Banker of the Year: KeyCorp's Beth Mooney

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When KeyCorp announced in October 2015 that it was buying First Niagara Financial Group in Buffalo, N.Y., for $4.1 billion, the reaction from investors ranged somewhere between disappointment and shock.

Though flush with capital that it needed to put to work, Key to that point had given little indication that it was interested in pursuing acquisitions. Investors, who hate surprises to begin with, viewed the price tag — roughly 170% of First Niagara's book value — as too high and the projected revenue gains and cost savings as overly optimistic. They were particularly spooked by the anticipated dilution to tangible book value that Key officials said would take roughly a decade to earn back.

Yet despite the howls of protest — bank investor and blogger Tom Brown called the deal "a ticking time bomb of value destruction" — Key Chairman and Chief Executive Beth Mooney never wavered in her belief that acquiring the $39 billion-asset First Niagara was the right move for Key and its shareholders in the long term.

So far she has proven the critics wrong, and her early success in delivering on the promises of the First Niagara acquisition, combined with the strong leadership Mooney has shown on multiple fronts, have made her American Banker's selection for its 2017 Banker of the Year.

Mooney became chairman and CEO in 2011 after previously running Key's community banking unit. In her first five years at the helm of the Cleveland company she had won praise from investors for overseeing a successful cost-cutting program, beefing up commercial banking capabilities and enhancing its consumer lending by bringing its credit card business, which it had previously outsourced, in-house.

Having made history as the first female CEO of a top 20, U.S.-based bank, Mooney went on to earn a reputation as one of industry's most ethical and civic-minded leaders. On her watch, Key significantly increased its investments in community revitalization and developed a suite of products and services geared toward underserved consumers. These commitments have helped Key earn an outstanding Community Reinvestment Act rating from federal regulators in every year that Mooney has been CEO, as well as numerous awards for citizenship and corporate responsibility.

Even so, an ill-advised acquisition can doom a CEO's legacy and tarnish a company's image, and with skepticism about the First Niagara deal weighing on Key's stock, Mooney and other top executives moved quickly to calm investors' nerves.

The market overlap was a main selling point of the deal. Key and First Niagara were competitors in upstate New York, so their combination promised to significantly boost Key's deposit share in such markets as Buffalo, Syracuse, Rochester and Albany, while providing meaningful cost savings through the consolidation of overlapping branches and back-office operations.

In meeting after meeting with uneasy shareholders, Mooney also stressed that the deal would give Key a toehold in attractive markets where it had little name recognition, including Philadelphia, Pittsburgh and southern New England. It would accelerate its expansion in indirect auto lending and mortgages, business lines where Key had surprisingly little presence for a bank its size. Perhaps most important, it would give Key $29 billion in low-cost deposits and an additional 1 million retail and commercial customers to whom it could offer its products and services.

Like all banks, Key was under intense pressure to boost its top-line revenue, improve returns on assets and equity and reduce its efficiency ratio. The acquisition, Mooney argued, would help the bank reach its performance goals faster than it would otherwise.

Eventually, Mooney won over most of the skeptics. Shareholders overwhelmingly approved the merger in March 2016, and the sale closed in early October. Though some observers say the jury is still out and Mooney herself insists that there is plenty of room for improvement, the early results have been promising.

Now with $137 billion of assets, Key has already hit several of its post-merger performance targets — a return on tangible common equity of above 13% and an efficiency ratio of under 60%, to name two —and the company now projects it will eclipse its stated annual cost savings of $400 million a year by another $50 million. Key's quarterly profits have roughly doubled this year when compared with 2016, and its stock price is up nearly 50% since the deal closed, outperforming many of its regional peers during that span.

Mooney said she can understand why investors reacted negatively to the deal. It was the most significant acquisition in Key's history and among the largest announced since the financial crisis, and Mooney said shareholders needed assurance that she and her team were up to the task of managing the integration. The merger agreement also surprised the market, and some investors simply needed time to let it sink in, she said.

Key is still a long way away from completely reaping the benefits of the First Niagara deal. 'It takes three to five years to fully realize all of the synergies that you are going to get out of an acquisition,' said analyst Marty Mosby.

"We had not talked about being acquisitive and we had said that we had everything we needed to succeed, but this was a unique and compelling opportunity," Mooney explained during a recent interview in her office on the 56th floor of the KeyBank Tower in downtown Cleveland. "The market didn't see it coming, but we squared our shoulders and went out and explained the rationale for it. And what investors are telling me today is that it does appear that it was the right thing for our company."

With First Niagara in the fold, Key is a more balanced franchise than it was 14 months ago, with revenue from loans and deposits now more evenly split between commercial and consumer banking, said Don Kimble, Key's chief financial officer. "We were too heavily tilted toward commercial and, as a general rule, the top-performing banks are more balanced," Kimble said.

The better news is that Key is still a long way away from completely reaping the benefits of the deal, said Marty Mosby, an analyst at Vining Sparks who closely follows large banks. "It takes three to five years to fully realize all of the synergies that you are going to get out of an acquisition," Mosby said. Given the new markets it is in and the large base of customers it inherited, "Key has more to work with than other banks," Mosby added.

Building a legacy

But success is not solely defined by financial metrics and returns to shareholders. Particularly in the wake of the financial crisis, it is also defined by a bank's commitment to doing right by employees, customers and communities, and few CEOs have taken these responsibilities as seriously as Mooney.

Key's commitment to building a diverse, inclusive and engaged workplace is evident in the high percentage of women and minorities now populating its leadership ranks and board of directors. Women and minorities make up 36% of Key's leadership team and 44% of its board.

Its commitment to consumers, particularly those in lower-income brackets, is evident in the types of products it has rolled out in recent years. These include small-dollar loans, totally free checking with no minimum balance required and an overdraft-protection product that limits the fee to 10% of the amount of the overdraft and caps it at $10. (Most banks charge an average of around $30, regardless of the overdraft amount.)

And its commitment to communities is evident in initiatives like Key's five-year plan to invest $16.5 billion in community development across its 16-state footprint. A large chunk of the funds will be earmarked for affordable housing, an area in which Key has significantly ramped up its capabilities over the last three years as housing costs in many urban markets have soared.

Mooney is quick to deflect credit for such initiatives. Bruce Murphy, Key's head of corporate responsibility, and Dennis Devine, its co-head of community banking, spearheaded the consumer-banking strategy, and Angela Mago, Key's co-head of corporate banking, has been the driving force behind the affordable housing push, she said.

'Beth has a clearly defined set of personal and business ethics,' said lead director Sandy Cutler. 'She runs by the credo of doing business right.'

But Alexander "Sandy" Cutler, Key's lead director and longest-serving board member, said it is Mooney who sets the tone for the company and its roughly 19,000 employees. "Beth has a clearly defined set of personal and business ethics," he said. "She runs by the credo of doing business right."

Trina Evans, the head of Key's corporate center and its chief of staff, agreed, adding that Mooney wants to leave a legacy that goes far beyond being the first female CEO of a major U.S. bank. "For Beth, this job is a dream come true, but she's never forgotten that with opportunity comes an obligation," Evans said. "She wants to leave the company better than how she found it, for employees, shareholders, clients and communities."

Leading from the back

The story of Mooney's ascent to the highest levels of banking is familiar to readers of American Banker. Three times she was named our Most Powerful Woman in Banking, and in past interviews and speeches she has talked candidly about how, even as a young woman in a male-dominated industry, she aspired to someday occupy the corner office.

In a speech at the Most Powerful Women in Banking awards gala in 2014, Mooney said that her "lightbulb moment" came nearly three decades ago after she and a group of other senior women at the former Bank One had dinner at the home of then-CEO John McCoy.

"The group was abuzz in collective admiration of his wife, Jane McCoy. Her grace, her charm, her social position, they all wanted to be her," Mooney recalled during the speech. "I fell silent. What was going through my head ... changed my career and my life. I realized that I didn't want to be Jane McCoy. I wanted to be John McCoy. I wanted to be a CEO. A bank CEO."

Mooney, now 62, had held a number of high-level commercial and retail banking posts during a career that began in the late 1970s, and before joining Key in 2006 she served as chief financial officer at the former AmSouth Financial.

Cutler, a Key director since 2000 and a former Eaton Corp. chairman and CEO, said that prior management and the board had viewed Mooney as CEO material back when she was being recruited to run the community banking unit.

"Beth can lead from the front, but she can also lead from the back," Cutler said. "She has tremendous confidence in the quality of her people, and she's very comfortable having them out front making the decisions while she is in the background providing support and counsel. There are very few leaders who I think really understand how to lead from the back."

Kimble, whom Mooney recruited away from rival Huntington Bancshares in 2013, agreed that Mooney is unlike some other CEOs he has worked with in that she prefers to listen before she speaks. "I've been to many meetings over the years where [senior leaders] would wait for the CEO to say what his opinion is and then jump on board, but Beth wants to hear what everyone else has to say first," Kimble said. "She doesn't push the decision-making to others, but she does want the team to collaborate and come up with the right solution as opposed to waiting for her to come up with it."

Balancing act

This collaborative approach extends to Key's relationship with banking regulators. Unlike many bankers, who might view regulatory agencies as obstacles to their business plans, Mooney views them as "another set of eyes that can make the organization better," Cutler said.

That is not to say she supports all the regulations that have taken effect since the financial crisis. In late October, Mooney was one of 19 regional bank CEOs to sign a letter addressed to the Senate Banking Committee that urged lawmakers to scrap the $50 billion-asset threshold at which banks are deemed systemically important and replace it with an indicator test that bases a bank's risk to the financial system on its business model, not its size.

"A response to the financial crisis was required, but I do think some of what has been enacted is not aligned with where the risk is," Mooney said. "Banks are well capitalized, they are profitable, they have all done significant work in improving their risk profiles, so this is probably an appropriate time to go in and say, where at the margin can we make it a more effective regulatory regime?"

Still, Mooney views regulators as a constituent, just as she views employees, customers, communities and shareholders as constituents. Having a healthy relationship with regulatory agencies "makes Key a better bank," she said.

Mooney talks often about the importance of balancing the needs and concerns of all stakeholders. In the lead-up to the financial crisis, many banks "lost their way," she said, by focusing too much on the demands of shareholders and not enough on needs of customers, employees and communities.

This is why Mooney, not long after taking the helm at Key, formed a corporate responsibility group that now oversees many of its philanthropic, community development and other initiatives that are part of "being a great bank," Mooney said. This effort was turbocharged last year when Key unveiled its $16.5 billion community investment plan. The bulk of that effort is centered on small-business, mortgage and community-development lending, though it also sets aside funds for research and development of digital products geared toward low- and moderate-income consumers.

'A response to the financial crisis was required, but I do think some of what has been enacted is not aligned with where the risk is,' Mooney said.

There is a business case to be made for these efforts. Key has said that the "hassle-free" checking account it introduced in 2014 has been effective in attracting new customers who have gone on to use other products and services, and its expansion in affordable housing financing was driven by what Mago, the co-head of corporate banking, saw as a significant unmet need in the marketplace.

With rents rising in many markets and most new apartment construction targeting high earners, the supply of workforce housing is shrinking rapidly. Mago and her team responded to this dynamic by expanding Key's capabilities in financing the development and acquisition of affordable rental housing and taking the business nationwide.

"It just made sense. There are way too many people in the country spending way too much of their income on rent, and we can't do enough" to address the problem, Mago said.

It's an investment that is clearly paying off for Key and its shareholders. In 2016, Key was the No. 5 affordable housing lender in the country by total dollar volume, according to Affordable Housing Finance, an industry trade publication. It ranked No. 14 in 2015 and was not even among the top 25 in 2014.

Key's success in this business is a shining example of "balancing mission with margin," Mooney said, borrowing a phrase coined by Murphy, its head of corporate responsibility.

"We will be judged by shareholder metrics, but that starts with doing the right things, the right way," Mooney said. "If we really put our customers, our employees, our communities first, do the right things by them, then our shareholders win."

Closing the deal

Perhaps Key's biggest challenge going forward is making good on its commitment to generate meaningful, organic revenue gains from the First Niagara acquisition. Though the company has made some small business-line acquisitions in capital markets and merchant processing in recent months, Mooney has told investors repeatedly that it would pursue no whole-bank purchases that might distract from fully realizing the deal's value for shareholders.

"We are not done with this journey and it is incumbent upon us to create an organic-growth story from here," Mooney said. "That is our top priority." Another priority is returning more capital to investors through share repurchases and increased dividend payouts, she added.

The dilution to tangible book value remains a concern and investors will be watching closely to see if Key is able hit its revenue targets and, perhaps, earn it back in less than 10 years. (Vining Sparks' Mosby said that it typically takes three to five years for an acquiring bank to earn back the dilution to book value.)

Brown, who is not a Key investor but has been critical of the acquisition, noted that rules around purchase accounting and loan-loss provisioning may be giving Key a boost to net income that it may not be able to sustain as the accounting benefits fade in a few years.

For her part, Mooney said that Key "staked its reputation" on the First Niagara deal and that she is holding all senior leaders, herself included, accountable for making sure the company delivers on its promises.

Nowhere will that be truer than in mortgage lending, a business in which Key had been a relatively minor player before the acquisition. The Buffalo-based mortgage leadership has been hiring staff, developing a new underwriting platform and refining Key's servicing capabilities. Once all the elements are in place, Key intends to begin rolling out its new lending platform nationwide sometime in 2018.

"I've told our mortgage team that they have three priorities," Mooney said. "Get it right, get it right and get it right."

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