KeyCorp

1825–1991

KeyCorp is one of the national's 30 largest banks with banking and other financial services subsidiaries in the Northeast, the Northwest, including Alaska, and the Rocky Mountain states. On Wall Street, KeyCorp is often called the "Wal-Mart of banking" because it serves many small towns and has cultivated a folksy image--similar to that of the mass merchandiser Wal-Mart--by lending mostly to consumers and small businesses. KeyCorp refers to itself as "America's neighborhood bank."

While other banks, such as First Interstate Bancorp and BankAmerica Corp., operate in several states, they do not, according to the Wall Street Journal, have the regional diversity of KeyCorp. These banks with interstate holdings are more confined to specific parts of the country, while KeyCorp's holding span many regions. Unlike other banking leaders whose headquarters are located in Manhattan, KeyCorp is headquartered in Albany, New York. The makeup of KeyCorp's banking network is also very unusual. Whole KeyCorp is a coast-to-coast bank; its empire of more than 800 banking offices is concentrated in the nation's northern tier, skipping over the Midwest entirely.

KeyCorp's history dates back to 1825 when New York Governor Dewitt Clinton signed a bill chartering the Commercial Bank of Albany, KeyCorp's direct ancestor. In 1865, Commercial Bank was reorganized under the National Banking Act of 1864, and its name was changed to National Commercial Bank of Albany. Also during this time, another bank that would eventually become part of KeyCorp opened--the Trust and Deposit Company of Onondaga in Syracuse, established in 1869. In 1919, the Trust and Deposit Company of Onondaga merged with First National Bank of Syracuse to become First Trust and Deposit. Around the same time, the National Commercial Bank of Albany went through another reorganization, consolidating with Union Trust Company to become National Commercial Bank and Trust Company. These two new banking concerns operated independently until 1971 when First Trust and Deposit was merged into National Commercial Bank and Trust Co. (now incorporated as First Commercial Banks Inc.) With that transaction, First Commercial had 89 offices in New York State. The name was changed to Key Bank Inc. in 1979, and the institution adopted its present name six years later.

Victor J. Riley, Jr., became president and chief executive officer (CEO) of the bank in 1973; he would continue to serve in this capacity for over 20 years, making him the longest tenured CEO of any of the top fifty banks in the country. Riley led the bank from its days as a strictly update New York bank to its position as the country's twenty-ninth largest financial institution in 1991 with $23 billion in assets, up from $2.4 billion ten years before. Between 1981 and 1991, the bank's stock produced an impressive 810 percent total return including dividends, third among the 50 largest banks, according to the company's annual report.

During the 1970s and early 1980s, KeyCorp bought banks throughout the upstate area as well as 25 offices from the Bank of New York. Initially, Riley's plan was for KeyCorp to become a regional concern by acquiring banks in New England as well, starting with its purchase of a bank in Maine. However, at the same time, to keep the large New York banking establishments from dominating the New England banking system, a move was made to exclude New York banks from purchasing banks in Massachusetts and Connecticut.

Riley looked to the west when his New England strategy was thwarted. He anticipated that when U.S. trade with Asia increased, the economies of western states would also improve. KeyCorp bought a string of banks, and in the four years between 1985 and 1990 quintupled its assets from $3 billion to $15 billion. While other banks were focusing on large cities, especially in the Northeast, KeyCorp was focusing on areas of low population in which banking services were scarce. Furthermore, KeyCorp avoided the pricing wars that often occurred in highly competitive markets.

KeyCorp bought a string of banks, and in the four years between 1985 and 1990 quintupled its assets from $3 billion to $15 billion.

1984–1987

While eastern banks were buying up other eastern banks at premium prices, KeyCorp continued its westward expansion, acquiring inexpensive and promising banks in Wyoming, Idaho, and Utah. In 1985, Riley bought two banks in Alaska and Alaska Pacific Bancorporation; he used Alaska's interstates banking laws to purchase a bank in Oregon, which became know as Key Bank of Oregon. The next year, KeyCorp acquired Northwest Bancorp of Albany, Oregon, and Pacwest Bancorp of Portland, Oregon, which also became part of Key Bank of Oregon.

Many leaders in the banking industry thought Riley was making a mistake when he started buying banks in Alaska and the Northwest in 1984. Critics doubted his ability to manage such banks from a home office in Albany, New York. The purchase certainly seemed like a mistake when oil prices dropped dramatically, and Alaska plunged into a recession. KeyCorp moved quickly to restructure loans for borrowers hit by recession and foreclosed on loans when necessary.

KeyCorp also continued to buy banks in small towns and cities in New York State. In 1986, it acquired four savings banks in the mid-Hudson Valley. In the same year, it increased its western holdings by purchasing Beaver State Bank in Beaver, Oregon.

Although KeyCorp had been shut out of acquisitions in much of New England a few years before, in 1987 Riley bought eight branch offices in Maine from Fleet/Norstar Financial for $14 million. They became part of Key Bank of Maine. KeyCorp also opened a unique subsidiary based in Albany--Key Bank USA N.A., which provides banking services by mail to customers nationwide who were not within a Key Bank region.

Regional diversity has advantages and disadvantages for KeyCorp. On the positive side, KeyCorp is not so vulnerable to economic slumps in one region. Director H. Douglas Barclay told the Wall Street Journal, "Problems in one or two states can be contained. Over time it all balances out." While the Northwest was in a slump, the Northeast was booming. Then, the tables were turned and the Northwest picked up while the Northeast was in recession. However, geographic diversity also made KeyCorp expensive to run, with operating costs as a percentage of assets high. Top executives also spent a lot of time of the road, visiting branches far from the Albany headquarters.

Consistent with the small town approach, Riley rarely replaced personnel in the banks KeyCorp purchased, choosing instead to stay with management familiar to the local population. He told Business Week, "You cannot go into a new state and start shuffling people around and maintain yourself as a retail bank."

1990–1993

The small town philosophy also helped the bank avoid costly bad loans. KeyCorp's policy was to lend to people and businesses in the areas it served. It avoided the pitfall of many other banks--lending outside the states in which it had branches. In 1990, bad loans made up only four percent of its $9.9 billion load portfolio; most of those bad debts were at its Alaska banks, hard hit by a decline in oil exploration. Furthermore KeyCorp's lending practices were financially conservative. The company did not make any loans greater than $20 million and its average commercial loan was only about $2 million. Furthermore, no single industry group represented more than 24 percent of KeyCorp's commercial loans.

After more than ten years of acquisitions that had brought KeyCorp into the top 50 list, KeyCorp shifted its focus to reducing its high overhead costs. In 1990, its efficiency ratio was about 66 percent, meaning that about sixty-six cents worth of every dollar in revenue was spent on overhead. By the end of 1992, its efficiency ratio had improved to 61.9 percent and was more in line with the efficiency ratios of comparable banks. KeyCorp merged its operations into two computer centers and brought its four mortgage companies together as one. The banking company also sold a car-leasing business and a finance company that were unprofitable. Still KeyCorp lacked a standardized reporting system for its hundreds of branches. This became a priority for William Dougherty, the company's chief financial officer, who set to work linking KeyCorp's branches by computer and consolidating its back-office operations. By the end of 1992, all of KeyCorp's banks were linked electronically, with primary processing centers in Albany and in Tigard, Oregon. Six secondary sites handled business more suited to regional processing.

In line with the current trend in banking toward consolidation of holdings, KeyCorp consolidated several New York State operations into one financial institution. Key Bank of Eastern New York, Key Bank of Central New York, and Key Bank of Western New York became a single nationally chartered bank, Key Bank of New York State, N.A., with its offices in Albany.

KeyCorp benefited from the country's thrift crisis in the early 1990s by buying from the government assets of two large failed New York thrifts--Empire Federal Savings and Loan and Goldome Savings Bank. With the Goldome purchase, KeyCorp moved from its status as an unknown in the mortgage industry to become the nineteenth largest mortgage banker in the nation. Furthermore, the Goldome purchase turned out to be profitable as the market for new and refinanced mortgage loans boomed, with interest rates the lowest they had been in decades.

In 1992, KeyCorp acquired Valley Bancorporation of Valley Falls, Idaho, which became part of Key Bank of Idaho. KeyCorp also bought the 48 branches of Security Pacific Bank in Washington, which became part of Key Bank of Washington. The company negotiated several other deals as well that were completed in early 1993; Puget Sound Bancorp, with assets of $4.7 billion merged with Key Bank of Washington; 40 branches of New York's First American Bankshares and nine branch offices of National Savings Bank of Albany were acquired; and KeyCorp also bought its first holding in Colorado--Home Federal Savings of Fort Collins.

By the end of 1992, KeyCorp had its operations and its expenses under control, using a computer system to keep track of its coast-to-coast snowbelt holdings. Its earnings were also looking better. For a long time earnings stood at 90 cents for every $100 in assets, but in 1992, they pulled past the industry standard of one dollar per $100 in assets.

1990–2001

While other banks in the Northeast had been saddled with bad real estate loans, KeyCorp's net earnings were increasing because its Northwest holdings, which in 1990 made up more than 39 percent of its holdings, were booming. Although it owned banks in some larger western cities, the majority of its banks were located in small towns such as Troy, Idaho, with a population on 820 and Gig Harbor, Washington, with a population of 2,429.

Victor Riley and William Dougherty have been credited with taking KeyCorp into the ranks of the top 50 financial institutions. According to The Economist, KeyCorp's "loan book and profitability are the envy of other banks." That article explained that KeyCorp avoided the "easy money" made from big development loans for commercial property and corporate loans for highly- leveraged transactions. This kept KeyCorp out of some of the deep troubles that other banks encountered. KeyCorp also refrained from making loans to third world nations. In 1990, the bank's largest loans added up to only $500 million of a $10.4 billion loan portfolio. The Economist also credited KeyCorp's success to "rigorous financial and credit controls" over the banks it bought as well as its effective cost controls. In 1992, the bank held only 25 loans that were worth more than $12.5 million and only one worth ore than $30 million, a loan to the owner of the bank's headquarters in Albany.

KeyCorp began testing a Vision 2001 computer system and planned to have it fully installed by the end of 1993. At a cost of $15 million to $20 million, the system would help branch bankers market a wide range of credit services by allowing users to input new loan information, forward loan applications to managers, and access credit scoring data. The system could also aid in loan servicing and collection.

As it approached the twenty-first century, KeyCorp anticipated growth in the area of trust products, as the "baby boomers" entered middle age and started to think about retirement. KeyCorp planned to expand its trust services and products. In early 1993, KeyCorp's assets were more than $30 billion. Riley and Dougherty planned to increase KeyCorp's net assets to $40 billion by the mid-1990s, while still earning at least a 15 percent return on equity in order to keep attracting investors.

Since KeyCorp's reputation is not that of a "high tech bank," but rather a personal, neighborhood bank, Riley and Dougherty admit that attaining assets of $40 billion may be difficult. Riley told The Economist that the key would be to keep tight controls of the finances and operations but at the same time maintain management power at the local banks where the person-to-person banking takes place. KeyCorp's annual report explained that services that are "visible to the customer are managed locally," including loan approval and product pricing. Data processing, loan reviews, and audits, "invisible services," were handled by KeyCorp, the parent company.

While it was important to maintain that small town flavor and person-to-person services, to Riley, investors were the key to growth. He told Financial World "We've worried an awful lot about the depositor [in this country] but we've given no concern to the investor. And today, we need the investor if we're going to continue to raise capital, which is an absolute necessity." Nevertheless, banks have not proved to be attractive investments in recent years, and Riley maintained that KeyCorp would not buy banks just to meet their goal of $40 billion. His first priority would be to protect earnings.