusted to reflect our outlook for the remainder of the year. Consistent with our prior guidance, we expect to deliver positive operating leverage this year. Average loans are still expected to be relatively stable, reflecting continued momentum in our consumer areas, the impact of the PPP program, and a pickup in commercial loan growth later this year. We expect deposits to be up high single digits, reflecting the continued outperformance we have seen today. We will continue to benefit from our low-cost deposit base. Net interest income is now expected to be relatively stable, reflecting the low rate environment as well as the slightly lower than expected loan balances. Our net interest margin will continue to reflect the impact of excess liquidity on our balance sheet. Non-interest income should be now up in the high single-digit to low double-digit range, reflecting the broad base growth in most of our core fee-based businesses, including what is expected to be another record year for our investment banking business. Given the stronger revenue outlook, we now expect non-interest expense to be up low single digits, with the primary driver being higher production-related incentives. As we identified on our expense slide, we are also continuing to invest in areas that will drive future growth, namely teammates, technology, and also rolling out new capabilities, such as Laurel Road. This does not change our focus on core expenses and driving further efficiencies, including our commitment to generate positive operating leverage for the year. Moving to credit quality, we have reduced our net charge-off guidance once again, which is now expected to be in the 20 to 30 basis point range for the year. This reflects the quality of our portfolio, our current outlook, and performance to date. And our guidance for the GAAP tax rate has increased to 20% for the full year, reflecting the higher expected earnings for this year. Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns. Overall, it was another strong quarter, and we remain confident in our ability to deliver on our commitments to all of our shareholders. With that, I'll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator?