🔒Amid strong growth, KeyBank CEO Gorman sees more opportunity in CT; predicts ‘soft landing’ for economy

Nearly seven years after KeyBank gained a Nutmeg State presence through its $4.1 billion acquisition of First Niagara Financial Group, KeyCorp Chairman and CEO Christopher M. Gorman visited Hartford recently to celebrate the Connecticut/Massachusetts region being named the lender’s 2022 “Market of the Year.”

Cleveland, Ohio-based KeyBank, with $195 billion in assets, has roughly 1,000 branches in 15 states, divided among 26 markets.

The bank’s Connecticut/Massachusetts market was recognized for growth and its overall performance in several categories, including consistency of performance; new client acquisition and sales; collaboration; strength of risk management and asset quality; as well as service quality and employee engagement, according to KeyBank.

“It’s based on many metrics across all of our businesses,” Gorman said in an interview with the Hartford Business Journal. “It’s a really big deal, and it really indicates that we are getting outsized growth here.”

Matthew Hummel, KeyBank’s market president for Connecticut and western Massachusetts, said the region’s production relative to its goals was a key factor in measuring its overall performance.

“It’s always been a strong market,” Hummel said. “What I would say is we kind of scaled the business in the state. We’ve hired really good people, and we’ve hired more people, and I think what it says is we’ve hired the right people because we have grown, on average, 140% for the last couple of years.”

The Connecticut/Massachusetts market saw a nearly 20% growth in net revenue year-over-year in 2022, and reached 114% of its goal for total business production, according to KeyBank.

The region’s private bank/wealth management business experienced 125% growth in assets under management, while loan production and deposits grew 192% and 360%, respectively.

As of June 30, 2022, KeyBank reported $5.4 billion in Connecticut deposits, giving it the eighth-largest deposit market share in the state.

Its June 2022 deposit total was up 9.6% from a year earlier, and 27.4% from 2017, the first year it reported Connecticut deposits following its First Niagara purchase.

KeyBank’s deposit growth occurred as it trimmed its Connecticut branch count to 48 locations as of June 30, 2022, from 69 in 2017.

Like other regional banks, KeyBank has been impacted by recent economic shifts. Gorman predicts the U.S. economy is headed toward a “soft landing,” but the bank is building reserves against a possible jump in credit losses.

In the second quarter of 2023, KeyBank reported $250 million in profits, or 27 cents per diluted share, down a little more than half from the second quarter of 2022.

Its percentage of non-performing loans ticked downward slightly year-over-year, to 0.36%. Even so, KeyBank more than tripled its provision for credit losses to $167 million.

Hummel, Gorman and other KeyBank leaders celebrated the Connecticut market’s growth milestones in July with about 260 staff, ranging from summer interns to executives, at Dunkin’ Park in downtown Hartford. Gorman also spent a few days making the rounds to various local offices and clients to gather feedback.

Gorman sat down with Hartford Business Journal for a wide-ranging conversation about the Connecticut market and broader banking industry and economy.

Here’s what he had to say. The Q&A was edited for length and clarity.

What opportunities do you see for continued growth in Connecticut?

A. I think there’s significant growth opportunities here.

Connecticut — when you think about things like aerospace — has always been a really solid industrial base. There’s also a good service economy here.

Between Connecticut and Massachusetts, we have about 62 branches. And so, when you really look at our footprint, our focus on relationships, and our focus on targeted scale, I think we have a unique product, and that’s one of the reasons we continue to grow in the market here.

Should the Federal Reserve continue to increase interest rates?

A. I think the Fed has taken a very measured posture. I do think there’s a lag in the effect of increasing interest rates significantly, and also the fact that banks are going to have to carry more capital and that debt is more expensive.

I am a proponent of let’s digest what has happened.

How is borrower credit quality holding up?

A. We, in a very proactive fashion, have built a reserve in each of the last three quarters. We feel like we’re very appropriately reserved. We feel very good about our loan book.

Having said that, because the economy is slowing down … we’re at a point in the cycle where I think it’s appropriate to build reserves.

In terms of commercial real estate, where do you see the most growth opportunities?

A. I think affordable (housing) will continue to be a huge opportunity, and multifamily broadly. Apartment buildings are doing extremely well.

Obviously, industrial continues to do well, although activity there is slowing.

What is your brick-and-mortar branch strategy?

A. Branches will be an important part of banking for the foreseeable future.

People have been projecting the demise of the branch for a long time. The fact is, people like to do business with other people and, at those critical moments that matter – whether people are trying to buy a house, send their kid to college, or retire – they want to talk to a person.

So, branches will still be around for a long time.

KeyBank is a $195 billion lender. What are your goals for growth over time? Will that be organic growth or through acquisitions?

A. My experience as a banker for many years is that the best companies grow both organically and inorganically.

First Niagara, that deal was now seven years ago, but that’s a business we purchased to keep the good people and to keep the clients. We were able to take out 42% of the cost. That’s a pretty good business model.

The other place I’m really proud of, what Key has done a great job of doing, is buying smaller, entrepreneurial businesses.

(Examples include Laurel Road, a digital lending business that KeyBank acquired in 2019; and Gradfin, a public service loan forgiveness counseling provider purchased last year).

I think we have figured out, as a large company, how to buy entrepreneurial companies and really leverage them, which, in business, is not always the case.

Too many times, large companies buy small entrepreneurial companies and they proceed to destroy the very thing that they liked about what they just bought.

I think we try to be careful. We call it ‘not crushing the butterfly.’

After the Silicon Valley Bank failure, there was a flight to larger banks. Do you see a lot more consolidation going forward?

A. There’s been virtually no consolidation year-to-date, and that’s because there are three things going on. One, people have unrealized losses in their bond portfolios, and when you buy a bank with unrealized losses, they become realized.

Two, everyone is still trying to gauge where we are in the economic cycle, which is a challenge. And third is the lack of clarity as to what deals can be approved (by federal regulators).

I think over time, each of those issues will subside, and when they do, I think there will be a wave of consolidation, which has gone on in our industry for a long time.

At one point, there were 20,000 banks (nationally). Today, there’s 4,200.

Do you think we are heading into a recession?

A. I think we’ll have a recession, but I think it will be fine. I’m more hopeful today we can have a mild recession without really damaging the job market.

I think a soft landing is possible.