Ladies and gentlemen, good morning, and welcome to KeyCorp’s Fourth Quarter 2019 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, Beth Mooney. Please go ahead.

Thank you, operator. Good morning, and welcome to KeyCorp’s Fourth Quarter 2019 Earnings Conference Call. Joining me for the call are Chris Gorman, President and Chief Operating Officer; Don Kimble, our Chief Financial Officer; and Mark Midkiff, our Chief Risk Officer. Slide 2 is 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 moving to Slide 3. I will provide some overview comments on the quarter and full year results, and then Don will provide a more detailed look at our results and outlook and then Chris will discuss Key’s priorities for 2020 and beyond. As you have seen with our headlines this morning, Key had a good quarter, which finishes what has been another successful year for our company as we continue to grow, invest for the future, and deliver on our commitments. For the fourth quarter, we reported GAAP earnings per share of $0.45 and our EPS results for the quarter were $0.48, excluding $0.03 from notable items related to a previously disclosed fraud loss and a pension settlement charge. To provide a consistent view of our financial trends and prior period comparisons, my remarks this morning will focus on results that exclude notable items in all periods. Importantly, we delivered positive operating leverage for both the quarter and the year, and this was our seventh consecutive year of positive operating leverage which places us among a select group of peers. We continue to see strong balance sheet growth this quarter with both loans and deposits up over 4% relative to the year ago period. Our relationship-based business model continues to position us well with our targeted clients, which results in more clients and expanded relationships. Total revenue was…

Thanks, Beth. I’m now on Slide 5. This morning, we reported fourth quarter net income from continuing operations of $0.45 per common share. Adjusting for notable items, including a pension settlement charge and additional costs related to a previously disclosed fraud loss in July of 2019, earnings per share was $0.48. Our adjusted results compared to $0.48 per share in both the year ago period and the prior quarter. This quarter, we recognized an additional charge of $16 million in our provision related to the previously disclosed fraud incident. Importantly, we do not expect material losses from this incident in future period. I would also point out that no collections have been applied against our loss, but we do expect recoveries to be realized later this year. I’ll cover many of the remaining items on this slide in the rest of my presentation. So now turning to Slide 6. Total average loans are $93.6 billion, up 5% from the fourth quarter of last year, driven by growth in both commercial and consumer loans. Consumer loans benefited from strong growth from Laurel Road, residential mortgage business, and indirect auto. Laurel Road originated over $800 million of student loan consolidation loans this quarter, and we generated $1.5 billion of residential mortgage loans. The investments we have made in these areas are clearly driving results and importantly adding high-quality loans to our portfolio. Linked quarter average loan balances were up 2% and were primarily driven by momentum in our consumer business. C&I loans in the fourth quarter were relatively flat reflecting the timing of various bridge loan repayments, which are consistent with our business model. Importantly, we have remained disciplined with our credit underwriting, and we have walked away from business that does not meet our moderate risk profile. We remain committed to…

Thank you, Don. I would agree with Beth and Don that this was a good quarter and a very successful 2019 for Key. This is especially notable given the challenging rate environment. Our performance clearly demonstrated the strength and resiliency of our strategy and our business model. Importantly, we continued to make investments to drive long-term growth sometimes at the expense of near-term earnings and efficiency. A great example is Laurel Road. Not only has this acquisition exceeded our initial expectations but we believe we have only begun to realize the potential of Laurel Road in building long-term digital relationships. It’s a great example of strengthening our franchise by building scale in a very targeted way. As we look forward, our priorities will guide our decision making in 2020 and beyond. First, we will continue to invest in order to build targeted scale in our distinctive and proven business model, technology and digitizing, our business will remain high on our list of priorities. Secondly, we will continue on our journey to improve productivity and efficiency, which will drive positive operating leverage. Third, there is nothing more important than maintaining our moderate risk profile. This is an area where we underperformed through the last downturn, and we are committed to outperform through the next business cycle. And finally, we will be disciplined with our capital. As you’ve probably heard me say, we are focused on the return on and the return of capital. I will close by saying that I’m very excited about Key’s future. As Beth mentioned, our leadership transition continues to go very smoothly. We have a great leadership team, and we are well positioned to achieve our long-term targets. We believe our valuation does not yet reflect the strength of our company and the progress that we have made. I am committed to delivering on our commitments and building value for our shareholders. With that, let me turn the call over to the operator for instructions for the Q&A portion of the call. Operator?

Thank you. [Operator Instructions] And we’ll go to Gerard Cassidy with RBC. Please go ahead.

Good morning everyone. How are you?

Good morning.

Good morning.

Beth, can you share with us and maybe, Chris, as well, what are you hearing from your business customers? We’ve heard some of your peers talk about a change of sentiment amongst commercial customers in the fourth quarter. And I was wondering if you guys saw any of that in your fourth quarter numbers?

Yes, I will briefly address that, and then I’ll turn it over to Chris to further augment. But I do think as we go back and look at the summer when there was so much anxiety for lack of credit reform in the economy and sentiment was impacted by what we’re going to be various trends around trade, interest rates, and global growth. We saw a strengthening of sentiment in the fourth quarter as a number of these things both got clarified, specifically relative around trade and then just the impact of the cumulative months of the economy continuing to perform well. So, sentiment strengthened as we went through the end of the year. And obviously, consumer sentiment with the strength of the employment in labor markets ended the year strong as well. Chris?

Yes. Beth, the only thing I would add to that, the consumer is very strong. And we see that in our mortgage business, we see that in our Laurel Road business, as we look at FICO scores, 760, 770, very solid on the consumer side. On the commercial side, Gerard, to your point and Beth’s point, we did see what I think is a pivot to more constructive kind of mindset and discussions in the last 45 days to 60 days. The challenges still remain in that area. We’re not seeing a lot of capital investment yet. I would anticipate that we would at some point and also their biggest challenge is continuing to be able to go out and hire people. Those are kind of the two challenges, but I do agree with the premise of your question that it’s gotten better as we got through Brexit and also the – some trade discussions.

Very well. And then, Don, you touched a couple of times in your prepared remarks about the losses associated with the fraud. Two-part question. One is, in the post op, now, it’s about six months from that discovery, what have you guys learned from that issue? And then second, you talked about recoveries, I don’t know if you can give us a guide on how much you think you might recover?

Yes, a couple of things. What we have learned and maybe provide a little bit of additional clarity as to what happened as far as the losses this quarter that we have made the decision as we entered into this discovery that we were going to honor payments going to employees or employee benefits related to employees of customers of the fraudulent company. And so we want to make sure we had good money for good people. And so we had some outsized payments occur after that July 9 time period that got reflected in this additional $16 million charge this quarter. And so we think it’s the right decision for us as a company, but did translate to that. We do not expect to see any further material charges going forward from this and continue to work with the bankruptcy courts, the restructuring agent that’s onsite, and also the forensic accounts as well. And as far as the recoveries going forward, we’re still subjected to the legal process. So we are not in a position yet to start to realize some of the benefits for those recoveries. But as I highlighted briefly that we do believe that the loss we recognized this quarter is temporary and the future recovery should more than offset that, but we probably don’t expect much until second half of this year as far as the flow from that.

Very good. Thank you.

Thank you.

Our next question is from Ken Usdin with Jefferies. Please go ahead.

Hey, thanks. Good morning. Hey Don, you mentioned in your comments, you had a bit of the excess liquidity, and you mentioned your lingering exposure rate changes. I’m just wondering, as you’re growing the consumer book and fixed rate product at it, how do you expect that liquidity to get pulled out back into earning assets? And do you expect to grow the securities book anymore or is that a reasonable size? Thanks.

Yes. I would say that we would expect, as we highlighted, to see a mid-single-digit kind of loan growth, and it’s going to have a bigger contribution from consumer loan growth. And so we’re very excited about that. We’ve also highlighted that we expect to see deposits up low single-digits. And so you’ll start to see a remixing of the overall balance sheet. Long-term, we target our loan-to-deposit ratio to be in the 90% to 95% range, and we’re well south of that today. So we’ve got a lot of room to move that liquidity position down and remix into more loans. And so that’s why we feel comfortable with our guidance as far as relatively stable margin and could have some potential upside if that liquidity level gets absorbed quicker than what our forecast would suggest.

Okay. And then one question on the efficiency ratio. You mentioned that you expect to be a little bit above the top end of the $54 million, $56 million. If rates stay flat from here, what would need to happen to get back inside that range on an annual basis?

What we talked about was that with our midpoint of our guidance ranges we’ve established, it does show positive operating leverage. And with that positive operating leverage, I can say that very well – with that positive operating leverage, it will help drive that efficiency ratio down. And so that’s part of our guidance. And so we do think that we’ll make progress towards that in 2020, and that’s what’s needed to continue to achieve that from here that if you would just look at the rate environment that was in place in October of 2018 when we initially set this goal and also when we reaffirmed in January of last year, we’re seeing a bigger impact as far as rates on our net interest income. And if we would have had that rate environment in place throughout the year, we would have been inside that range here in the fourth quarter and also our outlook for 2020 would be inside that range. So that’s really the sole contributor that we are achieving our expense targets, and we are making progress as far as growing the overall core business but realizing the near-term impact of the lower rate environment.

Got it. Thank you, Don.

Thank you.

Next, we’ll go to Scott Siefers with Piper Sandler. Please go ahead.

Good morning, guys. Thanks for taking the question. Don, just a quick question. You mentioned earlier in a sense of reason, most of – or I guess, the preponderance of growth will come – continue to come from the consumer side. Just as you guys look at things, at what point would we anticipate seeing a heavier lift on the provision just due to the complexion of growth?

Yes. Well, this year will be an interesting year for all banks because of CECL. And I would say that the provision for loan growth should be higher on a relative basis compared to what was in the incurred loss method because the reserves required are higher. That being said, the categories that we’re expecting to continue to grow are very high FICO scores. So whether it’s residential mortgage or the Laurel Road loans or even our indirect auto. Even the CECL reserves are not that significant. And so we think that there will be some pressure there, but that not as much as you might initially assume.

Got it.

It’s Chris. The only thing I would add to that is our starting point. Obviously, we’ve been working really hard to be a more balanced bank between commercial and consumer. And our starting point is such that we think those are asset classes we can really grow.

Yes, okay, perfect. Thank you. And then, maybe, Chris, if you could just give kind of an updated thought on the outlook for the investment banking business? I know Don had mentioned that a couple of deals might have gotten pushed into the first quarter from the fourth quarter. So presumably, the pipeline is pretty strong, but just your overall thoughts on how 2020 might play out?

Yes, we feel good about where that business is. As Don mentioned in his comments, we did have some slippage from things into the fourth quarter, into the first quarter. But obviously, the trade-off for that as we go into the first quarter with strong pipelines, we feel good about the business, Scott.

Okay, perfect. Thank you guys very much.

Thank you.

Our next question is from Peter Winter with Wedbush Securities. Please go ahead.

Good morning.

Good morning.

Good morning.

I wanted to ask about the fee income. It was flat in 2019 and what some of the drivers are to get to the mid-single-digit growth rate for 2020?

Yes, sure. A couple of things there. One, in 2019, as you recall, in the first quarter of 2019, we had a government shutdown, which really impacted on a negative way, the investment banking debt placement fees. We only had $110 million in that quarter. Up until that, the first quarter tends to run around $130 million-or-so in IB&D revenues. And so that was a direct impact. Also linked year that in 2018, we sold off our insurance business, which also had about a $20 million drag as far as the year-over-year fee income growth. And so that also had a negative impact from that perspective. Going forward, we think that fee income will see some strong growth from investment banking debt placement fees, not only because of the pipeline because we have an outlook that doesn’t include a government shutdown. And so we think first quarter should be off to a good start on a relative basis. We also expect to see continued growth in residential mortgage fees. We’ve seen some very good growth this year. We had $4.3 billion in originations, and that’s more than double what it was a year ago. And so we expect to see continued trajectory there as far as growing that business. And the third category, which had some noise in it in 2019 as well was our cards and payments related revenues that we launched a new cash back card, which had some negative impacts as far as the first year start-up of that product along with the wind down of a previous joint venture we had there. And so our expectation for 2020, which showed growth in that category as opposed to a relatively stable level there as well. So we’re excited about the momentum in our fee-based businesses, and that’s why we show an outlook that has mid-single-digit kind of growth for the year.

Thanks. Very helpful. And then, Chris, if I can ask about Laurel Road, obviously, the origination activity is much better than even you guys were expecting. Can you talk about some of the opportunities that you have to deepen those relationships on the digital side? And when we would start to see some type of impact?

Sure. So there’s kind of three phases to it. One is to make sure we’re doing a really good job in the student loan refinance business. And obviously, that’s hitting on all cylinders. So that’s working. The next phase is the notion of having mortgages. And so we are in the pilot process and we’ll be rolling out throughout 2020 the opportunity for people complete online experience to go out and get a mortgage. The nice thing about that, Peter, is we’re also going to – we’re going to actually transport that across Key. So that will have a benefit for the rest of our company. And then lastly, we’re in the very early stages of this, but we believe, as I mentioned in my remarks, that we have the opportunity to realize holistic digital relationships with these more than one million health care professionals that are out there as an available market.

Great. If I could just squeeze in one more housekeeping. How much was the paydowns on the commercial side from the bridge loans this quarter?

Total paydowns for bridge loans were approximately $1 billion this quarter. So they were outsized compared to normal levels. But as we highlighted, that’s part of our core ongoing business. And so we will expect some timing differences throughout the various periods as to those events occurring.

Got it. Thanks for taking my questions.

[Operator Instructions] And next, we’ll go to line of John Pancari with Evercore. Please go ahead.

Good morning.

Good morning.

Good morning.

On the efficiency ratio expectation, the 54% to 56%, I understand that you expect to be just above it for 2020. Can you talk about the attainability of that range in terms of timing, if we don’t get rates? I know you answered to Ken that you had originally expected a better rate environment than what we’ve seen. So if we assume that we don’t get any change on the rate front, what is the timing around that range? What’s the reality about when you really see that is achievable?

John, are you talking about for the full year or by quarters or because we don’t provide quarterly guidance. I would say that we would expect to see ongoing improvement this year compared to 2019 and further improvement in 2020. That if you use the midpoint of the guidance range, we still have a 56% handle to that efficiency ratio number. And so I think we’re making sizable progress toward that, and we continue to focus on that generation of the positive operating leverage to drive the earnings level. So I think we’re good there.

Okay. All right. Thanks. And then separately on the CECL front, could you just talk about your – how CECL may have impacted your appetite to grow on the consumer side? Is there any difference in how you’re going to be treating some of the exposure that you put on the books in terms of longer-dated consumer loans? Thanks.

Yes, sure. That we continue to look at that. I would say that the good thing about the consumer loan products that we’re focused on, we’re focused on very high FICO scores. And so very low default factors associated with those customers and through any type of economic scenario. And so we do believe that it still is appropriate risk profile for us. So it really hasn’t impacted our origination strategy that it does have a little bit higher upfront cost when you book the loan compared to the incurred loss method, but economically we still feel that it’s the right move and excited about the returns and the growth that we’re seeing from those areas.

Okay. Thanks. If I could just ask one more on the margin side. I know you had indicated that you do expect some incremental declines in deposit costs. So for the margin outlook of relatively stable versus the fourth quarter level, so does that imply that you expect some decline on the loan yield side? Or is it a mixed factor that can help keep the – or that will not – or do you see some form of earning asset decline there in yields?

Yes, that we could see some slight resetting of the loan yields, some of the fixed rate loans. The current go-to rates are slightly below what the portfolio is. So we should see some migration there. In the investment portfolio that overall rate came down by about two basis points this quarter, and that we’ll see some continued slight pressure there that our current purchase yield is slightly below where the overall portfolio is and so that will put some pressure. But with all that considered, we do expect to see the margin relatively stable and deposit costs should come down to help offset that other pressure.

Got it. All right. Thanks, Don.

Thank you.

Our next question is from Erika Najarian with Bank of America Merrill Lynch. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

I wanted to follow up on Ken’s question. The market feeling good about some sort of revenue stability and growth going forward. But if the revenue outlook disappoints, particularly if it falls outside of your range, is there room to take expenses down in order to generate positive operating leverage? Or does the stable expense outlook have pretty firm plans in place for 2020?

A couple of things. One, we’ve always talked about it, if the growth prospects from an organic business perspective aren’t there, we can’t pull that lever to pull back on the investments to pull or reduce the expenses over time. And so part of the challenge is that we don’t have that same flexibility if some of those are rate related like we experienced in 2019, but we do have levers there. And then the second thing is that those revenues that we’re forecasting growth rates, too, many of them have some variable expense component to it. And so if the revenues aren’t delivered, we won’t see the increase in incentive compensation that we’re forecasting in other areas like that. And Chris, any other thoughts there?

Well, the only thing I would add to that, Erika, is we have a lot of plans that involve investment. And so as we look at this plan to the extent that the revenues don’t show up as we would anticipate, we have the opportunity to either defer investment or reevaluate investments. So we are committed to providing positive operating leverage, and we’ll pull the levers that we need to.

Great. And just as a follow-up question to John’s line of questioning earlier, how much more rooms do you think there is to lower deposit costs from here?

Yes. I would say near term, even in the stable rate environment for the next few quarters, we could see a four to six basis point kind of linked quarter decline in deposit rates. And some of that is related to what we talked about last quarter that we have some promotional rate money market deposits that will reset after either a six-month window or a 12-month window, and that’s about $7 billion, and as those reset that will help provide some benefit as far as driving those deposit costs down.

Got it. Thank you.

Thank you.

And with no further questions, Ms. Mooney, I’ll turn it back to you, if you have any closing comments.

Again, we thank you for participating in our call today. And if you have any follow-up questions, you can direct them to our Investor Relations team at (216) 689-4221. That concludes our remarks, and thank you, again.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.