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WNY IS KEY TO NEW STRATEGY <br> KEYCORP IS PUSHING RELATIONSHIP BANKING ON COMMERCIAL CUSTOMERS, AND VIEWS WESTERN NEW YORK AS A MODEL FOR THAT GROWTH STRATEGY

When struggling KeyCorp announced a restructuring in 1999 to eliminate 4,000 jobs nationally, and got the ball rolling by cutting 107 employees from a computer department in Amherst, the company's future in the region was murky.

Now, a couple of years later, Key's Western New York District is breathing new life. Many local jobs that had been eliminated were replaced when Key selected Amherst for a new subsidiary providing real estate settlement services in 34 states.

And Key's new chairman views Western New York as a model district for his new revenue growth strategy.

Exit Robert W. Gillespie, the cost cutter, who retired as KeyCorp chairman in May. Enter Henry L. Meyer III, the salesman.

Meyer plans to finish up Key's restructuring in early 2002, with no additional layoffs planned in Buffalo, and focus on increasing revenue by selling more services to existing customers.

KeyCorp's main unit, Key Bank, is trying to sell commercial loan customers other services, such as a cash management service which automatically shifts money between accounts and credit lines to maximize returns, investment banking services for acquisitions, and managing company 401(k) plans.

"We're not afraid to tell our customers that if they want credit only, Key may not be the best place for them, because we're a relationship bank. We don't just want to be a lender," Meyer said during a trip to Buffalo this week to meet with bank clients.

To boost this effort, the company has a new bonus plan offering Key's bankers referral fees for selling new services. The program paid $3.7 million in bonuses to Key employees nationally last year.

Key has been transforming from a traditional bank, making money off the interest rate spread between deposits and loans, to an asset management company profiting from fees.

The company has ditched some commodity-style bank businesses, selling its credit card portfolio and auto leasing line in the last two years, and bought the stock brokerage McDonald & Co. in 1998 and the investment bank The Wallach Co. earlier this year.

Fee income was 30 percent of Key's revenue in 1997 and jumped to 41 percent last year. The strategy is taking hold in Western New York, where Cleveland-based Key has found its niche in a market dominated by M&T Bank and HSBC Bank USA.

"Our sweet spot is the privately held, middle market companies (with annual sales from $10 million to $100 million). We're actually having the most successful year we've ever had here," said Marsha S. Henderson, Key's Western New York District president.

Key has 26 districts spreading from Maine to Washington state - and Western New York is the second largest with $2.6 billion in total deposits, topped only by Cleveland's $4.9 billion. In a region relying heavy on taxpayer-funded government jobs, Key remains one of Buffalo's larger private employers with a payroll of about 1,000.

McDonald & Co. recently expanded into a new office on Essjay Road in Williamsville where the local staff manages more than $3 billion in 401(k) plans, individual retirement accounts, trust funds and other assets.

"McDonald has helped me look at some potential acquisitions," said Steven Zillig, chairman of Lancaster-based Jiffy Tite, an auto parts maker with 120 employees. "I've even been out to Cleveland to meet with their people. They've been really helpful to me because I really don't have a lot of experience with the valuation of companies."

Zillig also uses Key to manage his company's 401(k) plan and invests in the bank's proprietary line of Victory mutual funds.

Meyer, who has been with the bank for 30 years, has to make Key's new formula work because the company's stock performance has lagged for years. Key's stock has risen just 10 percent in the last five years, far trailing the 59 percent growth of peer banks in the Standard & Poor's regional bank index.

Other banks, such as Pittsburgh-based Mellon Corp., have already proven the transition from a bank to an asset management company can by done. If Meyer fails to execute, Key's lagging stock price could make the company an acquisition target, according to stock analysts.

"He doesn't have much of a choice. He's got to deliver. And thus far, he has demonstrated a willingness to change the management style there," said Jennifer Thompson, a bank analyst with Putnam Lovell Securities in New York. "I definitely think he's got them on the right track, now it's just a matter of executing."

Timing has been killing Key. The bank's Midwestern base revolves around the manufacturing industry, which has been hammered by the national economic downturn. This is also not the best year to be looking for profits through growth in investment banking. The declining stock market has reduced brokerage trading and slowed the number of private companies doing initial public offerings.

Key has struggled to hit profit targets this year. The company's net income grew just 1.6 percent to $249 million during the third quarter. Key's non-performing loans, meaning the borrower has stopped making payments, grew from $797 million at the end of June to $885 million at the end of September.

"There are people out there who are not convinced that this company is turning its earnings around. Given that the biggest part of Key's business is in the Midwest, where the manufacturing sector has been hardest hit, that makes it doubly hard for them to show earnings growth right now through their restructuring," said Peter Winter, a bank analyst with CIBC World Markets.

Meyer expects tough economic times until mid-2002.

"I believe the economy was in recession before (the terrorist attack) Sept. 11 and I believe Sept. 11 will exacerbate that decline," he said.

When demand for loans and investment banking services does gain steam, Meter said Key is well positioned. The restructuring plan started back in 1999 will reduce company expenses by more than $300 million and the new focused approach will fuel Key's revenue growth in coming years, Meyer said.

"I really think that when the economy turns around, all of the bank and financial service stocks are going to do better. And Key will rise farther and faster than other banks," Meyer said.

e-mail: cbridger@buffnews.com

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