KeyCorp

Good morning and welcome to Key Corp's first quarter 2022 earnings conference call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead.

Well, thank you, operator, and thank you for joining us for Key Corp's first quarter 2022 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 disclosure 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 turning to slide three. This morning, we reported earnings of $420 million, or 45 cents per share. Our results reflect strong underlying operating performance, expected seasonality, and the impact of current market conditions. Our results also included 4 cents per share of additional loan loss provision in excess of net charge-offs. One of the standouts this quarter was our strong loan growth. Average loans were up 4 percent from the last quarter, driven by both our consumer and commercial businesses. Adjusting for the planned runoff of PPP and the sale of our indirect auto business, we grew loans by 15 percent year over year. Our strong loan growth benefited net interest income, which came in above our expectations. We also revised our net interest income outlook higher, reflecting both stronger loan growth and the ongoing benefit from higher interest rates. In our consumer business, we continue to focus on adding and deepening client relationships and our two growth engines, consumer mortgage and Laurel Road. We originated $2.6 billion in consumer mortgages in the first quarter, and Laurel Road had a record quarter with originations of $820 million. It's worth noting that our Laurel Road results were accomplished with the federal student loan payment holiday remaining in place. The outlook for this business remains strong with a new offering for nurses, the largest segment of the healthcare industry, planned for May 6th. National Nurses Day. We also experienced strong core loan growth in our commercial businesses as we grew our targeted industry verticals. Additionally, we benefited from a 2% increase in CNI line utilization. In the first quarter, we raised over $24 billion in capital for our clients, retaining 23% on our balance sheet. This is a 500 basis point increase from the amount retained in 2021. As we discussed at our recent investor day, this is exactly the way our business model is designed to work, offering our clients the best solution and execution both on and off balance sheet through various market conditions. This quarter, we were able to offer attractive balance sheet alternatives for our clients. Our pipelines and outlook for loan growth across our franchise remain strong, which will continue to provide us with an opportunity to deploy our liquidity into higher yielding assets. Market conditions impacted several parts of our business this quarter. Fee income reflected a slowdown in capital markets activity late in the quarter, which adversely impacted our investment banking results. We also experienced various mark-to-market adjustments that Don will cover in his remarks. Importantly, our long-term outlook for our investment banking business remains positive. Our pipelines remain strong. we will also continue to add senior bankers to support our growth. Expense levels this quarter reflected normal seasonality as well as lower production-related incentives, consistent with our variable cost structure in many of our businesses. Also benefiting expenses this quarter was lower prepaid volume related to state benefit programs. We also remain committed to delivering sound profitable growth by maintaining our risk discipline. Credit quality remains strong this quarter, with net charge-offs as a percentage of average loans of 13 basis points. Non-performing loans and criticized loans also declined this quarter. 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. Our capital remains a strength, providing us with sufficient capacity to support our clients and return capital to our shareholders. Looking ahead, we are encouraged by our first quarter business trends and outlook, which has led us to make a number of positive revisions to our full year 2022 guidance. These include stronger loan growth based on the pipelines we see across our company, higher net interest income, driven by loan growth, liquidity deployment, and our interest rate positioning. And lastly, lower net charge-offs, reflecting our strong risk profile. Importantly, we remain confident in our ability to generate positive operating leverage again in 2022 and make continued progress against each of our long-term goals. Don will cover the specifics of our full-year guidance in his comments. Overall, despite market headwinds, Key delivered another solid quarter. I remain confident in our future and our ability to create value for all of our stakeholders. Now, before I turn it over to Don, I want to take a minute to share some exciting news as it pertains to ESG priorities and commitments. Tomorrow, April 22, is Earth Day. Fittingly, earlier this week, we published our 2021 ESG report. It is designed to complement our annual shareholders report, which was released last month. Our ESG report provides all stakeholders with an update on our priorities and progress as both a responsible bank and citizen. In 2021, we refreshed our ESG strategy with input from our stakeholders, identifying four major priorities, climate stewardship, financial inclusion, diversity, equity and inclusion, and data privacy and security. Specific to climate stewardship, we are committed to leveraging our expertise, our relationships, our market influence, and our resources to help address the pressing challenge of climate change. We are proud to announce a number of expanded climate commitments included in our ESG report. These include commitments around sustainable financing, an area where we are a market leader. We look forward to continuing an open and transparent dialogue with all of our stakeholders as we work to address the needs of our communities. With that, I'll turn it over to Don to provide more details on the results of the quarter and our outlook for the balance of 2022. Don? Thanks, Chris.

I'm now on slide five. For the first quarter, net income from continuing operations was 45 cents per common share, down 16 cents from last year. Our results in the current quarter reflect the benefit of strong core operating performance combined with the challenge of the current market conditions. Our strong loan growth, up 4.4 percent from last quarter, resulted in better than expected net interest income and positions as well for future growth. The challenging market conditions at the end of the quarter were reflected in a few areas. including investment banking fees and market-related adjustments in other income. Finally, the increase in our allowance this quarter reflected a qualitative adjustment to reflect the economic uncertainty given the current events with Russia and Ukraine. Absent the qualitative adjustment, our provision would have approximated our net charge-off level. I'll cover the other items on this slide later in my presentation. Turning to slide six. Average loans for the quarter were $103.8 billion, up 3 percent from a year-ago period and up 4 percent from the prior quarter. Strong loan growth continued through the first quarter. Commercial loans increased 4 percent from last quarter. Line utilization rates improved this quarter, increasing 200 basis points. PPP loan balances were $1.2 billion on average this quarter, compared to $7 billion last year and $2.3 billion last quarter. Our consumer business continued its strong performance as we saw residential real estate originations of $2.6 billion resulting in an increase in balances of 8.6% from last quarter. We achieved record Laurel Road originations of $820 million this quarter despite the ongoing federal student loan payment holiday. Year-over-year comparisons were impacted by the sale of our indirect loan portfolio late in 2021. If we adjust for the sale of the indirect auto portfolio last year, as well as the impact of PPP, our core loans were up year over year by approximately $14 billion, or 15%. Our outlook for 2022 now reflects an increase for loan growth for the year of mid-single digits on a reported basis, or mid-teens growth on a basis adjusted for both PPP and the sale of the indirect auto portfolio. Continuing on to slide seven, Average deposits total $150 billion for the first quarter of 2022, up $12 billion, or 9%, compared to the year-ago period, and down $1 billion, or 1%, from the prior quarter. The current quarter change was consistent with previous seasonal trends. Compared to the previous year, we have experienced nice growth in both commercial and consumer deposits. Our cost of interest-bearing deposits remained unchanged at six basis points. We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60 percent of our total deposit mix. Turn to slide eight. Taxable equivalent net interest income was $1.02 billion for the first quarter compared to $1.012 billion a year ago and $1.038 billion for the prior quarter. Our net interest margin was 2.46 percent for the first quarter compared to 2.61 percent to the same period last year and 2.44% for the prior quarter. Year over year and quarter over quarter, both net interest income and net interest margin reflect the PPP forgiveness. The current quarter reflected $21 million of net interest income from PPP, down $30 million from the prior quarter and $38 million from the prior year. This negatively impacted net interest margin by six basis points compared to the last quarter. PPP is impacting key disproportionately compared to peers given the success we achieved in delivering this product to our customers. Offsetting this impact was the benefit from deploying some of the excess liquidity through strong loan growth. We have increased our 2022 outlook to reflect the strength of our loan growth as well as the impact of higher interest rates. Our current rate outlook follows the forward curve and a beta assumption beginning in the high single digits in the second quarter and treading toward the 30 percent level later in 2022. This outlook results in a high single-digit increase in net interest income from 2021, or between 6 and 9 percent. Adjusting this for the impact of PPP, our growth would have been 11 to 14 percent. Also included in the appendix is additional detail on our investment portfolio and asset liability positioning. Moving on to slide nine. As mentioned before, our non-interest income was negatively impacted by changing market conditions late in the quarter, which impacted several line items. Non-interest income was $676 million for the first quarter of 2022, compared to $738 million for the year-ago period and $909 million for the fourth quarter. Compared to the year-ago period, the decrease was primarily driven by market-related adjustments included in other income, representing about $50 million of the year-over-year variance. This included both changes in write-downs of certain holdings and reversals of derivative reserves last year. The reductions in cards and payments fees are related to the lower level of prepaid card activity from the state-supported programs, which is offset by a corresponding reduction to the related expense. Additionally, during the quarter, our consumer mortgage fees were lower, reflecting higher balance sheet retention and lower gain-on-sale margins. These declines were partially offset by stronger corporate services income resulting from customer derivative activities. Compared to the fourth quarter, non-interest income decreased $233 million, primarily driven by lower investment banking and debt placement fees coming off the record level in the fourth quarter of last year. Market-related adjustments negatively impacted the quarter over quarter variance by $55 million, as last quarter included market-related gains and this quarter experienced losses. I'm now on slide 10. Total non-interest expense for the quarter was $1.07 billion compared to $1.07 billion last year and $1.17 billion in the prior quarter. Compared to the year-ago quarter, our expenses reflect lower production-related incentive compensation offset by higher salaries, including the impact of our direct investments into the businesses. On the non-personnel side, our other expense category reflects lower prepaid card-related expenses offset by higher travel and entertainment expense and FDIC assessments. Now moving to slide 11. Overall, credit quality continues to perform well. For the first quarter, net charges remained low and were $33 million or 13 basis points of average loans. Non-performing loans, delinquency, and criticized classified levels all remained relatively stable. Based on this performance, the quantitative level of our allowance remained flat with last quarter. However, we did add a qualitative adjustment to our allowance to reflect the economic uncertainty given the current events with Russia and Ukraine, as well as potential impact of higher rates. The qualitative adjustment is driven by the impact from changes in the overall economy and their potential impact on our customers. As a result, our provision expense exceeded our net charge-offs by about $50 million. We have no direct exposure to Russia or Ukraine. Now on to slide 12. We ended the first quarter with a common equity Tier 1 ratio of 9.4% within our targeted range of 9 to 9.5%. 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. On slide 13 is our full year 2022 outlook. The guidance is relative to our full year 2021 results, and ranges are shown at the bottom of the slide. Importantly, using the midpoints over guidance ranges would support Chris's comments about delivering another year of positive operating leverage in 2022. Average loans will be up mid-single digits on a reported basis, excluding PPP and the impact of the sale of our indirect auto loan business, average loans would be up mid-teens. We expect average deposits to be up low single digits. Non-interest income is expected to be up high single digits, reflecting growth in average loan balances and higher interest rates, offset by lower fees from PPP forgiveness. Our guidance is based on the forward curve with eight additional expected rate increases. This would assume a Fed funds rate of 2.25% by the end of 2022. On a reported basis, non-interest income will be down mid single digits, reflecting the lower prepaid card revenue related to our support of government programs and our first quarter actual results. We expect non-interest expense to be down low single digits. Once again, adjusting for the expected reduction in expenses related to prepaid cards, expenses would be relatively stable. For the year, we expect net charge-offs to be in the range of 15 to 25 basis points. Given our strong credit trends, we would expect loss rates to remain below the targeted range early in the year and move to modestly higher levels later in the year. and our guidance for the GAAP tax rate is approximately 19%. 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 a solid quarter, and we remain confident in our ability to grow and deliver on our commitments to all of our stakeholders. With that, I will now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator?