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spk08: Good morning and welcome to Key Corp's 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.
spk03: Thank you for joining us for Key Corp's second quarter 2022 earnings conference call. Joining me on the call today are Don Kimball, our Chief Financial Officer, Clark Kyatt, our Chief Strategy Officer, and Mark Midkiff, our Chief Risk Officer. On slide two, 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 three. 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 Lower Road. Let me spend just a moment on Lower 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 GradFence, 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 3,200 individual consultations for refinance 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 loan 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 cents 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?
spk02: Thanks, Chris. I'm now on slide five. 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-provisioned debt 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 and 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 six, 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 our industry verticals. Line utilization rates improved this quarter, increasing 100 basis points from last quarter. Our consumer businesses 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%. Continuing on to slide seven, average deposits totaled $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 two 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. Turn 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, 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 the 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 to today's interest rates, we would have an annualized net interest income benefit of over $700 million. Moving to slide nine, non-interest 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 increased 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 non-assist 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 incentives and stock-based compensation offset by higher salaries, including the impact of our direct investments into the business. On the non-personnel side, other expense increased $8 million, and computer processing expense increased $7 million. Compared to the prior quarter, non-interest expense is up $8 million. Other expense was elevated, reflecting charges for lease terminations, higher travel and entertainment, and FDIC assessments. We also saw increases in marketing expense and net occupancy, which were more than offset from lower personnel costs, reflecting lower production-related incentives and stock-based compensation, and 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 loan. Non-performing loans were $429 million this quarter or 38 basis points of period-end loans, a 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 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 to slide 12. We ended the second quarter with a common equity tier one ratio of 9.2% within our targeted range of 9 to 9.5%. 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 cents 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 would support Chris's comments about delivering another year of positive operating leverage in 2022. Average loans 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 a Fed funds rate of 3.5% by the end of 2022. Non-interest 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 in market-related adjustments relative to year-ago period. We expect non-interest 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 are our ongoing investments in our business. For the year, we expect credit quality to remain 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 the slide are our long-term targets, 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 for the Q&A portion of our call. Operator?
spk08: Thank you. Ladies and gentlemen, if you would like to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the command of 1, then 0. Our first question comes from the line of Ibrahim Poonawalla, Bank of America. Please go ahead.
spk00: Good morning.
spk03: Good morning, Ibrahim.
spk00: 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 issue upside from repricing? One, what part of the curve is that sensitive to? And second, if interest rates roll over in the next three to six months, is there a way to capture that NII upside?
spk02: 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 assets. And so it's picking up over 200 basis points on that $9.5 billion. The other piece would be to reprice our 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 rates benefits. As far as capturing that earlier, we'll always take a look to see how we can. And we've done some things such as forward starting swaps and other things to position the portfolio to start to benefit from that in earlier quarters. But we feel good about how we're positioned and with the opportunity to realize that over the next couple of years.
spk00: Got it. And I guess just a separate question on the outlook for loan growth. Obviously, it seems like you're not seeing any real signs of slowdown. Just talk to us in terms of how you're balancing customer demand, capital market stuff, the balance sheet versus the risk of a downturn and maybe the inter-recession over the next six to 12 months and how you're thinking about credit quality and just tightening the writing box.
spk03: Sure, Ibrahim. 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 10 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. The actions that we've taken more recently, of course, is 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's leverage we focus intently on. And 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've went from about 18% typically on our balance sheet up to 22. And obviously, 4% of $36 billion is a lot.
spk00: Thanks for taking my questions. Thank you.
spk08: Our next question comes from the line of Ken Usden Jeffries. Please go ahead.
spk05: Yeah. Hey, guys. Good morning. I just wanted to follow up on the capital market side. So obviously, you know, tough market environment to execute. You know, obviously, you're talking still 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 obviously, you 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.
spk03: 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 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.
spk05: Got it. And one follow-up, if I may, the starting point here you had on interest-bearing deposit costs was really excellent. Can you just talk about how you're expecting that to traject as, obviously, we get into the meatier part of the magnitude of rate raises? Thanks.
spk02: Sure can. You're right. 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 at a two basis point increase in average interest-bearing deposit costs compared to about a 60 basis point increase in the LIBOR, which 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 talked about in the last call, we do expect that incremental beta 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.
spk05: Got it. Thank you, Don. Thank you.
spk08: And our next question is from the line of Stephen Alexopoulos, JP Morgan. Please go ahead.
spk03: Good morning, Steve.
spk01: Hey, good morning, everyone. So looking at the updated guidance, and specifically I'm looking at the 9% to 11% loan growth and 1% to 3% decline in deposits, which is a pretty wide mismatch, how do you plan to fund loan growth beyond 2022? And at what loan-to-deposit ratio do you need to start fully funding loan growth one-for-one with deposits?
spk02: Okay. 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. One of the benefits of originating 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, we're currently below 80% on our balance sheet. Typically, we would target between 90% and 95% loan-to-deposit ratios, 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 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. Okay. That's helpful.
spk01: 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. You think you'll be at 30%. or so loan deposit 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 know, you feel good that 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? I think it can.
spk03: 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 to your question is I think it will.
spk02: And on the deposit side as well, historically we would have had a deposit beta of around 40% to 45%. 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 – five 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.
spk01: Okay. And Don, if I could squeeze one more in. So the 85% of commercial deposits at operating accounts, is the implication from that that we shouldn't expect much of a mix shift out of non-interest-bearing? Is that the read-through from that?
spk02: Well, we'll see some shifts there just because of the impact of the higher rates and 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 in other interest-bearing but it still does imply that we'll see left shift than what we would have historically just because of the higher level of operating account balances.
spk01: Got it. Okay. Thanks for all the color. Thank you.
spk08: Our next question comes from the line of Erica Najarian, UBS. Please go ahead.
spk07: Hi. Good morning.
spk01: Good morning.
spk07: My first question is on, you know, credit quality, which is clearly pristine currently. Chris, you know, you said to Ibrahim that the time to prepare for a downturn is well before the downturn hits. And, you know, maybe help us understand how we should think about, you know, how key ACL would look like in a recession. So you ended the quarter at 113, you know, and clearly your book has changed. But you also have more consumer loans, which, you know, Even if the credit is good, my understanding is from a CECL standpoint, they have longer lives, right? So, you know, 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?
spk03: So, obviously, first of all, good morning, Erica. Obviously, we're really comfortable with, you know, 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 were 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 just a whole lot of different scenarios. But at the moment, we're very comfortable with where our reserve is. 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.
spk02: Eric, this is Don. I can probably add a little bit more color to that as well. If you look at our allowance, it is very quantitative in the approach. I would say that under CECL, what you do is take a look at the foreseeable period as far as forecasted losses. For us, that's a two-year type of period. 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 Laurel Road, 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. It would be our best guess at this point in time.
spk07: Got it. And, Chris, maybe a follow-up question for you. You know, as you take a step back, you know, you and your colleagues have built key into this, you know, powerhouse, super regional, commercial, and corporate bank. And I think a lot of investors are thinking that, you know, a lot of the issues in credit and corporate from higher rates and, you know, lower EBITDA perhaps may come outside of the banking system. And given your comments about de-risking, you know, is there any room at Key Corp for perhaps some market share gains if you do see some blowups in the private credit markets? Or are those deals just deals that, you know, you wouldn't be comfortable with anyway?
spk03: Well, I think there's no question that depending on how people are funded and I think banks in general will be able to gain share. And the nice thing about a downturn, Erica, 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 structure because the market is obviously adjusting as we speak.
spk08: Got it. Thank you.
spk03: Thanks, Erica.
spk08: And once again, ladies and gentlemen, if you have any questions or comments, please press 1, then 0. And our next question comes from the line of Matt O'Connor, Deutsche Bank. Please go ahead.
spk04: Good morning.
spk08: Good morning.
spk04: So your capital is kind of right in the middle of your range at 9.2 versus 9 to 9.5. Can you just update us on thoughts on both share buybacks and then also You know, where do you want to be within that capital range at this point in the cycle and maybe longer term?
spk03: 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. 9-9.5 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 of shares. And so I feel very good about where we are, you know, from a capital perspective.
spk04: And then somewhat related, as you mentioned earlier about investing in even more so within the investment bank and capital markets, broadly speaking. Is that all kind of organic or are there maybe some niche acquisition opportunities within those businesses?
spk03: 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.
spk04: Okay, thank you.
spk03: Sure, Matt.
spk08: And we have a last question here from the line of Mike Mayo, Wells Fargo. Please go ahead.
spk06: Hi. So 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 re intermediation 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 say capital market transactions don't get completed. So therefore they go to keys balance sheet. Just a little bit more detail would be great.
spk03: Sure. So let me give you an example. Say someone is trying to privately raise 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 that we have a relationship with and we would say, We won't structure it the way we were trying to structure it to place it out in 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 company Let's say it's 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.
spk06: Okay. And, you know, your investment banking fees were down less than the biggest players, down one-third versus down one-half. I guess that's partly just due to your mix, upper middle market. But the decline was not as much 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. And with that backdrop, you know, 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?
spk03: 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.
spk06: Okay. Great. Thank you. Sure.
spk03: Thank you, Mike.
spk08: And at this time, there are no other questions in queue.
spk03: 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. 216-689-4221. This concludes our remarks. Thank you.
spk08: And ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Conferencing Service. You may now disconnect.
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