Clock Ticks for Cleveland’s Key

Actually, sitting at Henry Meyer’s desk 800 feet up Key Tower means a view of the wall. Swivel the chair around, and there’s the sleek flat-panel screen behind, plugged into markets and bleeping with the far-flung operations of an $86 billion bank.

To get a look at what’s happening in Cleveland, the firm’s home turf and birthplace to Key’s seventh-generation Cuyahoga son, it’s around the hall to the airy lounge, well-suited for chief executive dealmaking.

On this day it’s all Lake Erie and jagged ice, clean water frozen as far as the eye can see, steam rising from the streets and man-made clouds hovering over the few factories left on the horizon. Six weeks later and the headlines out of Cleveland are on fire—suburban homes on the front lines of a huge marsh blaze. This may be the new Cleveland of the Jake and the Rock and Roll Hall of fame, but it’s still a volatile place.

Key is grounded in the Erie economy but rolls across the continent—mostly along the Canadian frontier. It’s commonly seen as a target; year after year it stays independent. Meyer, 53, has shaken the bank in his brief tenure as CEO. He put the finishing touches on his team last fall: Jeffrey Weeden, former Firstar exec is in as CFO; Bank of America vet Thomas Bunn is in to run the combined corporate lending and investment banking business. Brokerage insider Jack Kopnisky is heading the consumer bank.

Jetting in from a weekend golf outing with Meyer in Phoenix, Dick Gascoigne, a 54-year-old Marsh exec and a friend since the seventh grade, says there’s no fuss about the Key CEO. Meyer points a direction and until proven otherwise has every thought results will fall in place. “He and I were working at the bank together; I had started in January ’74 and he’d been there a year or two,” Gascoigne says. “He came in and said, ‘we’re going to grab two other friends and take a golf vacation.’ I’d only been at the bank for three weeks and I didn’t get any vacation.” Meyer prodded. “He said, ‘tell ’em what it’s about, take the risk, just try it.’ My boss said, ‘sure, take the week off.’” That golf group’s been together 30 years.

Meyer’s cleaning up the mess from Key’s bad loans. The firm’s gotten out of auto leasing, credit cards, mortgage lending, the 401(k) record-keeping business and given up on business-to-business e-banking. “We want to be the intermediary. We want to be the quarterback, but we don’t have to own all the products,” he says. Meyer’s cut spending to 1998 levels.

Unfortunately, earnings remain stuck at 1998 levels, too, so Key’s price-to-earnings ratio lags its peers and keeps it on takeover lists, analysts say. “One of our problems has been a charge a year. Not in 2002, it’s behind us,” Meyer says. “But you don’t get infinite times at bat in this league.” He figures he’s got two years before the firm’s forced to think about other options.

Given current economic malaise, analysts and market watchers are inclined to give him the benefit of the doubt, but there’s also skepticism about the firm’s ability to four-wheel its way out of the mud. “It seems to be a rolling two years,” Putnam Lovell analyst Jennifer Thompson says.

Loans with Hair

Key’s spring earnings were under expectations at 51 cents a share. Meyer says he can’t use the economy as an excuse and he’s frozen performance raises for a large part of the company until further notice. He’s pushed the firm to pump up corporate lending books, telling his team to “make some loans with some hair on them.”

But as he readily points out, Key is driven by several market-sensitive businesses. It has a sound investment bank—McDonald Financial Group—during a quarter when only five American companies floated shares at a volume of just $540 million. Key’s Victory brokerage lost $900 million under management in the first quarter. “When the goddamn market goes down 100 points a day, it’s very hard to show revenue growth,” he says.

Meyer’s not bitter, just stuck. His Key is a Cleveland-based commercial lender and a gangly retail bank with presence in Albany, NY and the northeast, running west to Colorado, Seattle and Alaska. Most important to the firm is its $17 billion commercial lending portfolio. The firm may want to boost corporate lending, but a good part of this client base is in the hard-hit Midwest.

At the same time, Key’s not in the mortgage business, which while interest rates sit at 40-year lows is providing many banks, including its big cross-town rival National City, a lifeboat with which to scud across today’s Sargasso economy. So Meyer and his lieutenants streamline, keep costs in line, and wait.

In the meantime, the firm’s got a mid-May stock price of $24.72, a price-to-earnings ratio of 11.14 and a long-term growth target of 7.5 percent. When Meyer looks out his window across the Key franchise, he sees 11.7 percent market share in Albany, with $1.6 billion in deposits and 12 more offices than market leader Fleet; he leads his home base in Cleveland with a 23 percent share and $13 billion in deposits; he’s number 14 in Denver and number 13 in Colorado Springs; number two in Portland, ME and number five in Portland, OR; number four in Seattle with $2 billion in deposits and number four in Anchorage with $156 million.

Window on the World

It was the view that got Henry Meyer into banking in the first place. With his econometrics degree freshly earned from Colgate, Meyer was on the receiving end of a father-son conversation. “Yes, but do you have a job,” Meyer recalls his engineer father, who died of cancer in 1987, saying to him. “When I did those interviews over that Christmas vacation, the accounting people—at least the young people, where I thought I’d start out—had no windows. They were in a bullpen,” Meyers says. “At least the bankers I talked to had windows.”

Meyer came of age in 1966, when the Cleveland Trust Company, which he would be instrumental in buying, was still one of the 10 largest banks in the country. That came later. Now came riots and Cleveland’s slide into a malaise remarkable even in a decade filled with it. Renewal from that kind of fall feels like the jittery success of a 10-step graduate surrounded by daily temptation. “When I was a kid, we used to come downtown at Christmas because the best stores were downtown. The Hippodrome was the best movie theater,” Meyer says. The Hough riots, over the refusal to give a black customer a glass of water at a bar, burned through the streets in the summer of ’66 and four people died before soldiers moved in with bayonets. “The National Guard troops were right down on Cedar and Fairmount, which is a couple of blocks from where I grew up,” he says.

A few years later logs, picnic benches, grease and petrol piled up under a railroad trestle and the polluted Cuyhoga River caught fire in the heart of town. It only burned for a half hour, but Cleveland fit as a symbol of the crumbling rust belt for the decade to come. Mayor Ralph Perk, flamboyantly cutting a steel ribbon with a blowtorch while opening a metals convention, instead found his hair in flames and himself on the nation’s front pages. His wife Lucille turned down an invitation to meet Pat Nixon, allegedly because it was her bowling night. The city’s financials were a mess. Another mayor, Dennis Kucinich, ran a turbulent administration and fought with Cleveland Trust’s Brock Weir over a $15 million debt. Neither blinked. The city defaulted.

A city of just under a million, the heart of the future Key’s economic base, shrank to 500,000. Henry went to Harvard. “Now, when someone asks where I live, I say Cleveland,” he says. “Back then, I said Shaker Heights, hoping that nobody would know where that was.” Quite an admission for someone who had a relative with Cleaveland—Moses Cleaveland, surveyor—when the city was founded in 1796.

Meyer’s eyes opened in Harvard’s Aldrich Hall; he likes to tell his troops about how flat his banker answers sounded in a field of creative classmates the first time he answered a case study. By the second year one of those classmates, a Kansas City girl and Smith psychology graduate headed for a career in healthcare consulting, made such an impression that Meyer wanted to marry her. They angled for New York; Henry got good offers and Jane didn’t. Her good offer came from Ernst & Ernst, headquartered in Cleveland.

Lake Living

So Meyer went back to the Society he came from—he had worked at Cleveland’s fifth of five banks, behind Union Commerce, Central National, National City and Cleveland Trust, for a couple years before Harvard. He made his bones bringing a Dayton bank into the Society fold, rising up the ranks as the bank grew to land in a consigliare spot to CEO Bob Gillespie. He was the ops man for the firm’s biggest power play, the 1992 takedown of Cleveland Trust, by then called Ameritrust and a firm reeling from commercial real estate disasters.

Society went against crosstown rival Nat City for the win, and it being for hometown prize, the pressure was on. “I don’t remember him bringing it home much,” Jane Meyer says. “They felt they were doing everything they could, so it was calm.” The deal-striking all happened within a few city blocks. On the day Society was to look at Ameritrust’s books, the team decided to walk down the block to the Jones Day law firm in twos and threes, so not to draw attention. “In this drizzle, people did what they were supposed to do, go over in threes and fours. And all of them took their Society umbrellas. It was a parade.”

While Gillespie closed the deal, Meyer entertained clients on the Mather, an old ore boat-turned-banquet hall and museum. He got the call and told Maury Struchen, an ex-Society chairman. “Maury had tears of joy because the little guy had bought the big guy,” Meyer says. “That really popped us into the big leagues.”

The emboldened Society now looked for another combination, which happened when Gillespie got to know Victor Riley, head of Albany’s KeyCorp. Society’s deal with Ameritrust brought the company heft; its deal with Key is responsible for the firm’s current shape. The “frost belt” strategy of setting up shop in a line from Albany to Anchorage was Riley’s, the product mix and culture clash in the new firm provided whitewater that Meyer is still trying to paddle through. Society, analysts say, was a corporate bank and Key really a sprawling community bank. More importantly, Meyer says, Society was top-down and centralized and Key the exact opposite. “The cultures collided,” Meyer says, setting the bank up for tumult at the top and customers leaving at the bottom. He says, somewhat hopefully, that prospect will ward off would-be buyers. Ragen MacKenzie analyst Jay Tejera, familiar with Key’s northwest moves from his base in Seattle, agrees. “The obvious question is when is the company going to be sold. But that’s not as simple an answer as it sounds because of the way the company was constructed,” he says. “You’ve got peanut butter and jelly, and ham and eggs. This was kind of peanut butter and eggs.”

Meyer’s Key Tower-top seat is modest. His workspace is tucked away in an alcove, although with two kids going to the same private $15,000-a-year University School Meyer himself once attended and a 19-year-old at Duke, the Key chairman qualifies for Cleveland’s upper crust. He’s a big man but not larger-than-life, understated, patient. Meyer relaxes in a rambling cottage-style house of river-cut stone on 10 acres with stream, woods and wild turkeys outside finishing the Greenwich-west style of Cleveland’s Hunting Valley. Meyer is low key, visibly feels in charge but calm about it, a blue-suit guy but adventurous enough to travel to Egypt and Israel—and to Kenya with his mother and sister and for safari. He eats lunch in the company cafeteria and balances his checkbook, by hand, every month to the penny.

This style doesn’t work for everybody but must have made the jarring changes Meyer orchestrated over the last two years a little easier. Not only did he shut down businesses, but he also took Key from 25,600 employees in 1999 to 20,400; even while picking up 200 by buying Denver’s Union Bankshares for $66 million, the firm has 40 less workers than it started the year with. Meyer’s a cost-cutter well aware that cost-cutting is not the way to make money. He deflects criticism that far-flung Key is an inefficient firm—its ratio is 57.3 percent—by pointing elsewhere. Meyer says analysts and investors focus less on expenses. “It’s revenue growth. Revenue growth,” he says. “Those who are sellers will be those companies who can’t show revenue growth.”

It must be frustrating. What Key really needs now to prove itself, Meyer says time and again, is for the economy to pick up. He’s got great hopes for the combination of Key and McDonald, and analysts say the fit works much better than Fleet and Robbie Stephens, which concentrated on technology, and U.S. Bank and Piper Jaffray with its culture clashes.

But who couldn’t do with a pickup in the economy? Meyer’s firm is challenged by the Midwest; Cleveland itself is a good example. It’s got confidence, its burning river’s long cleaned and people, or at least some people, are living downtown. Civic leaders and Meyer have hopes for the area to develop into a bio-medical research hub—Case Western University, Cleveland Clinic and University Hospitals are huge recipients of National Institutes of Health dollars and, at $527 million, Ohio gets one third more money that does Minnesota, home of the Mayo Clinic, and Georgia, home of the Center for Disease Control.

But making a return is a tough proposition: Case Western may be solid, but it won’t be a growth engine. Local banks like Key aren’t candidates for the leading-edge firms either. Meyer mentions the dot-coms; gene-therapy firm Copernicus operations chief Mark Cooper says second rounds might be nice, but right now the money’s coming from Taiwan and Montreal.

More important to Key are firms like those that left Cleveland, what Meyer calls ‘the alphabets’—BP, TRW, the bones of former steel giant LTV. Key dodged the big Ohio bankruptcies like Owens Corning. Troubling for Key’s future are clients it’s made happy, like $1.6 billion additive firm Lubrizol. Key’s a lead arranger of Lubrizol’s $525 million revolving credit line. “Key’s been a very strong and cooperative strategic partner to us,” says Lubrizol treasurer Rosanne Potter. “We’d love to have a reason to borrow. We have to spend our cash first.”

Meyer figures the moribund economy is buying Key time; that he can produce consistent and clean earnings and prove the bank’s a winner when the economy picks up. Others have their feet tapping. “The results have been clean, but below expectations,” Lehman Brothers analyst Jason Goldberg says.

Tejera thinks the firm’s still suffering from an identity crisis—that a firm can either concentrate in one area and claim growth during the good years, and ride it out during the bad, or spread out over a large area and smooth out earnings. “With flat earnings going back several years, we’re not getting the benefits of either with Key’s strategy,” he says. “I like Henry. I think he’s a smart guy. He inherited a passel of challenges with that franchise.”

The Key CEO is energetic, a glass-half full. He knows he may have to sell in the end; he says he’s willing to trade off pieces of Key if it makes sense. “If the financial guru of the world came to me and said, ‘Henry, here’s $85 billion,’ I wouldn’t put it where we are,’” he says.

Meyer’s reading some positive signs in the economy. He believes investment banking with a middle market clientele is something nobody’s done well and that Key has aligned commercial and investment banking. What Meyer won’t do is panic and take action for its own sake. He also doesn’t define his life by his job. “I went to Harvard so I wouldn’t be a slave to the company,” he says. “That gives you a little bit different attitude about doing the right thing as opposed to following all the rules.” When asked which competition worries him, BB&T sneaking up from Kentucky or Fifth Third from Cincinnati, changes the subject to Key’s recent Denver purchase. “I want to focus on what I can do,” he says.

So what keeps him awake at night? “Not a lot,” Jane Meyer says. “He’s not a worrier.”