KeyCorp has drawn a big circle around March 30 — National Doctors’ Day — on its corporate calendar.
That’s the day the $170.4 billion-asset company expects to open its
Key hopes the unit will enable its Laurel Road subsidiary to deepen relationships with doctors, dentists, physician assistants and nurses beyond student loan refinancing and home mortgages to deposits, additional kinds of loans and other services.
Laurel Road, which Key acquired in April 2019, originated $2.3 billion of loans in 2020, including $590 million in the fourth quarter.
“They have exceeded every expectation,” Chairman and CEO Chris Gorman said Thursday in an interview. “Think about a digital company that refinances student loans for doctors and dentists that are accredited, employed, have an average salary of about $200,000 per year. These are great clients to get.”
As it expands digital capacity, Key is moving to scale back its branch network. On an earnings conference call with analysts Thursday morning, Gorman announced plans to close 70 branches — or 7% of its network — in 2021.
The closings “are driven by customer preferences,” Gorman said. “As customers pivot more and more to digital … what we find is we need fewer branches.
The company’s overarching goal is to transition branches from serving as hubs for routine transactions to places where customers can go for help with milestone events.
“People day in and day out will transact on their phones, but when there’s a real moment of truth, when they’re trying to purchase a home or finance their kids’ education or finance their retirement, that’s when they want to come into the branch,” Gorman said.
“One of the interesting things that is kind of a second-order effect of this is … having a thin branch strategy actually can be a competitive advantage, if you think about a great digital offering augmented by the ability to have a relationship with a person,” Gorman added.
For the quarter ending Dec. 31, Key reported $549 million of net income from continuing operations on revenue totaling $1.845 billion — both records, according to Gorman. Those results, which were 25.1% and 12.6% year-over-year increases respectively, were paced by robust mortgage and investment banking performances.
Fourth-quarter investment banking revenue totaled $243 million, while mortgage banking gain-on-sale income topped $43 million. Looking ahead in 2021, Don Kimble, Key’s vice chairman and chief financial officer, said he is forecasting results that are just as strong or even stronger from both lines.
Indeed, Kimble foresees little or no drop off from the $8.3 billion in residential mortgages Key originated in 2020. Meanwhile, investment banking’s bottom line, which analyst Gerard Cassidy, who covers Key for RBC Capital Markets characterized as “blockbuster,” should be better.
“We do expect [investment banking] to grow again in 2021,” Kimble said.
“Pipelines remain strong,” Gorman said. “This area will be a growth engine.”
Like other banks that participated in the government’s Paycheck Protection Program, Key experienced a surge of deposits that continued into the fourth quarter. Average year end deposits of $135.7 billion were up 21% from the Dec. 31, 2019 level. At the same time, the cost of that funding plunged from 71 basis points at the end of 2019 to 8 basis points 12 months later.
Key, which originated about $8 billion of PPP loans during the program’s earlier phases between April 3 and Aug. 8, expects to originate $2.5 billion in the first quarter of 2021, Kimble said.
Key received approval to forgive approximately $1.3 billion of PPP loans in the quarter ending Dec. 31, generating $28 million in fee income. Forgiveness is expected to reach $1 billion in the first quarter of 2021, according to Kimble.
Key ended the year with $101.2 billion of loans on the books, essentially flat excluding PPP. Strong consumer loan growth was offset by weak commercial demand.
“We haven’t yet seen growth,” Gorman said. “We haven’t yet seen companies [resume] investing in products, plants, equipment or people.”
Gorman added he is optimistic commercial loan growth will pick up in the second half.
“Three things are going to drive increased borrowing,” Gorman said. “Companies have to burn down their higher-than-typical cash balances. Secondly, they have to invest in inventory. Right now, there is enough slack in the global supply chain that firms don’t really have to go long on inventory. … The last thing is the investment in property, plant, equipment, technology, people.
“Practically, as we sit here near the end of January, by the time you plan that out and by the time you actually put the dollars to work, I think you’re in the back half of 2021,” Gorman said.
Key ended 2020 on a solid note in terms of asset quality. Net chargeoffs of $135 million were 0.53% of average total loans. Nonperforming loans of $785 million were 0.78% of period-end total loans.
