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KeyCorp (NYSE:KEY)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good morning and welcome to KeyCorp's third quarter 2018 earning conference call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Chairman and CEO, Beth Mooney. Please go ahead.

Beth E. Mooney -- Chairman and Chief Executive Officer

Thank you, operator. Good morning, and welcome to KeyCorp's third quarter 2018 earning conference call. In the room with me is Don Kimble, our Chief Financial Officer; Chris Gorman, President of Banking; and Mark Midkiff, our Chief Risk Officer.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call.

I'm now turning to Slide 3. We reported solid results this quarter, with earnings per share of $0.45, up 2% from last quarter, and almost 30% from the year-ago period. Our results drove improvement in our cash efficiency ratio, which was 58.7%, and our return on average common tangible equity was 16.8%, both up over 300 basis points from the year-ago period. Revenue was up 3% from last year, driven by broad-based growth across our company, with positive trends in our community bank and corporate bank.

Our growth reflects the success of our business model, competitive positioning in the market, and investments we continue to make across the franchise. Average loans grew 2% from the prior year, and were down slightly from the prior quarter. The decline in average balances were impacted by a lower starting point coming into the quarter. Importantly, we saw stronger commercial loan growth as we moved through the quarter, which is reflected in our period-end balances, which were up 1% from the prior quarter. We expect to see further growth in the fourth quarter, which Don will cover in his comments.

Underlying trends in our fee-based businesses remain strong. Investment banking and debt placement fees grew compared to the prior quarter and year-ago period, reaching a new record for the trailing 12 months. Driving this quarter's results were strong advisory and loan syndications, as well as continued benefit from our acquisition of Cain Brothers.

We also continue to be disciplined with our expense management. This quarter, expenses were relatively stable after adjusting for merger-related charges in the year-ago period, and from notable items last quarter. We accomplished this despite the added costs from Cain Brothers acquisition and other investments that we continue to make in our business. We remain committed to further efficiency improvements and reaching our targeted range of 54% to 56%.

The final two sections on the slide highlight our strong position in terms of both risk management and capital. Credit quality remains a strength, with net charge-offs to loans of 27 basis points. We believe that maintaining our moderate risk profile will serve us well as we move through different parts of the credit cycle.

Our approach to capital has remained consistent and focused on maintaining a strong capital position, while returning a large portion of our earnings to our shareholders through dividends and share repurchases. Consistent with our 2018 capital plan, our Board of Directors increased our common stock dividend by 42% to $0.17 per share in the third quarter. We also repurchased $542 million of common shares. Key's common equity Tier 1 ratio ended the quarter at 9.9%.

Overall, it was another good quarter for Key, with broad-based growth across our franchise. We continue to be disciplined with expenses, while investing for growth and maintaining our credit underwriting standards. This resulted in strong bottom line performance, which drove further improvement in both efficiency and returns. We are positioned to build on our momentum as we move through the end of the year. As Don will discuss in his remarks, we expect to continue to deliver positive operating leverage in the fourth quarter, driven by linked quarter revenue growth and relatively stable expenses, which will result in our sixth conservative year of positive operating leverage.

Despite the recent sell-off in bank stocks, we remain positive about our long-term outlook and the steps we have taken to position the company to perform through the business cycle. Before I turn the call over to Don, I wanted to mention our upcoming investor day that we are hosting on October 30th. The purpose of the event is to expand more on our business model, strategies, and positioning, and to showcase our strong leadership team. If you are an analyst or an institutional investor and have not yet received an invitation, please contact our investor relations team. We are also making the event available to all of our important stakeholders through a live webcast that can be accessed through the IR webpage. With that, let me hand the call over to Don.

Don Kimble -- Chief Financial Officer

Thanks, Beth. I'm on Slide 5. As Beth said earlier, we reported third quarter net income from continuing operations of $0.45 per common share. Our results compare to $0.32 per share in the year-ago period and $0.44 in the second quarter. I will cover many of the remaining items on this slide in the rest of my presentation, so I'm now turning to page 6.

Total average loans of $88.5 billion were up 2% from the prior year and down slightly from the prior quarter. Average balances were impacted by a lower starting point coming into the quarter and a continuation of low utilization levels and elevated paydowns. Importantly, we saw increased new business activity and positive momentum as we moved through the quarter, which was reflected in period-end linked quarter growth of 1%, and commercial growth of almost 2%.

Clients remain optimistic and confident. Their businesses are performing well, increasing profits and generating sufficient cash to fund their business needs, resulting in lower loan demand than we would've expected earlier in this year. Despite this, our pipelines are strong and activity is up. As a result, we expect loan balances to be up in the fourth quarter on a low single-digit percentage basis.

Continuing onto Slide 7. Average deposits totaled $106 billion for the third quarter of 2018, up $1.6 billion, or 2% unannualized compared to the second quarter. The cost of our total deposits were up 10 basis points from the second quarter, reflecting recent rate increases, as well as the continued migration of our portfolio into higher yielding products. Our deposit beta for the current quarter was 52%, resulting in a cumulative beta of 29%, which we expect to migrate higher over time.

On a linked-quarter basis, deposit growth was primarily driven by retail and commercial relationships, as well as short-term and seasonal deposit inflows. We continue to have a strong, stable, core deposit base, with consumer deposits accounting for over 60% of our total deposit mix.

Turning to Slide 8. Taxable net interest income was $993 million for the third quarter of 2018. The net interest margin was 3.18%. These results compare to taxable equivalent net interest income of $962 million and a net interest margin of 3.15% for the third quarter of 2017, and $987 million and 3.19% in the second quarter of last year.

Purchase accounting accretion contributed $26 million or 9 basis points to our third quarter results. This compares with $28 million, and also 9 basis points in the second quarter, and $48 million or 16 basis points in the third quarter of 2017. Excluding purchase accounting accretion, net interest income was up $53 million or 6% from the third quarter of 2017. The increase was largely driven by higher interest rates in earning asset growth.

Net interest income increased $8 million or 1% from the prior quarter, excluding purchase accounting accretion, benefiting from higher interest rates and day count, partially offset by lower loan fees.

This quarter's margin was negatively impacted by higher levels of liquidity, as our cash position increased almost $1 billion from last quarter. The higher level of liquidity reduced our margin by 2 basis points. Also during the quarter, the average one-month LIBOR only increased 14 basis points, compared to the 25 basis point increase in the Fed Funds rate. If the one-month LIBOR had increased by 25 basis points, our net interest income would've been $5.5 million higher, and the margin would've been 3.20%.

Moving on to Slide 9. Key's non-interest income was $609 million for the third quarter of 2018, compared to $592 million for the year-ago quarter, and down from $660 million in the prior period. Growth from the year-ago period was primarily driven by a $25 million increase in investment banking and debt placement fees, related to strengthened advisory fees, including the benefit of the acquisition of Cain Brothers, as well as organic growth.

Operating lease and other leasing gains increased as well, related to higher volume and lease residual losses in the year-ago period. Compared to the prior quarter, the decline is largely due to the $78 million net gain on our insurance sale, which was recognized in other income last quarter. Trust and investment services income also declined, primarily reflecting the sale of Key insurance and benefit services. Partially offsetting these declines is a $41 million increase in operating lease income due to a lease residual loss in the second quarter 2018. Investment banking and placement fees also increased a record trailing 12-month level of $664 million.

Turning to Slide 10. Key's non-interest expense was $964 million for the third quarter 2018, compared to $992 million in the third quarter of 2017, and $993 million in the prior quarter, down 3% from both periods. The third quarter of 2017 included $36 million of merger-related charges. Excluding these charges, the slight expense growth from the year-ago period was largely related to acquisitions and investments over the year, including Cain Brothers. This growth offset the realization of cost savings and efficiencies across the entire franchise.

Compared to the second quarter, the decrease in expenses was largely driven by a $33 million decline in personnel expense. This was driven in part by lower severance and incentive compensation expense related to efficiency-related charges last quarter. Importantly, as we move toward the end of 2018 and into next year, we're committed to continuous improvement in our efficiency efforts across the franchise.

Moving on to Slide 11. Our credit quality remains strong. Net charge-offs were $60 million, or 27 basis points of average total loans in the third quarter, which continues to be below our targeted range. The provision for credit losses was $62 million for the quarter. Non-performing loans were up this quarter as a result of a few credits with no concentration by industry or type. NPLs represented 72 basis points of period-end loans.

Other leading indicators such as criticized loans and delinquencies all showed improvements this quarter. At June 30, 2018, our total reserve for loan losses represented 99 basis points of period-end loans and 138% coverage of our non-performing loans.

Turning to Slide 12. Capital also remains a strength of the company, with a common equity Tier 1 ratio at the end of the third quarter of 9.9%. As Beth mentioned earlier, in line with our 2018 capital plan, we increased our common share dividend by 42% this quarter, from $0.12 a share to $0.17 a share. We also continued to repurchase shares which totaled $542 million this quarter.

Slide 13 includes our outlook for the fourth quarter 2018, relative to the third quarter results, as we build our momentum through the end of the year. We expect positive operating leverage driven by revenue growth and relatively stable expenses. We expect average loan balances to increase by a low single-digit percentage in the range of 1% to 2% from the third quarter level of $88.5 billion.

Deposits are expected to remain relatively stable with the third quarter. Net interest income is expected to be up in the low single-digit range from the third quarter, again approximately 1% to 2%. This reflects the benefit of the September rate increase. We also expect one more rate increase in December, which will have minimal impact in the fourth quarter. We would expect our margin to increase 1 to 2 basis points, assuming our liquidity position remains at the relatively same level. We anticipate that non-interest income will be up in the mid-single-digit range from the $609 million reported in the third quarter. Growth is expected for many of the fee income areas, especially investment banking and debt placement fees. As I mentioned, we continue to expect non-interest expense to be relatively stable with a third quarter amount of $964 million.

We had previously assumed a benefit from the reduction in the FDIC assessment during the fourth quarter, which is no longer included in our outlook for next quarter. We had also previously communicated that we would be approaching the high end of our efficiency ratio target by the end of the year. Continue to expect our efficiency ratio to improve in the fourth quarter from the third quarter level, but the absence of the FDIC benefit and the lower loan balances will impact the pace of our progress in the fourth quarter.

As Beth communicated, we remain committed to our targeted efficiency ratio of 54% to 56%, and would expect to be within this range in the second half of 2019. Net charge-offs and provision expense are expected to remain relatively stable with the third quarter, and we expect our GAAP tax rate to be in the range of 16% to 17%, up slightly from the third quarter level.

As Beth said, this was a solid quarter, with continued growth across our franchise. We are benefiting from the results of our efforts to improve the efficiency and returns, and look forward to continuing to deliver on the commitments we have made. I'll now turn the call back over to the operator for instructions for the Q&A portion of the call. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question on the call, please press * then 1. You'll hear a tone indicating you have been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the # key. Again, *1 if you have a question. First from the line of Scott Siefers with Sandler O'Neill. Please go ahead.

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Good morning, guys.

Don Kimble -- Chief Financial Officer

Hi, Scott.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Don, appreciate the color on the margin guidance for next quarter up 1 to 2 basis points. I guess I was a little surprised that the core wasn't up this quarter. Maybe if you could provide a little more color on the main puts and takes you see affecting the margin rate, and how your rate sensitivity plays out from here.

Don Kimble -- Chief Financial Officer

You're right. I think the margin was lower than what we would've expected as far as the percentage compared to coming into the quarter. For the third quarter, there were really two items that negatively impacted us this quarter. One was the liquidity levels. As I mentioned, our cash position was up $900 million to $1 billion for the quarter, which cost us about 2 basis points in our margin. Didn't have much of an impact on net interest income, but did negatively impact the overall margin.

The second piece was, and I mentioned this earlier, was that the one-month LIBOR only went up 14 basis points this quarter. And so normally you would expect to see that moving parallel to the Fed Funds rate. And if it would have, that would've added another 2 basis points to the margin, or roughly $5.5 million. So as we look to the fourth quarter, we do expect to see more of a rate increase benefit, like we would've expected this quarter, and so probably will be in the couple basis points being driven from that and very little pressure coming from the purchase accounting accretion.

Then also keep in mind that our investment portfolio puts out about $1.2 billion of cash flows each quarter. The reinvestment rate there is about 1.2% to 1.3% higher for those cash flows for the new go-to yields compared to what's running off the portfolio as well, and so that will also be helpful going into the fourth quarter.

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Okay, that's perfect. Maybe just as a quick follow-up on that. LIBOR is guess we can watch where that has moved. So we know what the couple basis points of impact would be. I think you had suggested liquidity levels, the guidance assumes they stay the same. What would be the main deltas that would change the liquidity levels? I imagine the pace of loan growth and demand would be a factor, but what would materially alter those levels?

Don Kimble -- Chief Financial Officer

The only other impact that you didn't say really was the deposit flows. This quarter, we did have some growth in some temporary deposits, along with core growth. If that deposit growth outpaces loan growth, we see a buildup in our liquidity position. Not expecting that, but as we said, we expect loan growth up 1% to 2% from third quarter, and deposits relatively stable on an average basis.

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Perfect. Then just final one, really ticky-tack here. Guiding to a 16% to 17% GAAP tax rate for the fourth quarter. Will that sustain into next year or will it revert back up to a more recently typical level?

Don Kimble -- Chief Financial Officer

The 16% to 17% continues to expect a level of tax credits from some leasing activities. At this point in time, we think that's a reasonable assumption. We'll provide more guidance on our outlook in January for '19.

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Okay, perfect. Thank you very much.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Next we'll go to the line of Peter Winter with Wedbush Securities. Please go ahead.

Peter Winter -- Wedbush Securities -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning, Peter.

Peter Winter -- Wedbush Securities -- Analyst

I wanted to ask about loan growth. You talked about the C&I. But if I look at some of the other loan portfolios, we saw moderation or an improvement from prior quarters, particularly commercial real estate. I'm just wondering, some of these other portfolios besides C&I, are you close to an inflection point and could see growth next year?

Don Kimble -- Chief Financial Officer

As far as commercial real estate, I would say that we don't see that as an area of strong growth for us. That we like our business model there and risk profile. We did see some balance lift here in the third quarter from some relationships we had and progress, but wouldn't cite that as being a leading area for growth. The other area that we did see some growth this past quarter was our indirect auto. We would expect to see some continued growth there as we're continuing to originate through our existing Midwest branch that was legacy Key. So that should show some growth for us. But I'd say a good percentage of the growth should continue to come from C&I growth for us. That's where we believe we have our strength, and that's where we're seeing good pipelines for us as well.

Peter Winter -- Wedbush Securities -- Analyst

On the C&I side, are you starting to see with that growth at end of period, maybe paydowns slow? And would you expect that to continue going forward?

Don Kimble -- Chief Financial Officer

Our paydowns really have been elevated compared to historic levels. I don't know that they've slowed down much. Utilization rates are still relatively stable for the third quarter from what they were in the second quarter. The good thing is, our activity level has picked up as far as new origination lines late in the quarter, and that's where we saw the growth. And that's what gives us optimism going into next quarter is that we're seeing those activity levels pick up, and that's been helpful.

Peter Winter -- Wedbush Securities -- Analyst

Thanks, Don.

Don Kimble -- Chief Financial Officer

Thanks, Peter.

Operator

Our next question is from Matt O'Connor with Deutsche Bank. Please go ahead.

Matthew O'Connor -- Deutsche Bank -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning, Matt.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Matthew O'Connor -- Deutsche Bank -- Analyst

I just wanted to ask about several fee categories that were weaker than I would've thought. The service charges, corporate service income, cards and payments, and you mentioned revenue recognition change, which I think impacted on a year-over-year basis, but maybe just discuss a little bit why those three buckets were weaker, and then your outlook on those three, which a couple of them are pretty big drivers for you. Thanks.

Don Kimble -- Chief Financial Officer

Service charges you had mentioned. There were a couple of items there that were adjustments, including some revenue recognition true-up there as well. We would expect growth in that line item for the fourth quarter to more normalize for us for the quarter. So, it was artificially low this quarter for some of the adjustments there.

Corporate services income really was down mainly because of derivative incomes coming down this quarter that just saw a little less demand from our customer base for that category. It has been an area of growth for us historically, but there is some variability to that based on customer activity. Then as far as the cards and payments-related revenues, we did have some items in the second quarter that were more purchases of accounts and equipment that would have had that level be a little bit stronger. It is an area of growth for us. We do expect the fourth quarter to be up, and we expect that to be an area of growth for us going forward into 2019 as well.

Matthew O'Connor -- Deutsche Bank -- Analyst

Okay. That's helpful. Then just stepping back bigger picture, revenue overall I feel like was soft this quarter. Some of it seems like it's temporary. Obviously, you've addressed in the pieces of loans and fees, but big picture, do you think this was quarter of where things just kind of went against you from a revenue perspective? Or do you think the revenue outlook is going to be a little bit weaker than you would have thought, and then maybe you should be focused on tightening in the costs a little bit more?

Don Kimble -- Chief Financial Officer

I would say loan balances are coming in lower than what we would've expected for the third quarter, and that really was the surprise that we had at the end of the second quarter, which continued for us, which was the lower levels of utilization and the impact for some higher paydowns. As we would have come into this year, we would have expected loan growth to pick up in the second half of the year, and we haven't seen that. That is a surprise for us, based on what our expectations would have been coming into the year.

As far at the fee income categories, when we look at the activity and the volumes and the customer activity around these areas, we're seeing positive trends. And so our guidance for the fourth quarter says that fee income should be up mid single digits on a linked quarter basis. And so I think we're going to see some of that momentum come into the fourth quarter, and I think it helps set the table for us going forward. But the follow-on point that you made, Matt, is something we always do manage to. If the revenue growth isn't there, then we do believe it's important that we do manage our expenses more tightly, and that's something that we'll continue to look at, and make sure that we're doing what we need to do to make sure that we live up to our commitments.

Beth E. Mooney -- Chairman and Chief Executive Officer

Matt, this is Beth. We're obviously in the 2019 planning cycle. It is very much a focus as we have, both Don and I reiterated the commitment to the 54% to 56% efficiency ratio target, and that we plan to be operating within that by the back half of 2019. We are making sure we are constructively balancing both our outlook for revenue, as well as appropriate expense levels, investments in order to achieve that.

Matthew O'Connor -- Deutsche Bank -- Analyst

Okay. Thank you.

Operator

Our next question is from Ken Zerbe with Morgan Stanley. Please go ahead.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Great, thanks. I was hoping you could just elaborate just a little bit more on the higher non-performing loans that you saw in the quarter. I think it was up about $100 million. I know you said there wasn't any concentration, but was it a couple loans? Was it a lot of loans? Just trying to figure it out. Thanks.

Don Kimble -- Chief Financial Officer

It really was just a few unrelated loans where they weren't concentrated in any industry or geography at all. So don't view that as a trend for anything from a credit quality perspective. As I mentioned before, criticized and classified were down. Delinquencies were down. And so other trends would reinforce that credit quality continues to remain strong.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it, OK. Then in terms of loan growth, I guess in fourth quarter I know you were surprised that you were not seeing the rebound in second half loan growth more broadly speaking. But what could detail the growth in fourth quarter? I guess we're all probably a little bit worried that you expect it to go up, but are we going to be surprised again to the negative when fourth quarter ends? Thanks.

Christopher M. Gorman -- Vice Chairman and President of Banking

Ken, it's Chris. Good morning. As we look at it, the reason we have confidence as we go into the fourth quarter is we have a strong backlog. We have a much better starting point. We also have a business that typically in the fourth quarter is particularly strong. For example, we have a significant M&A backlog that often pulls through financing.

The other thing that we have is our leasing business, Ken, generates about 33% of their annual volume in the fourth quarter. They're very focused on technology and healthcare equipment. So those are pretty good flows, and we have pretty good visibility on that. In terms of what could derail it? One, if we have dislocation in the markets, and we can't get transactions complete, that's always a risk in our business. The other thing is that people continue to not borrow under their lines, but use their cash flow to buy inventory out of cash, to invest in PP&E out of cash.

Then the other thing, of course, that is always unique to our business model is we only put about 20% of the capital we raise on the balance sheet. So if by chance there are huge opportunities for us to better serve our clients by taking them to other markets, that too can have an impact on our loans. But the flip side of that would be it improves our fees.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Got it, OK. Thank you very much.

Operator

Next question is from Ken Usdin with Jefferies. Please go ahead.

Ken Usdin -- Jefferies & Co. -- Analyst

Hi, good morning, guys. Just following up on the NII and outlook and commentary. Don, can you just dig in a little bit more to what you're seeing in terms of this customer behavior on the different sides of the business from a repricing perspective? Obviously, you guys, like everyone else, are seeing the rate of increase move up on 13 basis points of deposit costs this quarter. Can you give us a little color on segments in terms of changes in terms of consumer versus commercial and how the behavior is starting to act, if any different?

Don Kimble -- Chief Financial Officer

This last quarter, we did see the deposit betas move up for both consumer and commercial. Consumer was in the mid-40s and the commercial segment was about 70%. We did see both of those move up. That continues to be a strong demand coming from both sides, as far as looking for additional products that have higher rates and yields. We're seeing that being offered to the customers across the board, whether it's the community banks, up through the largest banks in the U.S. are providing some rates that are higher for some of those commercial deposits.

As we look forward to our deposit betas, we would think that for the fourth quarter, we're still going to be in the mid-50s as far as deposit betas. So maybe up just a touch from where we were in the third quarter. But over time we'll continue to see that cumulative 29% beta inch up as the consumer behaviors continue to seek higher deposit products.

Ken Usdin -- Jefferies & Co. -- Analyst

Got it, OK. Then second question just on the mix of earning assets. You had some average deposit growth this quarter. You mentioned the loans weren't quite there. What's your philosophy right now in terms of securities portfolio? Do you want to be putting incremental cash there? And what are you seeing in terms of front book versus back book yields?

Don Kimble -- Chief Financial Officer

On the investment portfolio, we've been maintaining that fairly stable. It's just shy of $30 billion, and it's been there for a number of quarters. Longer term, we do believe that our loan growth will be outpacing our deposit growth. We do believe that there will be an opportunity to continue to maintain that level of investment securities, and not have to shift that mix overall. The good thing is on the investment portfolio, as I mentioned, we've got $1.2 billion of cash flow a quarter off the investment portfolio. The yield on that cash flow is 2.15% to 2.2% and the new purchase volumes are coming in at 3.4% to 3.5%, so we do see a nice lift there, which helps offset some of the drift in the deposit base, and also any purchase accounting accretion changes.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, thanks, Don.

Operator

Next we'll go to John Pancari with Evercore ISI. Please go ahead.

John Pancari -- Evercore -- Analyst

Good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

John Pancari -- Evercore -- Analyst

Back to the non-performer discussion. Do you think you could give us a little more specific detail around that? What was the number of credits? What were the sizes? And also, what were the industries? I know you mentioned they're not concentrated, but what were the exact industries?

Don Kimble -- Chief Financial Officer

I would say that it's five or less, as far as the total credits. So, it is a very few. I would say that the industry types are very diverse. And Mark, do you have just a general sense there?

Mark W. Midkiff -- Chief Risk Officer

Yeah, just broadly, from equipment to the real estate category. So, it's broad.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay. And any of them loans to financial institutions?

Don Kimble -- Chief Financial Officer

They're not, no.

John Pancari -- Evercore -- Analyst

Or leverage loans?

Don Kimble -- Chief Financial Officer

No, they're not.

John Pancari -- Evercore -- Analyst

Okay, all right. Then related to that, the loan loss reserve is around 99 basis points now, although I know it's higher when you exclude the acquired portfolios. But how are you feeling about that longer term here? Where do you think the appropriate longer-term loan loss reserve level is? Particularly in the context of where we are in this cycle and that we've got a little bit of noise that's now surfacing in the non-accruals. Thanks.

Christopher M. Gorman -- Vice Chairman and President of Banking

One, I don't want to have the non-accrual relate to future potential problems there. I don't think that's a trend that we would want to extend from here. Two, you're right. If you would take a look at the purchase accounting credit mark on the loan portfolio and add that to our total reserves, it's in the 1.15% to 1.16% level. I think that would be an appropriate assessment as to where that would trend over time as those purchase loans do mature and are replaced with new originations.

I think the other thing we need to keep in mind though too, is that the nature of this portfolio is this changed significantly from where it was before the crisis. So, it's a much cleaner portfolio, much less risk profile to it, so we think it would be an appropriate range as far as the overall allowance being in that 1.15% to 1.16% range.

Yet to be determined as far as the impact of CECL. We'll have that come through in 2020. That will set a new level and I think we'll be well south of that 1.15% level before CECL is implemented. We can provide more color at that time.

Kenneth Zerbe -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

Our next question is from Erika Najarian with Bank of America Merrill Lynch. Please go ahead.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Hi, good morning.

Don Kimble -- Chief Financial Officer

Good morning.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

The first question I wanted to ask is you've obviously addressed loan growth in many different ways. I'm wondering, especially from your Chris, if you could give us a little bit more sense of how competitive in non-banks are with your business, and give us a sense of structure versus rate competition. And also I hear you loud and clear on the NPL composition, but I'm wondering what your exposure is on balance sheet to either broadly syndicated leverage lending or sponsor-backed transactions?

Christopher M. Gorman -- Vice Chairman and President of Banking

Sure. Good morning, Erika. Just to give you a flavor on the competitive landscape. Clearly, there is competition and it manifests itself in structure and it manifests itself in pricing. The way we approach it is we price everything on a relationship basis. And so on the margin, 12.5 basis points does not make a huge difference for us. We go out there and holistically serve our clients. So, there is pricing pressure, but we don't find that it really degrades our return in total. Now as it relates to structure, there are some people that are taking duration risks. There are some people that are going out on the credit spectrum. That's not our business as we maintain our moderate risk profile. As it relates to the non-banks, most of their activity is around leveraged finance. So that's where you see the most activity by the non-banks.

As it relates to our leveraged finance specifically, we have been flat in terms of our exposure to leveraged finance, literally since before we completed the First Niagara transaction, where we grew by 40%. We get a lot of velocity out of that portfolio. We're really pleased with where we are. Obviously, we have the ability to distribute a lot of that paper, much of which, frankly, is purchased by some of the non-banks.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Okay. I'll just follow up more with the exposure offline. But I wanted to follow up to Matt's question. I want to not be difficult and ask this as respectfully as possible. But during your prepared remarks, you essentially told us that your efficiency target for the year, in terms of getting to your range by year end, was pushed out at least three quarters. I understand the dynamic of the FDIC surcharge not going away. But I'm wondering if you'll tell us in two weeks how your thought process is about really trying to hit that efficiency ratio target, even if the revenues fall short.

In other words, is there a capacity for expenses to be more meaningfully controlled as the revenue environment potentially doesn't improve next year? Because I do think that is probably part of why the discount on your stock persists to peers.

Don Kimble -- Chief Financial Officer

Erika, as far as pushing out our guidance as far as the efficiency ratio, I think one thing that I'd like to clarify is that we've been talking about the fourth quarter, where we'd be approaching the high end of our targeted range, with the benefit of the FDIC assessment. And so with our guidance showing revenues up in the fourth quarter, and expenses being relatively stable, even without the FDIC assessment, I think that would push our efficiency ratio into the 57% range. If we would've had the 70 basis point benefit from FDIC, I think that would be pushing us close to that 56% range, which I think would be meeting our commitment as far as approaching the high end of the range.

When we talk about the second half of next year being in that 54% to 56%, that's only to reflect in the first half of the year, and especially in the first quarter. We have some seasonal items that cause our expenses to be elevated and they tend to be a seasonally weak first quarter. But your more global question, we will provide some more color on that at the investor day. We will reaffirm that there are times when we have to push heavier on the expense side to make sure that we meet our commitments. So that's something we will live up, and we'll talk more in detail about that here on the 30th.

Erika Najarian -- Bank of America Merrill Lynch -- Analyst

Great, thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Our next question is from Kevin Reevey with D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Good morning.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Don, my question is for you related to your recent share price movement. Can you give us some color as to what your appetite is for M&A, and would M&A be pushed to the back burner? How aggressive should we expect to see you on the buyback?

Don Kimble -- Chief Financial Officer

Sure, a couple things. One on the M&A side. What we talked about as far as our focus going forward is maybe continuing to look at some very small investments and acquisitions that would be aligned and more people, products and capabilities, but nothing on the banking front at all. We do not believe that's something that's necessary to deliver against our operating model, and have not been focused on bank M&A. So that would not be a priority.

As far as our share buybacks, the pacing of those are really controlled by our capital plan that we submitted earlier this year. As we noted before, we acquired or repurchased $542 million of stock here in this current quarter. Our total capital plan for this year is $1.2 billion. And so think about those share buybacks for the rest of the three quarters being fairly consistent throughout that remaining time period. But that does allow us to accelerate the pace based on the price sensitivity, and allows us to navigate within those quarters a little bit, but not much within the absolute level of share buybacks.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Then related to revenue enhancements, can you talk about any revenue enhancements that you've seen materialize related to First Niagara that you can pinpoint?

Don Kimble -- Chief Financial Officer

The areas that we've been talking about really are residential mortgage. We still view that as a top candidate for us. The markets have not been good for us as far as the mortgage market, but we are making investments there, and we do expect to see some nice trajectory going forward in residential mortgage.

The second area really has been on the payments side, and we have seen very good traction there. We are seeing the commercial payments and the commercial deposit products being offered throughout the former First Niagara customer base. We are having a lot of success and traction with that.

The third area where we have seen good activity in on the capital markets side. That we've been leveraging the capabilities that we bring to market, especially on the commercial real estate side, to meet the needs of the commercial real estate customers of First Niagara, and that's had a huge success for us.

The fourth area where we continue to see some growth is in the indirect auto space. We've taken that product and really started to sell that throughout some of the legacy Key footprint, where we did have commercial relationships with those auto dealerships. So we've seen nice growth on a year-over-year basis in indirect auto, and much of that is coming from the new markets that Key has brought in.

The last piece is more private banking. We are seeing traction there. It is a longer sales cycle, but we are making progress on that front, and believe there still is opportunity for us to continue to offer up more wealth management and private banking traditional products to the high-end retail customers of First Niagara, and looking for some strong success there as well.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Then lastly, your investment banking debt placement fees continue to outperform. My question is how much better can it get?

Christopher M. Gorman -- Vice Chairman and President of Banking

This is Chris. We feel good about where the business is. We're out there having great discussions with our clients. Our backlogs are strong. It's market-dependent. This is a business that we've grown since 2011 at about a 16% compound annual growth rate. We're confident that on a linked quarter, we will be up. We're confident that ultimately year-over-year we'll be up, so we feel good about it.

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Great. Thank you very much.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Next we'll go to Mike Mayo with Wells Fargo Securities. Please go ahead.

Michael Mayo -- Wells Fargo Securities -- Analyst

Hi.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Michael Mayo -- Wells Fargo Securities -- Analyst

I guess I'll ask a personal question, Beth. When do you have mandatory retirement, if at all? And how many more years do you expect to stay? One reason I ask is maybe we get more interest in the October 30th investor day when we see the rest of the management team, maybe the next CEO is from that group. I'm not sure. But if you could share some insights?

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning, Mike. I didn't expect that. KeyCorp does not have a mandatory retirement policy. I think the goal of our investor day is, as I stated earlier on, we have a really strong leadership team. I think you've met many of us over the years, where we've really evolved our strategies and our thinking by customer segment, how we're going to market, and the strength of our performance. You will see broadly our leadership team to include obviously our two Vice Chairmen, Don Kimble and Chris Gorman, but deeper into our businesses, a chance to introduce our new Chief Risk Officer more broadly to investors and analysts as well, Mark Midkiff. So we are looking forward to appearing as team KeyCorp and talking about the future of our business.

Michael Mayo -- Wells Fargo Securities -- Analyst

Staying on the theme of investor day, I guess you'll talk about scale. You have a lot of scale against smaller banks, and not as much as the largest banks. I look forward to hearing some insights at investor day. But when you look at your digital engagement with consumer customers, what percent of your customers are online, and how much do you spend on technology every year?

Beth E. Mooney -- Chairman and Chief Executive Officer

Those will both be topics within investor day. We are very much keying up this notion of how we think about scale, and how we drive our business against products and businesses and client segments where we can scale, such as our discussion of what we have successfully done in our middle market, commercial, and corporate banking. Dennis Devine will be walking through our consumer platforms and digital strategies, as well as we have said that of our $700 to $800 million a year roughly in technology operation spend, $200 million of that is against investments in digital and other capabilities for our product set. And then we are also going to talk a little bit about how we think about fintech partnerships and investments there as well. So a wide range of topics.

Michael Mayo -- Wells Fargo Securities -- Analyst

Last question, a small one. I think I see tangible book value flat for the second quarter to the third quarter despite some good earnings. Is anything happening with securities or OCI or am I missing something?

Don Kimble -- Chief Financial Officer

Mike, the tangible book value was negatively impacted by OCI to the tune of about $0.08 a share. Then the other impact is the mitigated some of the lift you would've seen in tangible book value also was with the fact we bought back $542 million of stock. That's on an incremental basis dilutive to tangible book value.

One thing to keep in mind, mentioning OCI, that if you look back to where our OCI has moved since the day that we announced First Niagara, we had about an $0.86 negative impact to our tangible book value per share because of OCI, because of interest rates. If you would add that back on to our current tangible book value, we'd be in excess of tangible book value per share that we were at of the date of announcement by about $0.16 or $0.17 a share. So it just doesn't show, given the changes in rates and the impact to OCI, but we are making progress to recapturing that lost tangible book value.

Michael Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you. See you October 30th.

Don Kimble -- Chief Financial Officer

Thank you.

Beth E. Mooney -- Chairman and Chief Executive Officer

Thank you.

Operator

Next we go to Saul Martinez with UBS. Please go ahead.

Saul Martinez -- UBS Securities -- Analyst

Good morning, everybody. I wanted to ask a follow-up on the guidance for net interest income offering mid single digits. I'm struggling with how you get there. And I think in your prepared remarks you mentioned IB debt placement fee, but that was probably the only line item on the fee line that was a bright spot this quarter. So mid single digits implies I think $25 to $30 million sequentially. What am I missing? Is there some seasonality we're not taking into account? I guess where do you fill that gap in terms of sequential growth?

Don Kimble -- Chief Financial Officer

There is clearly some seasonality. I would say that in addition to investment banking debt placement fee, most if not all of the individual items are expected to have some growth at a third quarter to fourth quarter level. So that wasn't the case for this past quarter given seasonality. But we do expect growth in just about every single one of those line items going into the fourth quarter.

Saul Martinez -- UBS Securities -- Analyst

Okay. Are there any specific areas that are going to drive it or have more seasonality? Or is it just pretty broad-based across all the categories?

Don Kimble -- Chief Financial Officer

It is broad-based. Some of the things that you would see seasonal lift would include corporate-owned life insurance tends to be higher in the fourth quarter, that deposit service charges incur some payments for revenues tend to be higher in the fourth quarter than they are in the third quarter. Then some of the other items we mentioned earlier, such as deposit service charges, were artificially low this quarter, which should see some pickup again next quarter. Each one of those we believe will be contributors to our outlook for growth in the fourth quarter.

Saul Martinez -- UBS Securities -- Analyst

Okay, fair enough. Then can you remind us how much Key insurance and benefit impacted the revenues this quarter? I think I have in my mind $60 million for full-year was the run rate. Did it all fall into the trust and investment services line? I think I guess related, how much of a tailwind did you get in terms of expenses from the sale of that business?

Don Kimble -- Chief Financial Officer

The trust and investment services line had about $7 million of insurance-related revenues to our KIBS sale. Much of that was more in the contingent fee revenues that we recognize in the current quarter. So there really wasn't a lot of expense reduction going from Q2 to Q3 for KIBS. Most of that was realized in the second quarter.

Saul Martinez -- UBS Securities -- Analyst

Okay. So $7 million this quarter, and not really anything on the expense line?

Don Kimble -- Chief Financial Officer

That's correct.

Saul Martinez -- UBS Securities -- Analyst

Thanks a lot. Helpful.

Operator

Next we go to Geoffrey Elliott with Autonomous Research. Please go ahead.

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello, thanks for taking the question. Can you give us an update on earnings credit rate? In the previous conference call, you talked about some increases there. How's the movement there been playing up?

Don Kimble -- Chief Financial Officer

Most of the increases in our earning credit rate have really been more tied to LIBOR. So we are seeing those rates continue to increase. That does provide some incentive for some of our commercial customers to seek some interest-bearing deposits because some of the non-interest bearing deposits are being used to offset their other charges. So we do see some shift coming from that.

But we also do believe that there still is an opportunity for us to grow our commercial deposits, and so we think that could help minimize some of the migration trends that the earnings credit rate would normally have for that area.

Geoffrey Elliott -- Autonomous Research -- Analyst

Thanks. In terms of that migration out of non-interest bearing into interest-bearing, is there anything you can do to help frame that for us? What portion of non-interest bearing deposits do you think potentially flow out over time?

Don Kimble -- Chief Financial Officer

We really haven't set that expectation. Let us get back to you with some thoughts on that. I don't have anything right now that would be helpful for you.

Geoffrey Elliott -- Autonomous Research -- Analyst

I will ask again on the 30th. Thanks very much.

Don Kimble -- Chief Financial Officer

Thank you. Appreciate it.

Operator

Our next question is from Marty Mosby with Vining Sparks. Please go ahead.

Marlin Mosby -- Vining Sparks -- Analyst

Don, I want to ask you about repositioning that you did. Back in the appendix, you explained a lot of different moving pieces that you actually made. In the liquidity impact, I just want to make sure that's separate from -- because there had to be some costs in the NII related to this repositioning as well. So, I just want to make sure that wasn't somehow counted in liquidity. Do you think, how much of NII or incremental charges came into the play given the repositioning this quarter?

Don Kimble -- Chief Financial Officer

Good question, Marty. The one thing that we didn't talk about in the appendix. We note that we actually terminated $5 billion of swaps that were scheduled to mature in 2019. That enabled us to reset our asset sensitivity position back in about the 3% range. Because we've seen that asset sensitivity drift down as deposit betas increased. So we wanted to reaffirm that. So we actually terminated those swaps. At the end of the third quarter, we're seeing about $12 billion worth of received fix swaps as opposed to the $18 billion we were into last quarter.

Again, we did that because the yield curve was fairly flat, and also because our outlook would have had a few more rate increases than what the floor curve was implying at that time. We've actually seen the rate curve move up about 15 to 20 basis points since we've terminated those swaps. So it's proved out to be a fortunate transaction for us. At the same time we did that, we did enter into some floors to help protect the down side, but the total cost of those floors was only $330,000. It was a very nominal cost to us.

To your point as far as the impact for the current quarter, the losses on those swaps get amortized over the remaining life of those swaps, so there was very little negative impact to us in the current quarter, about $1 million. We would think that would be more than offset with positive benefits coming forward in the fourth quarter and beyond. We like how it positioned us, and we think it streamlines the overall asset sensitivity position for us.

Marlin Mosby -- Vining Sparks -- Analyst

Then if you look at the roll-forward of the portfolio, $1.2 billion per quarter, the maturation of your swap book, about $1.6 billion, and the over 100 basis points that you're picking up, that in and of itself every quarter should generate, I'm estimating somewhere between $5 and $7 million of incremental NII every quarter, just from rolling those yields back up to current market rates. Is that about right for the impact?

Don Kimble -- Chief Financial Officer

That sounds generally about the right range. That really is allowing us to keep our margin relatively stable, even when rates don't go up. And so that helps to offset the deposit drift and also the purchase accounting accretion reductions. And then as we mentioned before with the rate increases, we think that the margin should be up 1 to 2 basis points in each of those quarters, so that was part of our outlook for the fourth quarter.

Marlin Mosby -- Vining Sparks -- Analyst

Then lastly, on the non-performing increase, you didn't really see delinquencies and you didn't really see criticized move up. Again, if you look back down into that appendix in some of the details. I was just curious, can you give us some flavor? Because you really were adamant in the sense that the increase in non-performers doesn't really lend to increased losses going forward. What is the characterization that forced them to be classified as non-performing, and why are you so comfortable that's not going to lead to, I mean, what's the characteristic of those loans that makes you feel like that doesn't make your net charge-offs go up meaningfully in the next year?

Don Kimble -- Chief Financial Officer

A couple things. One is that some of those credits were actually current throughout the second quarter. You wouldn't have seen a delinquency spike from that, so it didn't have an impact from that perspective going into the third quarter. Second, as we put those credits in the non-performing, we do an assessment as to what type of lost content is there, and so we do maintain specific reserves against those credits and/or write them down as appropriate. And so we believe that they are maintained at the appropriate level, and why we don't believe there is additional lost content there.

The third, as far as the timing, it really was just part of the overall workout of those individual credits. Each one of them had unique circumstances and issues, some of which were some transactions were expected to happen in the third quarter and got delayed. And so it resulted in us taking those to non-accrual status until those transactions are completed.

Marlin Mosby -- Vining Sparks -- Analyst

So then there would be a relatively short workout period if there was just an expected event in the near future that was going to happen just didn't happen in this particular quarter?

Don Kimble -- Chief Financial Officer

I think that's a good assessment.

Marlin Mosby -- Vining Sparks -- Analyst

All right. Thanks.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

We'll go to Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Beth. Good morning, Don.

Don Kimble -- Chief Financial Officer

Good morning.

Beth E. Mooney -- Chairman and Chief Executive Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Don, touching upon future risks, clearly the industry and you folks, even though I know you've talked a little bit about a small pickup in credit issues, but generally speaking, credit is very strong. Trying to look for other risks for you folks and your peers, can you share with us what if this U.S. economy, and this is not consensus of course, but what if it overheats and next year at this time the Fed has moved more aggressively and they're talking about three or four rate increases in 2020, and even made a 50 basis point rate increase. Can you share with us what could happen to the securities portfolio, the OCI market and stuff? Can you kind of frame that out? Again, I know it's not consensus, probably low probability, but just to give us an idea.

Don Kimble -- Chief Financial Officer

One, on our investment portfolio, we keep a fairly short average life and average duration. I think it's 4.9 and 4.3 years on average. We don't have a lot of extension risk in our portfolio. We tend to keep it more 5-year-type of CMO structures or 15-year passthrough paper. So, there really isn't a lot of extension. We could see, if the long end of the curve moves up like you've suggested, that could put some additional pressure on OCI and our tangible common equity. I would say that we tend to be focused on common equity Tier 1 and some other measures which we really believe assess where our overall capital picture is. Even with some additional pressure on the OCI, I don't think it would take our tangible common equity to a level that would be of concern to us at this point.

As far as other areas, that's one of the reasons why we did go to a little bit more asset-sensitive position this quarter, is that we did believe there was a higher likelihood that we were going to have a December rate increase, and continued rate increases into '19, as the Fed has suggested, and the forward curve wasn't implying that. And so we did pick up our asset sensitivity a bit to better position us for that potential outcome.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Then just as a follow-up, what kind of environment would you need to foresee in the future to take the received fixed swap book down to zero? You've mentioned you've already lowered it in this quarter. But what would you have to see to say gosh, you know what, we'd better take that to zero?

Don Kimble -- Chief Financial Officer

I would say as a general rule that we want to continue to maintain a moderate risk profile. We tend to manage our asset sensitivity within a range. That range probably is plus or minus 5%. You probably won't see us take it to zero, but as you've seen this quarter, we do have the ability and the flexibility to manage that actively. And with the use of floors, we can protect us on the down side of it without minimizing the potential up side impact for interest rate increases. We could toggle one way or the other a little bit, but I don't want you to expect that that's going to go to zero.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. Thank you.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

With no further questions, Ms. Mooney, I'll turn it back to you for any closing comments.

Beth E. Mooney -- Chairman and Chief Executive Officer

Thank you, operator. Again, we thank you for taking time from your schedule to participate in our call today. If you have any follow-up questions, you can direct them to our investor relations team at 216-689-4221. That concludes our remarks. Have a good day. Thank you.

Duration: 60 minutes

Call participants:

Beth E. Mooney -- Chairman and Chief Executive Officer

Don Kimble -- Vice Chairman and Chief Financial Officer

Christopher M. Gorman -- Vice Chairman and President of Banking

Mark W. Midkiff -- Chief Risk Officer

Scott Siefers -- Sandler, O'Neill & Partners -- Analyst

Peter Winter -- Wedbush Securities -- Analyst

Matthew O'Connor -- Deutsche Bank -- Analyst

Kenneth Zerbe -- Morgan Stanley -- Analyst

Ken Usdin -- Jefferies & Co. -- Analyst

John Pancari -- Evercore -- Analyst

Erika Najarian -- Merrill Lynch -- Analyst

Kevin Reevey -- D.A. Davidson & Co. -- Analyst

Michael Mayo -- Wells Fargo Securities -- Analyst

Saul Martinez -- UBS Securities -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

Marlin Mosby -- Vining Sparks -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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