KeyCorp

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'm now moving to slide three. This morning, we reported another strong quarter with net income of $616 million, or $0.65 a share. We delivered positive operating leverage and expect to generate positive operating leverage for the full year. We delivered record third quarter revenue, which was up 8% from the year-ago period. Our results were driven by growth in both net interest income and non-interest income. Non-interest income reached a record third quarter level, up 17% from the same period last year. The increase was driven by broad-based growth across our fee-based businesses, including investment banking, which was up 61%. I am especially proud of the way our teammates continue to serve our communities and clients, and in doing so, creating new and deeper relationships across our franchise. In our consumer business, we experienced record growth in net new households in the first nine months of the year. Our Western franchise is growing at a rate of over two times the rest of our footprint, and younger clients continue to be our fastest growing segment. Additionally, our consumer business generated a record $4.2 billion in loan originations for the quarter, which reflects growth from our consumer mortgage business and Laurel Road. Through the first nine months of the year, our consumer mortgage originations increased have exceeded 2020's full-year record level of $8.3 billion. Laurel Road had another strong quarter as we continued to add and expand high-quality relationships through our national digital bank. Importantly, what really sets Laurel Road apart is our targeted client approach, which results in high-value digital relationships nationally. Currently, 75% of our volume is coming from outside our footprint. Laurel Road is part of a broader healthcare initiative across our company that has established Key as one of the leading healthcare banks. Moving on to our commercial businesses, we had another strong quarter. Our investment banking business generated fees of $235 million, a record third quarter level. and the second highest quarterly level in our history, we experienced growth across the entire platform. Our broad and comprehensive platform has enabled this business to grow consistently over the past decade. Our investment banking business has grown at an 11% compound annual growth rate over the last 10 years. We are on pace to generate double-digit growth again in 2021. Expenses this quarter reflect higher production-related incentives and the investments we continue to make in our franchise, in digital, in analytics, and in our teammates. Year to date, we consolidated 73 branches, or approximately 7% of our branch network. These consolidations will drive future cost savings and support ongoing investments. We will continue to look for opportunities to right-size our footprint. Shifting to credit quality, our trends remained very strong this quarter. Non-performing loans and criticized loans were all down from the prior quarter, and net charge-offs to average loans were 11 basis points. We continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through all business cycles. Finally, we have maintained our strong capital position while continuing to return capital to our shareholders. Our common equity tier one ratio ended the quarter at 9.6%, above our targeted range of 9% to 9.5%. In the third quarter, we entered into an accelerated share repurchase program facilitated by the capital relief from the sale of our indirect auto portfolio. The accelerated share repurchase program is part of our previously disclosed $1.5 billion share authorization. In total, we repurchased $593 million of common stock in the third quarter. Dividends also remain a priority. Our dividend yield remains above 3%. Our board of directors will consider a dividend increase at our meeting next month. I will close by restating that it was another strong quarter. We generated positive operating leverage by growing our top line and managing expenses while continuing to make investments for our future. As always, we remain committed to our disciplined approach to risk management and returning capital to shareholders through both dividends and share repurchases. I will now turn the call over to Don, who will provide more details on the results of the quarter. Don?

Thanks, Chris. I'm now on slide five. For the third quarter, net income from continuing operations was $0.65 per common share. Our results reflected a net benefit from our provision for credit losses, which was largely driven by our strong credit metrics and positive economic outlook. Importantly, we delivered positive operating leverage this quarter, and as Chris said, we expect to deliver positive operating leverage for the year. Total revenues were up 8% compared to the same period last year. We had year-over-year growth in both net interest income and non-interest income. Our return on tangible common equity for the quarter was 18.6%. I'll cover the other items on this slide later in my presentation. Turn to slide six. There were two major items that impacted loan growth this quarter, PPP loans and the sale of our indirect auto portfolio. Average PPP loans declined $3.3 billion this quarter as we helped clients take advantage of loan forgiveness. We also sold our indirect auto portfolio last month. The sale impacted our third quarter average results by approximately $800 million and $3.3 billion on an ending basis. Average loans were down from the year-ago period, reflecting the reduction in PPP balances and lower commercial line utilizations. Compared to the prior quarter, average loans were down 0.7%. Adjusting for the sale of the indirect auto portfolio, our loans were up approximately $100 million on average and up over $1 billion on an ending basis. Adding to the comments on our core loan growth, adjusting for both the indirect auto loan sale and PPP loans, our linked quarter total loan growth would have been 4.3%. we continued to see strong consumer loan growth driven by Laurel Road and consumer mortgage. On the commercial side, we were pleased to see a slight uptick in utilization. Continuing on to slide seven, average deposits total $147 billion for the third quarter of 2021, up $12 billion, or 9% compared to the year-ago period, and up 2% from the prior quarter. The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances. The growth was partially offset by a continued, unexpected decline in time deposits. So, interest-bearing deposit costs came down one basis point from the second quarter, following a two basis point decline last quarter. We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60% of our total deposit mix. Turn to slide eight. Taxable equivalent net interest income was $1.025 billion for the third quarter of 2021 compared to $1.006 billion a year ago and $1.023 billion from the prior quarter. Our net interest margin was 2.47 percent for the third quarter of 2021 compared to 2.62 percent for the same period last year and 2.52 percent for the prior quarter. Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to a year ago period. The larger balance sheet benefited net interest income but reduced net interest margin due to the significant increase in liquidity driven by strong deposit inflows. Compared to the prior quarter, net interest income increased $2 million and the margin declined five basis points. Lower interest-bearing deposit costs and the benefit of the day count were partially offset by lower earning asset yields and continued elevated liquidity levels. For the quarter, total loan fees from PPP loans were $45 million, compared to $50 million last quarter. We've also included in the appendix additional detail on our investment portfolio and our asset liability positioning. In the third quarter, our sensitivity to rising rates moved higher, and we ended the period with over $25 billion in cash and short-term investments. Moving on to slide nine, we continue to see strong growth in our fee-based businesses, which have benefited from our ongoing investments. Non-interest income was $797 million for the third quarter of 2021, compared to $681 million for the year-ago period and $750 million in the second quarter. Compared to the year-ago period, non-interest income increased 17%. We had a record third quarter for investment banking and debt placement fees, which reached $235 million, driven by broad-based growth across the platform, including strong M&A fees. Additionally, corporate services income increased $18 million, and commercial mortgage servicing fees increased $16 million. Offsetting this growth was lower consumer mortgage fees due to a lower gain on sale margin. Compared to the second quarter, Non-interest income increased by $47 million. The largest driver of this quarterly increase was the record third quarter investment banking and debt placement fees. I'm now on slide 10. Total non-interest expense for the quarter was $1.112 billion compared to $1.037 billion last year and $1.076 billion in the prior quarter. Our expense levels reflect higher production-related incentives and the investments we have made to drive future growth. The increase from the year-ago period primarily reflects higher incentive and stock-based compensation attributed to our higher fee production and key increased stock price. The quarter-over-quarter increase in expenses was primarily driven by two areas. The first, personnel expense, related to one additional day of salary expense in the quarter and slightly higher employee benefits. The second was an increase in other expense of $18 million, largely related to a pension settlement charge and higher charitable contributions. Now moving to slide 11. Overall credit quality continues to outperform expectations. For the third quarter, net charge-offs were $29 million, or 11 basis points of average loans. Net charge-offs in the current quarter included $22 million related to the sale of the indirect auto loan portfolio. Our provision for credit losses was a net benefit of $107 million. This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production. Non-performing loans were $554 million this quarter or 56 basis points of period end loans, a decline of $140 million or 20% from the prior quarter. Now on to slide 12. We ended the third quarter with a common equity Tier 1 ratio of 9.6%, which places us above 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. Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. We repurchased $593 million of common shares during the quarter, and our Board of Directors approved a third quarter dividend at 18.5 cents per common share. Of the 593 million in common share repurchases, $468 million were related to the initial settlement of our accelerated share repurchase program, representing 80% of the $585 million authorization. The remaining $125 million were purchased in the open market. The remaining 20% of the ASR will be settled in the fourth quarter. On slide 13, similar to prior years, we've provided guidance for the fourth quarter relative to our third quarter results. Guidance ranges are listed at the bottom of the slide. Importantly, using midpoints of this outlook would imply our PPNR is at or above our full year 2021 outlook provided last quarter. We have adjusted our guidance to reflect our strong third quarter performance, especially in our fee-based businesses, as well as the continued strength in our credit quality. Average loans will be up low single digits, excluding the impact of the sale of our indirect auto portfolio. We expect continued growth in both our core commercial and consumer balances. Average deposits should remain relatively stable in the fourth quarter. Net interest income is expected to be down low single digits, reflecting lower PPP forgiveness in the fourth quarter and the impact of the auto loan sale. Non-interest income should be relatively stable off our record third quarter performance with momentum in most of our fee-based businesses through year end. We will also benefit from what we expect to be another record year for our investment banking business. We expect non-interest expense to be down low single digits in the fourth quarter. Moving on to credit quality, we expect our net charge-off to be below 20 basis points for the fourth quarter. Credit trends were strong in the third quarter, and we expect a strong finish to the year. And our guidance for our GAAP tax rate has remained unchanged at 20%. Finally, shown at 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 another strong quarter, and we remain confident in our ability to deliver on our commitments to all of our stakeholders. With that, I will now turn the call back to the operator for instructions of the Q&A portion of the call. Operator?

Thank you. And ladies and gentlemen, if you would like to ask a question on the call, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1, then 0 at this time. And first, we'll line up with Stephen Alexopoulos with J.P. Morgan. Please go ahead.

Hey, good morning, everyone. Good morning. I wanted to start, so on the IB and debt placement fees, right, this has moved from, I think you were $160 million per quarter pre-pandemic. Now you're running consistently over $200 million per quarter. And we know this is an unusual year for debt issuance. How should we think about this line over the intermediate term? And do we eventually just go back to $160?

So good morning, Steve. It's Chris. As we look at this line, we always look at it kind of on a trailing 12 basis. I don't think we're going back to $160. You know, over the last decade, we've grown this, as I mentioned, at a compound annual growth rate of 11%. We continue to add bankers. We continue to further penetrate these niches that we're in. It's a unique business, seven industry verticals serving the middle market. It is the deal business, but having said that, we feel really good about the long-term trajectory of the business. I'll give you one statistic you might find interesting. This year we added 5% in terms of incremental bankers, and the call activity is up 20%. I think we're in the right sectors. I think we continue to invest in the business, and I think it's a unique business. I don't think it's going back to 160. I do think over time it will continue to be a double-digit grower.

Okay. So we should consider this current run rate as a baseline? Chris, is that right?

I don't know if I would consider it as a baseline. I mean, we always look at it on a trailing 12 basis, but I do think we can continue to grow it, Steve. As you know, you guys are in the deal business, too. You can't sort of annualize one quarter, but I do think you can look at long-term trends and we'll continue to grow it.

Yeah, got you. Okay. And on the PPP, can you guys give out what the fees recognized in the quarter were? And maybe, Don, do you have the end-of-period balances on PPP?

Sure can. The total loan fees realized this quarter were $45 million. That was down from $50 million last quarter. The average balance for PPP loans was $4.2 billion, and the ending was at $3.1 billion. Okay.

That's helpful. If I could squeeze one more in for you, Chris. There's been quite a bit of activity in M&A this year. It's actually a record year. Have you been active at all in exploring M&A opportunities, either bank or non-bank? Thanks.

Steve, we're always out there talking to people, particularly in the non-bank space. We have a pretty good track record of buying entrepreneurial businesses and integrating them. Obviously, this year we bought AQN, which is an analytics firm. We have a long history of investing in and partnering with fintech companies. So we'll continue to be very, very active around sort of niche businesses, whether it's investment banking, boutiques. And then we're always out there. Our job is to always be out there in the marketplace and see what there is out there that could create a lot of value. And so we're out there, but particularly focused on these niche businesses.

Great. Thanks for taking my questions.

Thank you.

And next we'll go to Ibrahim Poonawalla with Bank of America. Please go ahead.

Good morning.

Good morning.

I guess if we could just follow up a little bit on the outlook. You've talked about positive operating leverage this year. As we look beyond 2021, you mentioned an opportunity to right-size the branch footprint. Give us some perspective on how big that is. And as we look forward, some of the PPP revenues tail off. How do you think about maintaining that positive operating leverage? We've heard other banks talk about inflationary pressures impacting expenses. So we'd love your perspective on that.

Sure. Well, thank you for the question. First of all, operating leverage is very important to us. We're really proud of the fact that We have positive operating leverage on a year-to-date basis. We will have positive operating leverage for the year 2021. We have not yet pulled together our plans for 2022. We will share that guidance with everybody in our January call. But I can tell you positive operating leverage is a very important part of how we run the business. It's a huge area of focus. When we have all of our business leaders in, We're investing heavily in these businesses, but we have to be able to get the growth for the investment. And to date, obviously, we're getting that, but we'll continue to focus on positive operating leverage. You mentioned inflationary pressures. I don't think there's any question that there's inflationary pressures in the financial services industry and within our customer base. We clearly are seeing those, and those will be a challenge, I think, for everyone in the economy.

And I guess one for you, looking at your ALM slide disclosure at the end, just talk to us how you're managing the balance sheet as we think about cash deployment given the steepening and the curve we've seen, and where do you want the bank set up 12 months from now in terms of NII sensitivity to 100 basis points higher interest rates?

That's a great question, and that's something we challenge all the time, that You might see from the materials that this quarter we had some activity in our bond portfolio with purchases of traditional core investments of about $3.7 billion compared to runoff of $2.1 billion that we saw from the cash flows off the existing portfolio. In addition to that, we bought some short-term treasuries of about $4 billion, and also the auto securitization transaction ended up increasing our overall bond portfolio by $2.8 billion as well. We ended the quarter at about $49 billion of total investments, which is up from the average of $43 billion. What I would say is that we've seen a nice tick up in rates, that the purchases we made in the third quarter had an average yield of a 135, those same types of investments at the start of the fourth quarter in the 150 to 160 range. And so that would probably give us some opportunity to lean a little heavier into portfolio purchases in the fourth quarter and beyond, and we'll continue to assess that. We're sitting right now on $25 billion of excess liquidity compared with cash positions and short-term treasuries, and we do plan to put that to work over time and probably see a clip of something in that $4 billion to $5 billion range near term instead of the $3.7 billion that we purchased in the third quarter. and maybe moving that up as we get more and more comfortable with where rates are positioned for the long term.

That's helpful. And any changes done on slide 19? I think you lay out $36 billion in portfolio hedges. Is that what's rolling off? Is that number expected to stay steady state over the next year?

Of those hedges, $22 billion really are true asset liability hedges. The remainder are both debt hedges and also some very specific security hedges. For the maturities for the next 12 months, for all of 2022, that's a $4.6 billion number as far as the maturity of those swaps. And just to put that in perspective, the average received fixed rate for those hedges $22 billion in swaps is 1.2%, and the current go-to rate for us would be about 1.1%. So we're seeing markets start to – rates start to pick up and close that gap that we have as far as that rollover risk.

Thanks for taking my questions.

Thank you. And next we'll go to Scott Seifers with Piper Sandler. Please go ahead.

Morning, guys. Thanks for taking my questions. I was hoping to talk about loan growth for just a second. You're certainly starting to see more of a recovery. I'd say the magnitude of yours, once you sort of wade through all the noise, has maybe been a little bigger than some others out there. Now, to a degree, things like Laurel Road and mortgage, which you guys have talked about quite a bit, offers you some flexibility. But I was hoping you could speak to the commercial side and sort of what's differentiating you guys there, and maybe some comments about what you're seeing in terms of pricing, structure, those kinds of things, please.

Sure, let me start, and then Don, I'm sure you'll have some comments on this as well. We are pleased with the trajectory of our loan growth, Scott. You mentioned on the consumer side our two growth engines. Those will both continue, so we feel good about those. As it relates specifically to the commercial side, we've seen a lot of activity around energy, around affordable housing. We're significant players in healthcare and technology. All of those sectors have been active, and the pipelines look strong. As it relates to pricing and structure, we are not giving on structure at all. And I would say there's been sort of a continued erosion of pricing. Think about sort of from pre-pandemic to current sort of a triple B credit, an erosion of maybe 25 basis points. That would be kind of a good benchmark.

I would agree, Chris. And as far as the commercial loans, link quarter, apps and PPP, we're seeing those balances up over a billion and a half dollars. I would say of that, about a half a billion dollars is coming from increased utilization rates that we saw go up about 50 basis points. We saw a little bit of growth in our commercial real estate portfolio, and that really is aided by our focus on affordable housing and some other areas there that have been paying dividends for us. And the core commercial portfolio itself grew by about half a billion dollars. And I'd say that a good chunk of that is coming from customer growth. And we're seeing the benefit of the additional calling efforts that Chris mentioned and the addition of more bankers on the street to help us drive that growth.

Okay. Perfect. Thank you very much. And then maybe, Don, just a question on the indirect portfolio sale. Does that have any bearing on what you think about sort of the steady state reserve level. I can't imagine it would be huge just given the starting size of that portfolio, but just would be curious to hear any of your thoughts.

It really doesn't have a huge impact on it at all. If you look at the reserve levels we had there, they were a little bit less than the average for the overall loan book, but generally in line, so not much of a change there that the The one thing we continue to watch is that our credit metrics continue to improve and exceed our expectations as far as the relative performance there. And so that's been the main driver as far as some of the adjustments we've seen down as far as our overall reserve levels.

Yep. Perfect. All right. Thank you guys for taking the questions.

Thanks, Scott. Next, we'll go to Bill Karkash with Wolf Research. Please go ahead.

Thank you. Good morning, Chris and Don. Good morning. Wanted to follow up on the operating leverage dynamics implicit, specifically in the investment banking fee income line item. Clearly, there's a relationship between that fee income and how you compensate your producers. But how does the rate of growth and revenues in that line item compare to the corresponding expenses over time? How creative is it to your consolidated operating leverage?

I would say that historically, we've seen that operating margin hold in fairly well for that business, even though we've been investing in it. As we see variances from quarter to quarter, we typically see an increase in incentive compensation to about 30% of the change in revenues. And while it's not a strict formula, it tends to work out to be about that range. I would say as far as the efficiency ratio for this business, it's a little higher than what the core would be overall, but isn't too dilutive to the entire company.

Got it. That's helpful. And then separately, can you give a little bit of color on how you'd expect Laurel Road's mortgage volumes and mix to evolve in a higher mortgage rate environment?

Yeah. So, Bill, thanks for your question. So just as you step back and you look at our mortgage business broadly, Right now, about 20% of our volume is to doctors. So it's not an inconsequential piece across all of Key. Additionally, our purchase volume right now is about 50%. We're up 60% year over year. I think the MBA would say those are relatively flat. So I would expect that we'll continue to grow fairly aggressively on the purchase side as it relates to Laurel Road. And obviously, as interest rates go up, the refinance piece of it will obviously be impacted by that.

And also keep in mind our target customer for this Laurel Road business. It really is those doctors that are coming off the residency and locating to their permanent assignment. And so step one typically is to consolidate their student loans, and step two would be to buy a house. and establish more of a permanent residence. And so even if rates are going up, we would expect to see some strong purchase volume coming from that targeted customer base as well.

Got it. If I may squeeze in one last one, was the strategic rationale behind the exiting of the indirect auto lending business simply a result of your desire to focus on direct relationships with your customers? And with that sale, have you now fully exited indirect consumer lending?

So, Bill, there's no question you're correct there. I mean, we are a relationship bank, and specifically we believe in targeted scale. And if you think about that, being really focused on who you do business with and being a relationship bank, clearly the indirect auto business just is not a relationship business. And so we made the decision to exit the business, and then the transaction that we completed just recently with the accelerated share repurchase just made a whole lot of sense for us because it freed up capital, had a great IRR, and frankly enabled us to eliminate the tail risk at a time when the value of used automobiles was quite high. So that was kind of the strategic logic between exiting the business and executing the transaction we did recently. Understood. That makes a lot of sense.

Thank you for taking my questions. Sure, Bill. Thank you.

Our next question is from Ken Usden with Jefferies. Please go ahead.

Hey, thanks. Good morning. Don, just a follow-up on the swap comment. You gave that 4.6 number and talked about it, but I just want to understand the broader strategy with the swap book, the 22 now and that 4.6 billion. Just wondering just how you're thinking about either replacing some of those, and if you could remind us what the benefit was from hedge swap income in this quarter and how you'd expect that to redirect. Thank you.

Yeah, sounds good. That's The whole thought as to the size of the SWAB book is really to get to the end target as far as our asset sensitivity that we have been biasing our position to be much more asset sensitive than we typically would. We're now in our, we talk about a 6% asset sensitive position in our slide deck and that's higher where it would be traditionally. But also available to us going forward into next year is the redeployment of liquidity. So some of that will be taking out the cash position, which is a variable rate asset, low-earning variable rate asset, but still variable rate, and replacing it with long-dated investment securities. And we typically have about a four-year average life for those securities. And so we'll have to take that in consideration as to whether or not we just do more of that or we do additional replacements of the swaps. Right now, we've not been replacing any of the swap maturities, and we'll continue to reassess that going forward. So... That's just generally how we would manage the overall asset sensitivity position of the company. As far as the benefit from the swaps in the third quarter, we had about $76 million of net interest income coming from the swaps. We could see that come down slightly over the next couple of quarters. And then the question will be going forward is what happens with rates and as the short-term rates move up. you would see that number come down, but we would have seen an offsetting impact from the rates on the commercial loans going up, benefiting from those higher rates. And so that's, again, just a summary of where we're positioned today and what impacts there might be going forward.

Yeah, and as a follow-up, so if you were to just let, let's say, all of that, the 4.6 go and not replace, do you have an idea of where that 6% sensitivity would turn into?

I would say that would probably take us up as far as asset sensitivity, but I don't have the exact rate there. And one of the things we would be monitoring is just what our outlook would be for rates overall and what's the other changes in the balance sheet. So since those swaps are fairly short in duration, it wouldn't have a huge impact in overall asset sensitivity, but it's just something prospectively that we'd have to evaluate.

Understood. And if I could just ask a last clarifying one, Don, can you just give us what the total PPP income was this quarter versus last?

The total, which would include the interest on the individual loans, was $56 million, including the $45 million in fees. Last quarter, that was $69 million, including $50 million of fees. And so that's just the relative change from quarter to quarter.

Perfect. Thank you, Don.

Thank you. Next, we'll go to Matt O'Connor with Deutsche Bank. Please go ahead.

Good morning. Just a couple of follow-ups on some individual fee categories. Service charges for you guys and others are bouncing back nicely. Do you think that's obviously some seasonality and just kind of inherent recovery, but do you think it might also be a bit of a leading indicator of that some consumers are spending down their excess liquidity and could start borrowing more? Or what do you think is driving that?

Well, one, if we look at the individual balances of our retail customers, we're seeing balances maintained, if not growing across the board, even the smallest customers as far as average deposit balances. And so we're not seeing a lot of change there. I would say that, to your point, some seasonality, some activity level. We're seeing activity levels pick up, and that's driving service charges up. And more importantly for us is we're seeing household and customer growth. And we've had record growth for the first nine months of this year that exceeds what we had previously originated as far as net new households in a full year. And so we're seeing strong growth there, which also does translate to increased fee activity for us as well.

Yeah, Matt, just to give you some numbers from the first quarter of 2021, Our merchant business is up 49%. Purchase cards up 39%. Retail payments in general are up 28%. So to Don's point, there's a lot of velocity.

Okay. And then separately, the trust fees were down a little bit and flat, you know, Just what's going on there, and then remind us how much money market waivers are embedded in those results as well for when rates rise and you recover that. Thank you.

As far as the trust fee income, the biggest driver there really was commercial brokerage activity, and that was down link quarter and year over year. If you look at the core private banking revenues, those were up for each of those periods, and retail investment sales are down slightly, linked quarter because of seasonality, but up year over year. And so those are the main drivers there. And then, I'm sorry, Matt, as far as your last question, I forget what that was. I apologize.

Any money market waivers that are embedded in that line that, you know, when rates rise, you'll recover?

uh really don't have any money market uh waivers there at all we don't we don't manage any money market funds and so that really doesn't uh trip our our revenues there okay that's helpful thanks for reminding me thank you next question is from peter winter with wedbush securities please go ahead uh good morning chris i wanted i wanted to ask on on a capital um i'm just wondering what the improved credit risk

profile, the outlook for the economy is getting better. Would you consider moving the capital target maybe to the low end of nine to nine and a half or even take it below the low end?

Peter, we still believe that nine to nine and a half is the right number as we think about our business. Now, there's obviously a lot of variables. Could we be in the lower portion of nine to nine and a half? Depending on the scenario, we could, but we do not intend to lower the target of nine to nine and a half of CET1. Okay.

And then, Don, if I can ask, just in terms of the fourth quarter outlook, could you talk about the average loan growth and the net interest income excluding PPP and then also with the net interest income excluding the impact of the sale of the indirect auto?

Sure could. As far as the average loan growth, we've talked about up low single digits, up one to three percent, excluding the impact of the indirect auto. If we added on the impact of the PPP forgiveness and loan balance expectations there, that would add another $1.8 billion to the overall loan growth, so almost two percent. So that would take it from a a low single-digit to a mid-single-digit kind of growth expectation on a linked quarter basis. And so something similar to what we reported essentially this quarter. As far as the NII outlook, I would say that there's two things that are impacting NII outlook for the fourth quarter. You hit on one, which is PPP, and we would expect probably in the neighborhood of a $10 million or so type of outlook. decline in PPP revenues. The other is the indirect auto loan sale, that as a result of the sale, our net interest income will be down, but our fee income will be up. We essentially receive 75 basis points for servicing those loans, and so you will see a decline. And I have about $10 million in an increase of fee income in the range of $5 million to help offset that, and those are kind of the moving parts and pieces.

Thanks for taking my questions.

Thank you. Next, we'll go to Eric Chan with Wells Fargo Securities. Please go ahead.

Hi, guys. I have a question that relates to tech. So, you know, as you guys have retold the bank, I was just wondering if you could speak a little bit about, you know, how the role of fintech partnerships have changed for Key. And if possible, you know, perhaps you could give us a number of fintech partners that you guys currently work with.

Sure, Eric. Thanks for your question. So our relationship with FinTech partners has really been both important and helpful for us. As a bank, we were in early, and I think it's really helped us successfully execute our targeted scale strategy. Frankly, it's helped us kind of with our client service strategy, our sales strategy. It's also clearly contributed to our thinking as we developed our technology roadmap. We are clearly tied into the entire fintech ecosystem, and our unique strategy is both known and understood by the fintech community, which is helpful. Going to your question of how many relationships we have, I would say today we have probably 10 client-facing relationships. We literally have dozens of infrastructure relationships with fintechs. Because we're sort of known in the whole ecosystem, we see a lot, maybe 15 or 20 opportunities every single month that we kind of sort through. Kind of if you step back and take a look and think about kind of from a strategic perspective, our targeted scale strategy just makes us a great partner because we have such distinct client groups. And obviously, as you're developing software, that's really helpful. What we have done at Key in Laurel Road is we've built this National Digital Affinity Bank, which is a relationship approach to digital banking. What fintechs really are best at is really solving one pain point and doing it extremely well. So it's been a good relationship probably for, I can certainly say for us, and I'm sure it's been a good relationship for the fintechs as well.

Yeah, that's helpful. And then just kind of a follow-up onto that. So how do you guys determine which strategy to follow when it comes to actually building in-house or partnering with fintechs, so to say? Just kind of like on a high level, what are your thoughts there?

It starts with the client out. We are a relationship-driven bank, and so we have these distinct client groups that we're pursuing. And to the extent we can partner, invest... you know, with a FinTech that can make us more impactful in the market serving that specific client set, we will enter into some partnership, we'll invest in them. To the extent it doesn't help us compete and win in the marketplace and solve a specific pain point for our targeted customers, we take a pass. Now, as I mentioned, that's on the client-facing stuff. In the infrastructure space, we have dozens and dozens, and obviously the criteria there is Is it cheaper and faster to buy it versus build it?

Great. Thanks so much. Thank you.

Next question is from Gerard Cassidy with RBC.

Please go ahead.

Hi, Chris. Hi, Don.

Good morning, Gerard.

Can you guys give us some color? Credit, obviously, has been great for you and your peers today. You've already given us guidance for the second quarter net charge off number, which is lower than your long term numbers that you have for 40 to 60 basis points through the cycle. When do you think we start creeping up for normality? And I'm not talking about a recession, but do you think you stay at this lower level for another quarter or two and then we start creeping up later in 22 or into 23?

Let me take a pass at that, Gerard. The answer is we don't know. We've got really good clarity. Obviously, as we look into the fourth quarter, we gave guidance of 20 basis points. Interestingly enough, our results this quarter, while we report 11 basis points, it's really closer to two when you take out the 22 million that relates to indirect auto. I think we are in, I can speak for Key, I think the de-risking that we've gone about for the last 10 years is going to serve us extremely well. We won't stay at a level this low, but I actually think as we look into 2022, you're still going to see us below our targeted range of 40 to 60 basis points.

Gerard, I would agree with Chris's comments. There are a couple things to think about. One is that as far as our overall credit quality position, for many of the metrics today, we're actually better than what we were pre-pandemic. So if you look at non-performing loans, non-performing assets, the delinquency stats for consumer and commercial loans are all better than where they were pre-pandemic. Our criticized and classified are a little higher than what they were before the pandemic, but coming down dramatically. And And we've seen incremental improvements this quarter that are outpacing what we'd seen before that. And so that would suggest that things are going to be good for some time. But at the same time, I would think that you're probably going to see the consumer start to turn a little sooner. They've been the beneficiary of so much stimulus. And if that starts to slow and go away like we would expect it to, you would start to see some of that start to return to more normal levels over time as well. And then the commercial customer, while it's still flush with liquidity, but we just aren't seeing the early signs of that there's going to be some challenges down the road. And so I think that we're going to be in a period for some time where we're going to see charge-offs below the low end of guidance ranges across the industry.

I think, Gerard, one of the first things you'll see is in the small business sector, the inability to pass through what are some pretty significant price and wage increases. And I think that will be the beginning of a bit of a pressure on the commercial side, particularly with smaller customers that have less pricing power.

Very good. And as a follow-up, Chris, two things. One, when you look at your investment banking numbers, which of course were very strong, record levels $235 million, can you give us a flavor for... how does that break out, you know, M&A advisory versus DCM, et cetera, and compare that to first quarter last year. But then second, in your prepared bullets, it looked like you pointed out that you retained 20% of the business on the loans. And I thought that seemed high because normally I thought you sold 90% of it or more off. But if any of those two questions, thank you.

Sure. So, Gerard, we've never broken out each of the different components, our investment banking fees. I can tell you that our M&A business was extremely strong, and you can imagine the equity business was very strong, given that we have a focus on technology. So, those were a couple just bright spots broadly. As it relates to our mix of what's distributed and what we put on our balance sheet, it's actually been very consistent over a long period of time. We've always basically held of the credits that we take on, we've always held about 20% on our balance sheet. So we really haven't dialed that up at all. We've been just maintaining our moderate risk profile and taking advantage of what are some pretty attractive markets out there.

Great. Thank you so much. And next we'll go to John Pancari with Evercore ISI. Please go ahead.

Morning. Good morning. I appreciate the color you've given around the loan growth activity that you're seeing. I'm curious how you're thinking that interprets into 2022 in terms of the type of on-balance sheet loan growth that you could see. I was just wondering if you can give us a little bit of color on how you're thinking about that and curious how that could play into the full year. Thanks.

John, thanks for your question. We will be addressing our view on 2022 in January. But what's interesting about our model is there's a lot of variables, and depending on what the market conditions are, you could see us, going back to the previous question, you could see us maybe putting more on our balance sheet if some of the markets that are right now functioning very, very well went into dislocation. But we'll have a specific view for you when we report in January.

Got it. All right, Chris, thanks. And then separately, on the expense side, you've talked about wage inflation, and how are you thinking about what it could add to expense levels as you look at full-year expectations? I know you're not giving 2022 guidance, but around the wage inflation topic specifically, just curious about annualized expense impact, how do you think about that?

So the biggest impact to date for us has obviously been those variable structures, principally in investment banking and in our mortgage business that are driven by business flows and the fact that those businesses have grown. Your question is a good one in that we have had to, particularly at the low end of the entry level throughout Key and also in kind of the junior banker area, We have, in fact, had to increase wages there. And Don, can you give us some specifics on what the impact of that is on an annualized basis?

Well, our total salary expense each year is about $1.3 billion. And I would say that those two components probably have cost us somewhere in the range of about $15 to $20 million a year. So it's a little over a percent cost as far as the impact there overall. But it's something we'll continue to evaluate and As Chris highlighted, we're seeing that in the entry-level type of positions, and we're also starting to see some of that in other more specialty areas as well. And so we'll have to assess as we go into the next year what kind of targets we'll have as far as salary expense overall.

Got it. But that's $15 to $20 million per year. That's mainly on the lower-end wages in the junior banker areas?

You got it, yes. Got it.

Okay. All right. And then lastly, just one question around your tech side of the shop. Just curious in terms of if you can update us on the size of your tech budget and how that's been growing annually and then perhaps how much is split between growing the bank versus running the bank. Thanks.

Sure. So broadly, our spend is about $800 million a year. Of that, about $200 million is spent on development. Of the 200, about half of it is client-facing. The other half is core. One of the great things is we've been updating our core technology over a long period of time, and we actually have to spend a little less in that category, which frees up more dollars for some of the development on the front end. The other thing that we also have been doing is we've been buying a lot of niche businesses that have actually brought a lot of technology to us. Obviously, Laurel Road would be an example of that. AQN would be an example of that. And that's really tech investment that is outside of what we would think about in terms of our tech budget.

Got it. Very helpful. Thanks, Chris.

Sure.

And with no further questions, I'll turn the call over to you, Mr. Gorman, for any closing comments.

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, and we appreciate everybody's time. Thank you. Goodbye.