KeyCorp (KEY) Q2 2022 Earnings Call Transcript

KeyCorp (KEY 0.55%)
Q2 2022 Earnings Call
Jul 21, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to KeyCorp second quarter 2022 earnings conference call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the chairman and CEO, Chris Gorman. Please go ahead.

Chris Gorman -- Chairman and Chief Executive Officer

Thank you for joining us for KeyCorp second quarter 2022 earnings conference call. Joining me on the call today are Don Kimble, our chief financial officer; Clark Khayat, our chief strategy officer; and Mark Midkiff, our chief risk officer. On slide 2, you will find 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 am now moving to slide 3. This morning we reported earnings of $504 million or $0.54 per share. We delivered positive operating leverage compared to the prior quarter and the year-ago period. Our results reflect the resiliency of both our business model and our teammates, as we continue to successfully navigate a rapidly changing environment.

Pre-provision net revenue was up 14% from the first quarter, with a 6% increase in revenue and relatively stable expenses. Revenue was driven by growth in net interest income, which benefited from higher interest rates and strong loan growth. Importantly, we will continue to benefit from higher interest rates over the next several years, as our hedges and short-term investments continue to reprice. Our balance sheet also benefits from our strong, stable deposit base.

Approximately 60% of our deposits are in stable retail and escrow balances. In our commercial business, approximately 85% of our deposits are from core operating accounts. As I mentioned, loan growth continues to be strong. Average loans were up 5% from the last quarter and 8% from the year-ago period.

Adjusting for the planned runoff of PPP and the sale of our indirect auto business, average loans grew by 21% year-over-year. Our growth was driven by both our consumer and our commercial businesses. We continue to add clients and support our existing relationships. In our consumer business, we generated over $3.6 billion in loan originations in the quarter from consumer mortgages and Laurel Road.

Let me spend just a moment on Laurel Road. We continue to see good momentum in this business, and that is despite the continuation of the federal student loan payment holiday. In May, we launched a new offering for nurses, the largest segment of the healthcare industry. While early, we are very encouraged with the response to our expanded offering.

Nurses represent a sizable demographic looking for differentiated, personalized financial products and services, and Laurel Road has the unique opportunity to meet these needs. In the second quarter, we also announced the acquisition of GradFin, a leading loan counselor for healthcare professionals. With a digital platform that provides fast and effective solutions for debt relief and government forgiveness programs. In June, our first month with GradFin, we held over 3200 individual consultations for refinancing and public student loan forgiveness.

This acquisition aligns well with Laurel Road, and our recent expansion to include nurses. These actions enhance our commitment to accelerate growth through targeted investments in niche digital businesses. In our commercial businesses, we continue to see strong long growth in our targeted industry verticals. Additionally, we benefited from a 100 basis point increase in CNI line utilization.

Our outlook for loan growth across our franchise remains strong. Fee income this quarter reflects a slowdown in capital markets activity. Importantly, we continue to offer our clients the best solutions and execution, both on and off balance sheet. This is exactly the way our business model is designed to work.

In the second quarter, we raised over $36 billion in capital for our clients, retaining 22% on our balance sheet. Historically, we've retained approximately 18% on our balance sheet. Despite the slowdown in the capital markets, our pipelines remain strong, and our long-term outlook for this business is positive. We have, and we will continue to invest in this business, including adding high-performing senior bankers.

Now, let me shift to expenses. Our expense trends this quarter reflect our strong focus on managing costs, while concurrently making investments. Investments in places like additional teammates, investments in digital, and of course, analytics to drive future growth. In addition to investments in Laurel Road and GradFin that I mentioned earlier, we have also continued to invest in digital innovations throughout our business, including our recent expansion of our embedded banking platform with new end-to-end capabilities.

We remain committed to delivering sound profitable growth by maintaining our risk discipline. Credit quality remains strong this quarter, with net charge-offs as a percentage of average loans of 16 basis points. Non-performing loans and criticized loans both declined this quarter. We will continue to support our clients while maintaining our moderate risk profile, which has, and will continue to position the company to perform well through the entire business cycle.

Our capital levels remain strong, providing us with sufficient capacity to support our clients and return capital to our shareholders. Our Board of Directors recently announced our third quarter dividend of $19 .5 per share. This equates to $182 million and a dividend yield of approximately 4.5%. As is our normal practice, the board will evaluate a dividend increase in the fourth quarter.

I will close this morning by reaffirming our expectation that we will deliver another year of positive operating leverage in 2022. We recognize there is a great deal of economic uncertainty. Areas like inflation, higher interest rates, quantitative tightening, and of course, the potential for a recession. Given the economic backdrop, we remain steadfast in our focus on serving our clients, maintaining our strong balance sheet, managing our capital, and remaining disciplined in our credit underwriting.

Don will cover the specifics of our full-year guidance in his comments. Overall, he delivered another solid quarter, and I remain confident in our future, and our ability to create value for all of our stakeholders. With that, I'd like to turn the call over to Don to provide details on the results for the quarter, and our outlook for the balance of 2022. Don.

Don Kimble -- Chief Financial Officer

Thanks, Chris. Now on slide 5. For the second quarter, net income from continuing operations was $0.54 per common share, down $0.18 from last year, and up $0.09 from the prior quarter. Our results in the current quarter reflect strong core operating performance and the resiliency of our business model, as we continue to navigate through the current market conditions.

Importantly, we generated positive operating leverage compared to both the prior quarter and the prior year, and remain confident in our ability to do so for the full year. As Chris mentioned, pre-provision net revenues was up 14% from the first quarter, with a 6% increase in revenue and relatively stable expenses. Higher net interest income was driven by strong loan growth in the way we have positioned our balance sheet to benefit from higher interest rates. Our results also reflect our focus on strong expense management and our strong risk profile.

Turning to slide 6. Average loans for the quarter were $109 billion, up 8% from the year ago period, and up 5% from the prior quarter. We continue to add and deepen client relationships across our franchise, which drove strong loan growth in both our commercial and consumer businesses. Commercial loans increased 4% from last quarter, reflecting broad-based growth across in our industry verticals.

Line utilization rates improved this quarter, increasing 100 basis points from last quarter. Our consumer business has continued its strong performance, as we saw residential real estate originations of $3.2 billion, resulting in an increase in balances of 13% from last quarter. Consistent with our focus on the healthcare segment, approximately one-third of our consumer mortgage originations were to healthcare professionals. Laurel Road originated $445 million of loans this quarter, despite the ongoing federal student loan payment holiday.

PPP loan balances were $658 million on average this quarter, compared to $7.5 billion last year, and $1.2 billion last quarter. If we adjust for the sale of the indirect auto portfolio last year, as well as the impact of PPP, our core loans were up year-over-year by approximately $19 billion on average, or 21%. Continued on the slide 7. Average deposit total $147 billion for the second quarter of 2022, up $3 billion or 2% compared to the year-ago period, and down $3 billion or 2% compared to the prior quarter.

Year-over-year, we saw broad-based growth in consumer and commercial relationships, including higher commercial escrow and retail deposits, partially offset by the expected continued decline in time deposits. The decline from the prior quarter reflects seasonal commercial outflows, including annual tax payments, as well as lower public sector deposits related to stimulus funds. Our cost of interest-bearing deposits only increased 2 basis points from the prior quarter. We continue to have a strong, stable, core deposit base with consumer deposits accounting for approximately 60% of our total deposit mix.

In addition, 85% of our commercial deposits are from core operating accounts. Turning to slide 8. Taxable equivalent net interest income was $1.1 billion for the second quarter, compared to $1.02 billion in both the year ago period and the prior quarter. Our net interest margin was 2.61% for the second quarter compared to 2.52% for the same period last year, and 2.46% for the prior quarter.

Year over year, and quarter-over-quarter of both net interest income and net interest margin benefited from higher earning asset balances, and a favorable balance sheet mix, as well as the benefit from higher interest rates. Quarter-over-quarter, net interest income also benefited from one additional day in the quarter. Both net interest income and the net interest margin reflect lower loan fees related to PPP loan forgiveness. The current quarter reflected $14 million of net interest income from PPP, down from $21 million in the prior quarter, and $62 million in the second quarter of 2021.

Included in the appendix is additional detail on our investment portfolio and asset liability position. As Chris mentioned, we have significant upside to higher interest rates over the next several years. For example, if we were to reprice our existing $9.5 billion in short-term treasuries and $27 billion of swaps for today's interest rates, we would have an annualized net interest income benefit of over $700 million. Moving to slide 9.

Noninterest income was $688 million for the second quarter of 2022, compared to $750 million for the year ago period, and $676 million in the first quarter. As we mentioned in our mid-quarter update last month, our fee income continues to be impacted by the slowdown in capital markets. Investment banking and debt placement fees were $149 million for the quarter, down $14 Million from the first quarter. Compared to the prior period, offsetting the decline in investment banking fees was an increase of $15 million in the other income, mostly related to larger negative market-related adjustments in the prior quarter.

Commercial mortgage servicing fees also increase related to elevated prepayment fees. Year-over-year, in addition to lower investment banking fees, cards and payments income was $28 million lower. Primarily driven by lower prepaid card revenue, which was partially offset by core growth. Consumer mortgage income was also lower, reflecting higher balance sheet retention and lower gain on sale margins.

Strength in our corporate services income partially offset these declines. I'm now on slide 10. Total noninterest expense for the quarter was $1.1 billion, relatively stable with both last year and last quarter, compared with the year ago quarter, our expenses are up $2 million. Personnel expenses reflect lower production-related incentive and stock-based compensation offset by higher salaries, including the impact of our direct investments into the business.

On the nonpersonal side, other expense increased $8 million and computer processing expense increased $7 million. Compared to the prior quarter, noninterest expense is up $8 million. Other expense was elevated, reflecting charges for lease terminations, higher travel and entertainment, and [inaudible] assessments. We also saw increases in marketing expense net occupancy, which were more than offset from lower personnel costs, reflecting lower production-related incentive, and stock-based compensation, and seasonally higher [inaudible ] seasonally lower employee benefit expense.

Moving to slide 11. Overall, credit quality remains strong. For the second quarter, net charge-offs were $44 million or 16 basis points of average loans. Non-performing loans were $429 million this quarter, or 38 basis points of period-end loans, with decline of $10 million from the prior quarter.

Additionally, criticized loans declined, and delinquencies were relatively stable quarter-over-quarter. Our allowance for credit losses remained stable with last quarter. Keep in mind, we added up to our reserves in the first quarter, reflecting our expectation for a slowing economy. The reserve level is based on our continued strong credit metrics, as well as our outlook for the overall economy.

Now on the slide 12. We ended the second quarter with a common equity tier one ratio of 9.2%, within our targeted range of 99.5%. This provides us with sufficient capacity to continue to support our customers, and their borrowing needs, and return capital to our shareholders. We continue to manage our capital consistent with our capital priorities of first supporting organic growth in our business.

And this quarter, we certainly saw strong loan growth across our franchise. Second, paying dividends, and third, repurchasing shares. As Chris said, our board of directors just approved a quarterly common dividend of $19.5 per share for the third quarter. As is our normal practice, the board will evaluate a dividend increase in the fourth quarter.

On Slide 13 is our full year 2022 outlook. The guidance is relative to our full year 2021 results. To make a comparison easier, we provided both our prior guidance and our updated outlook, which is shown on the right-hand side of the slide. Using the midpoints of our guidance ranges, with support on Chris's comments about delivering another year of positive operating leverage in 2022.

Average loan will be up between 9% and 11%, this is on a reported basis. Excluding PPP and the impact of the sale of our indirect auto business last year, average loans will be up closer to 20%. We expect average deposits to be up 1% to 3%. Net interest income is expected to be up between 10% and 12%, reflecting growth in average loan balances and higher interest rates, partially offset by lower fees from PPP forgiveness.

Our guidance is based on the forward curve, assuming the Fed funds rate of 3.5% by the end of 2022. Noninterest income will be down between 10% and 12%. This reflects the slowdown in the capital markets and lower investment banking revenue, as well as lower prepaid card fees related to the government support program, they stepped down and market-related adjustments relative to a year ago period. We expect noninterest expense to be down between 2% and 4%, reflecting lower production-related incentives, and our continued focus on strong expense management, included in our outlook on our ongoing investment in our business.

For the year, we expect credit quality remains strong, and net charge-offs to be in the range of 15 to 25 basis points. Our guidance for our GAAP tax rate is approximately 19%. Finally, shown on the bottom of slide are our long-term target, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency which will drive returns.

Overall, it was a solid quarter, and we remain confident in our ability to grow and deliver on our commitments. With that, I'll now turn the call back to the operator for instructions of the Q&A portion of our call. Operator.

Questions & Answers:

Operator

Thank you [Operator instructions] Our first question comes from the line of Ebrahim Poonawala, Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning. I guess maybe first question. Don, just wanted to go back to your comments around interest rate risk management and the securities book. Looking at the slide in the appendix 17.

Just talk to us, when you talk about the $700 million upside from repricing one, what part of the call is that sensitive to? And second, if interest rates are lower in the next 3 to 6 months, is there a way to capture that upside?

Don Kimble -- Chief Financial Officer

That's a great question. As far as the impact, I'm talking about $9.5 billion of our investment portfolio, which is in our short-term treasuries, and that's just repricing those securities at basically a two-year yield on the asset. So it's ticking up over 200 basis points on that $9.5 billion. The other piece would be to reprice or swap book, which is a little over $27 billion, and that has an average life of two and a half years, and just repricing that combined with the short-term treasuries would yield over $700 million in run rate benefit.

As far as capturing that earlier, while we take a look to see how we can, and we've done some things such as for starting swaps and other things to position the portfolio to start to benefit from that and earlier quarters. But we feel good about how we're positioned and with the opportunity to realize that over the next couple of years.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. I think it's just a separate question on the outlook for loan growth, obviously. Seems like you're not seeing any real signs of slowdown. Just talk to us in terms of volume balancing customer demand, capital markets stuff, the balance sheet versus the risk of a downturn, and maybe the into recession over the next 6 to 12 months.

And how you're thinking about credit quality and just tightening the underwriting box.

Chris Gorman -- Chairman and Chief Executive Officer

Sir Ebrahim, obviously, the time to prepare for any kind of a downturn is long before the downturn. And so if you go back over the last ten years, we have been de-risking key. And if you look in areas like, for example, housing and gateway cities, we've been dialing that back for some period of time. But the actions that we've taken in the more recently, of course, as we exited indirect auto last year, we had a $3.3 billion book that we exited.

And then we are constantly looking at our portfolio, any place that there is leverage, we focus intently on. We focus on certain places where we think there's been a run-up in asset values. So, for example, we've been dialing back loan to value percentages in places like the west, that kind of gives you an idea. The notion of what goes on our balance sheet and what we distribute, we do what's best for our clients.

And when you get into markets such as we have right now where there's dislocation, that's obviously an opportunity, and we went from about 18% typically on our balance sheet up to 22%. And obviously, 4% of $36 billion is a lot.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

Operator

Our next question comes from the line of Ken Usdin, Jefferies. Please go ahead.

Ken Usdin -- Jefferies -- Analyst

Yeah. Hey, guys. Good morning. I just wanted to follow up on the capital markets side.

Obviously, tough market environment to execute. Obviously, you're talking about strong pipeline. So can you talk about just how do you get a sense of what the revenue outlook looks like from here? And you obviously did some adjustments on the cost side as a result as well, how much flexibility do you see on that side as well? Thank you.

Chris Gorman -- Chairman and Chief Executive Officer

Sure, Ken. Good morning. Well, one of the things we really like about the business is it is a variable cost business. And you saw that reflected in our expense numbers.

In terms of the trajectory of the business, the pipelines with the exception of equity, as you can well imagine, remain stronger this year than they did at this time last year. Having said that, the real challenge is going to be what is the actual yield? And as you think about, for example, the M&A market, there's a disequilibrium right now between publicly traded companies, and where these private companies are being priced, and there's a bit of price discovery. I think it's going to take a while for that to shake out, but in my experience, it does shake out. And so I think the back half given if we can get some cooperation for the markets, I think the back half will generate some momentum.

The other thing I will share with you about this business, and you've been following us for a long time. This is a business that we believe in and will continue to invest in. And it's been challenging, frankly, to be out in the hiring market in this ride-up in the last couple of years. And so you'll see us invest in this business and hiring more people in sort of a flat or down market than we have in the past.

Thanks for your question.

Ken Usdin -- Jefferies -- Analyst

Got it. And one follow-up, if I may. The starting point here, you had an interest-bearing deposit cost was really excellent. Can you just talk about how you're expecting that to project as obviously we get into the meatier part of the magnitude of rate raises? Thanks.

Don Kimble -- Chief Financial Officer

Sure, Ken. You're right, that the starting point here is that we haven't seen a lot of pressure on deposit rates, and so we've got a very low beta for the quarter as a 2 basis point increase, and an average interest-bearing deposit cost compared to about a 60 basis point increase in the [inaudible] would suggest about a 3.5% to 4% deposit beta. We think the incremental betas will increase from here going forward, and by the end of the year, as we've talked about in the last call, we do expect that incremental beta in toward the end of the year to be closer to that 30% range, so that's really our expectations. We'll start to see more customer changes and more competition for deposit rates going forward.

Ken Usdin -- Jefferies -- Analyst

Got it. Thank you, Don.

Don Kimble -- Chief Financial Officer

Thank you.

Operator

And our next question is from the line of Steven Alexopoulos, J.P Morgan. Please go ahead.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Good morning, everyone. So looking at the updated guidance and specifically looking at the 9% to 11% loan growth and 1% to 3% decline deposits, which is a pretty wide mismatch. How do you plan to fund loan growth beyond 2022? And it was loan to deposit ratio. Did you need to start fully funding loan growth one for one with deposits?

Don Kimble -- Chief Financial Officer

Steve, this is Don. And as far as the loan growth, you're right, the updated guidance is 9% to 11%. Deposits are expected to be up 1% to 3% year-over-year. That implies relatively stable deposits through the rest of the year.

We do have some investment security maturities. We also will tap the wholesale market, as far as funding that one of the benefits of originate in residential real estate loans. It adds to our capacity, as far as borrowing at the home loan and we can do that in a cost-effective way. Loan to deposit ratios were currently below 80% on our balance sheet.

Typically, we would target between 90% and 95% loan to deposit ratio, so we've got plenty of room to work through that. I would say that we'll continue to monitor this, but as Chris has highlighted a couple of times, we want to support our customers. And in these markets, we're going to see more customer demand for loans than we are probably going to see for capital markets opportunities. And so we'll continue to see that.

We could see that reverse at some point in time, and help alleviate some of the pressure on loan growth overall.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. That's helpful. Don, how do we think about this? So at some point, you'll reach a loan-to-deposit ratio where you need to be more competitive on deposits. And I heard your response to Ken's question, do you think you'll be a 30% or so loan deposit bet by the end of this year? But if we keep moving it forward, what do you think is the through the cycle deposit beta? And Chris, just given your commentary that you feel good that NIM higher rates are going to benefit you long term, do you think your loan beta can stay consistently above the incremental deposit beta as we move forward beyond 2022?

Chris Gorman -- Chairman and Chief Executive Officer

I think it can. And the reason I said, I think as we go into an inevitable downturn and clearly the economy is slowing, I think you're going to see sort of a repricing of risk. And I think we'll be in a good position with the relationships that we have to garner that. And so I think the answer your question is I think it will.

Don Kimble -- Chief Financial Officer

Then on the deposit side as well, that historically we would have had a deposit beta of around 40% to 45%. And I would say that our deposit mix is much different today than what it was during the last rate increase cycle. That on the consumer side, we're very focused on core primacy accounts, or operating accounts for the consumer. As opposed to historically, we might have been more focused on promotional money market type of products and programs.

And so we should see less interest rate sensitivity there. On the commercial side, we're seeing now 85% of our deposits are in core operating accounts, and that's probably up 5 to 10 points from what it was just three years ago. So that mix should be helpful for us to continue to manage that beta down longer term compared to what the historic levels were for us. And so we will probably drift above that 30% level, but I think we'll be well below that 40% to 45% level that we were historically.

Steven Alexopoulos -- J.P. Morgan -- Analyst

OK. And Don, if I could squeeze one more in. So the 85% of commercial deposits that are operating accounts. Is the implication from that, that we shouldn't expect much of a mix shift out of noninterest-bearing? Is that the read-through from that?

Don Kimble -- Chief Financial Officer

Well, we'll see some shift there just because of the impact of the higher rates, and the earnings crediting rate that we provide to help manage fees. And so as rates go up, you might see less of a need to keep some of the funds there, and they might look to put some of those and other interest-bearing categories. But it still does imply that we'll see less shift than what we would have historically just because of the higher level of operating account balances.

Steven Alexopoulos -- J.P. Morgan -- Analyst

Got it. Okay. Thanks for all the color. 

Don Kimble -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Erika Najarian, UBS. Please go ahead.

Erika Najarian -- UBS -- Analyst

Hi. Good morning. My first question is on credit quality, which is clearly pristine currently. Chris, you said to Ebrahim that the time to prepare for a downturn is well before the downturn hit.

And maybe help us understand how we should think about how key ACL would look like in a recession. So you ended the quarter at 113, and clearly, your book has changed. But you also have more consumer loans, which even if the credit is good, my understanding is from a CECL standpoint, they have longer lives, right? I guess the question here is, if we do have a mild recession next year or sooner than that, where would this ACL ratio trend?

Chris Gorman -- Chairman and Chief Executive Officer

First of all, good morning, Erika. Obviously, we're really comfortable with where our reserves are today. A few things to keep in mind, both on our commercial and our consumer side. I'll start with the consumer.

That book of business at funding is about FICO, scores of about 780. So it's a little bit of a unique customer base as it relates to our consumers. So that's one thing to keep in mind. The other thing on the commercial side is, as I mentioned earlier, we've been consistently de-risking all of key, and we also have been consistently laying off about 72% of the risk that kind of flows through key.

And there were a lot of deals that we're able to place that don't meet our moderate risk profile. So I'm very comfortable with where our reserves are now. As you can imagine, we are modeling continually of just a whole lot of different scenarios. But at the moment, we're very comfortable through our reserve.

As you'll recall, last quarter we actually increased our qualitative reserve just on the premise that under CECL, our macro view had changed. And clearly, there were some more challenges out there.

Don Kimble -- Chief Financial Officer

And Erika, this is Don. I can probably add a little bit more color to that as well. And that if you look at our allowance, it is very quantitative. And the approach I would say that under CECL, what you do is take a look at the foreseeable period as far as forecasted losses.

And so for us, that's a two-year type of period. And so even in a recession, you would see those two years of losses go up from where they're at today, and then it would start to migrate back to the norm. And so you might think that with the longer life loans, as far as the residential real estate, or even our student loans through lower row, that you would see that for the entire life, and you really wouldn't you would see it spike in that first two year period. And so it might imply somewhere between a 40 to 50 basis point kind of increase to the allowance, but it wouldn't be a doubling.

That would be our best guess at this point in time.

Erika Najarian -- UBS -- Analyst

Got it. And maybe a follow-up question for you. As you take a step back, you and your colleagues have built key into this powerhouse, super-regional commercial, and corporate bank. And I think a lot of investors are thinking that a lot of the issues in credit and corporate from higher rates and lower EBITDA perhaps may come outside of the banking system.

And given your comments about de-risking, is there any room at KeyCorp for perhaps some market share gains if you do see some blow-ups in the private credit markets? Or are those deals, just deals that you wouldn't be comfortable with anyway?

Chris Gorman -- Chairman and Chief Executive Officer

Well, I think there's no question that depending on how people are funded, I think banks, in general, will be able to gain share. And the nice thing about a downturn, Erika, is you can have things structured the way you want to structure them, to put them on your balance sheet. I think there's no question that in dislocation, it will be an opportunity for us to gain market share, given our relationships, and given that we can have things structured the way we'd like them to structured because the market is obviously adjusting as we speak.

Erika Najarian -- UBS -- Analyst

Got it. Thank you.

Chris Gorman -- Chairman and Chief Executive Officer

Thanks, Erika.

Operator

[Operator instruction] And our next question comes from the line of Matt O'Connor, Deutsche Bank. Please go ahead.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning. So your capital is kind of right in the middle of your range at 9.2 versus 9 to 9.5Could you just update us on thoughts on both share buybacks. And then also where do you want to be within that capital range at this point of cycle and maybe longer term?

Chris Gorman -- Chairman and Chief Executive Officer

Sure, Matt. So we're obviously very comfortable at 9.2 frankly, I'd be comfortable at even a range that's a little broader than that 9 to 9.5 was just an internal range that we had put in place. As it relates to capital actions, first and foremost, as Don mentioned in his remarks, we preserve our capital to help our clients grow, so that's the first thing. The second thing is obviously our dividend, which is very important.

And then our third tertiary priority is the repurchase shares. And so I feel very good about where we are, from a capital perspective.

Matt O'Connor -- Deutsche Bank -- Analyst

And then somewhat related as you mentioned earlier about investing, even more so within the investment banking capital markets, broadly speaking. Is that all kind of organic? or are there maybe some niche acquisition opportunities within those businesses?

Chris Gorman -- Chairman and Chief Executive Officer

Well, as you know, in the past we have bought businesses. And I'm really proud of our ability to integrate these entrepreneurial businesses. But what I was really focused on in my comments is sort of organic individual hires that we think would be a good cultural fit to plug into our platform.

Matt O'Connor -- Deutsche Bank -- Analyst

OK. Thank you.

Operator

And we have a last question here from the line of Mike Mayo, Wells Fargo. Please go ahead.

Mike Mayo -- Wells Fargo Securities -- Analyst

It's not a new statement from you. But if you can't catch the ball with your left hand with investment banking, then you catch it with your right hand with traditional lending or the reintermediation to bank balance sheets from capital markets. So I know you've described this in the past, Chris, and this is your old area, as we all know. But can you be more specific? Like, what are we talking about? We see capital market transactions don't get completed, so therefore they go to key balance sheet.

Just a little bit more detail would be great.

Chris Gorman -- Chairman and Chief Executive Officer

Sure. So let me give you an example. Say someone is trying to privately raised debt, and there's all these debt funds, and there's all these unitranche offerings, and all of a sudden those markets freeze up. But whoever is the sponsor behind the deal has significant capital.

We can then go back to the parties involved. If we have a relationship with them, we would say we won't structure it the way we were trying to structure it to place out the market. But we'd be pleased to put a very conservative amount of debt on our balance sheet, and you sponsor, will need to come up with more equity. That would be an example.

Another example would be a company that we were going to take public that we could continue to fund in a variety of ways until they go public. A third example would be a large affordable project that wanted ultimately to place the paper with one of the agencies. But because of dislocation, you couldn't do that. That's a deal that we could bridge over a period of time with a known takeout.

That would be a few examples.

Mike Mayo -- Wells Fargo Securities -- Analyst

OK. And your investment banking fees were down less than the biggest players down one-third versus that one-half. I guess that's partly just due to your mix upper middle market, but the decline was not as much as first quarter to second quarter. You said you expect things to improve, now, I mean, maybe your guess is as good as anyone else's, or perhaps you have some extra insight, or maybe you hear what your clients are saying.

But with that backdrop, how are you allocating resources? You said you're going to be investing more than you have in the past. Does that reflect your optimism?

Chris Gorman -- Chairman and Chief Executive Officer

Well, there's no question I'm optimistic about the business long term. Mike, as you know, how these markets play out over the next six months is in fact, anybody's guess. But we're playing the long game. We're investing in the business.

The pipelines are there. I don't see anything happening in the equity market, for example, in the next three or six months. I do think this price discovery that I discussed earlier in the M&A market, I do think that buyers and sellers will start to come together on that.

Mike Mayo -- Wells Fargo Securities -- Analyst

OK. Great. Thank you.

Chris Gorman -- Chairman and Chief Executive Officer

Sure. Thank you, Mike.

Operator

And at this time there are no other questions in queue.

Chris Gorman -- Chairman and Chief Executive Officer

Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to our investor relations team, 2166894221. This concludes our remarks. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Chris Gorman -- Chairman and Chief Executive Officer

Don Kimble -- Chief Financial Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Ken Usdin -- Jefferies -- Analyst

Steven Alexopoulos -- J.P. Morgan -- Analyst

Erika Najarian -- UBS -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

More KEY analysis

All earnings call transcripts