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Operator: Thank you, everyone for standing by. Welcome to the 2024 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp Director of Investor Relations. Please go ahead.

Brian Mauney: Thank you, operator, and good morning, everyone. I’d like to thank you for joining KeyCorp’s third quarter 2024 earnings conference call. I’m here with Chris Gorman, our Chairman and Chief Executive Officer; and Clark Khayat, our Chief Financial Officer. As usual, we will reference our earnings presentation slides, which can be found on the Investor Relations section of the key.com website. In the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning’s call. Actual results may differ materially from forward-looking statements, and those statements speak only as of today, October 17, 2024 and will not be updated. With that, I will turn it over to Chris.

Christopher Gorman: Thank you, Brian, and good morning, everyone. I’m on Slide 2. Before I hand it over to Clark to review our financial results, I want to provide my perspective on a quarter that represented significant progress for Key as we position ourselves for the future. First, we received the initial $821 million, a little less than one-third of the anticipated minority investment from Scotiabank at the end of August. We used approximately $700 million of the proceeds to reposition our securities portfolio. In retrospect, this trade was fortuitously timed. Long-dated securities were sold near recent bond market highs in mid-September, which enabled us to sell over $7 billion of market value securities out of a total available-for-sale portfolio of $37 billion.

At this point, we have fully invested the proceeds at better-than-anticipated yields. In more liquid, less capital-intensive, shorter-duration agency, CMBS. We anticipate these actions will add over $40 million to quarterly net interest income in the fourth quarter. As for the remainder of the $2.8 billion Scotiabank minority investment, we are now through the public comment period and we continue to expect to receive regulatory approval by the first quarter of 2025. Secondly, we saw the long anticipated step up in our net interest income this quarter, up 7% quarter-over-quarter. This reflected a combination of a more meaningful amount of low yielding short-term swaps and treasuries maturing as well as proactive management of our funding costs.

We also continued to grow our client deposits, up 4% year-over-year and 2% sequentially. We achieved this NII growth despite some near-term impact as a result of the Fed’s 50 basis point rate cut in mid-September. We mitigated a portion of the cut through a very proactive and disciplined deposit repricing plan, which is a testament to the preparedness of our consumer and commercial deposit teams. As a result, our beta in the initial Fed cut is anticipated to be higher than we had previously modeled and communicated. Thirdly, we continue to see strong momentum across our most important fee based organic growth initiatives. Investment banking and debt placement fees were very strong at $171 million, one of the best third quarters in our history.

Activity was broad based with volumes particularly robust across loan syndications as well as debt and equity originations. Pipelines remain at historically elevated levels despite the third quarter pull through. Pipelines are stable compared to the June 30 levels and up meaningfully compared to year end and year ago levels. M&A backlogs, which we have said in the past have a 2 times to 3 times multiplier effect were near record levels and up 10% compared to the prior quarter. At this point, I am confident we will hit the high end of our full-year target for investment banking fees of $600 million to $650 million, with an opportunity to exceed the high end if our pipelines pull through prior to year-end. Again, assuming markets remain hospitable.

In commercial payments, leveraging our focus on primacy, commercial deposits were up 5% year-over-year and 2% sequentially. As a reminder, 93% of these balances are tied to an operating account. Underlying core treasury service activities remain strong, growing in the low-double-digits. We believe we are well positioned in this area to benefit as rates continue to decline. Our third-party commercial mortgage servicing business posted a record quarter due to a small portfolio acquisition over the summer. Additionally, active special servicing balances reached a record $7.5 billion. As a reminder, this is a countercyclical OFF-US business that also provides us with unique insights into the commercial real estate market. We are currently seeing high rates of transfers into special servicing concentrated on OFF-US and to a lesser extent multifamily, even as we have also seen resolutions accelerate as we move through the year.

In wealth, assets under management reached an all-time high of $61 billion, up 16% from the prior year. Sales production was a record this quarter and we are on track for a record year. While the entire wealth business is performing well, we continue to see particularly strong traction in our mass affluent segment. This quarter, we enrolled an additional 5,000 households and added $620 million of assets to the platform. In only 18 months, we have added over 36,000 households and about $3.6 billion of new household assets to Key. As a reminder, over 1 million of Key’s retail households have investable assets of over $250,000 and only about 10% have an existing investment relationship with us. So there remains a significant opportunity to continue to grow in the mass affluent segment.

Lastly, with respect to credit, we continue to demonstrate a conservative derisked credit profile. Nonperforming assets and loans as well as provision for credit losses were essentially flat. Net charge-offs as expected were up and reflected a few specific C&I credits that were known and had been mostly reserved against. Importantly, criticized loans declined by $132 million. We also saw a marked improvement in our net credit upgrades to downgrades trends, which while still slightly negative moved back to our trailing 13-quarter average. We believe that NPLs are peaking and criticized loans will continue to decline from current levels. In summary, I am proud of the significant progress we made as a company this quarter. We announced the strategic minority investment from Scotiabank closing on the initial one-third tranche a few weeks later.

We deployed most of that successfully completing one-half of our anticipated securities portfolio restructuring. At the same time, we continue to drive broad based momentum across the franchise, grew our pipelines, delivered the first meaningful leg of the uplift in net interest income that we’ve been communicating over the past year and took proactive actions across the deposit books to prepare ourselves for the rate cuts, all while continuing to demonstrate a strong credit risk profile. As a result, despite the onetime impact of the restructuring, we improved our CET1 ratio this quarter by another 35 basis points to 10.8%. With that, I’ll turn it over to Clark to provide more details on our financial results.

Clark H. I. Khayat: Thanks, Chris, and good morning, everyone. I’m now on Slide 4. In the third quarter, we reported earnings per share of negative $0.47, including $0.77 impact from the previously disclosed securities portfolio repositioning. Excluding the repositioning, EPS was $0.30 per share. As Chris mentioned, in mid-September, we sold roughly $7 billion market value of mostly long dated CMOs and CMBS, which had a weighted average yield of about 2.3% and an average duration of almost six years. And at this point, we have reinvested all of the proceeds, mostly in October when we saw term rates rise by 30 basis points to 40 basis points. As a result, we will see roughly 260 basis point yield pickup on approximately $7 billion of securities starting in the fourth quarter.

The new securities will also provide liquidity and capital benefits relative to what was previously owned. As a reminder, we currently contemplate doing a similar magnitude repositioning upon receiving the second tranche of the Scotiabank investment, assuming we get Fed approval. Reported revenue was down approximately 55% sequentially and from the prior year, but excluding the securities repositioning, revenue was up 6% sequentially and up 3% year-over-year with growth across both net interest income and fees. Expenses remained well controlled, down 1% compared to the prior year, a little better than we previously expected. This implies about 400 basis points of positive operating leverage on a year-over-year basis, excluding the securities portfolio repositioning.

Credit costs were essentially flat to the second quarter and included a $60 million release of our allowance for credit losses, reflecting primarily three charged-off credits that had specific reserve allocations held against them as well as lower loan balances. Our common equity Tier 1 ratio increased to 10.8% and tangible book value increased nearly 16% sequentially. Moving to the balance sheet on Slide 5. Average loans declined 2.5% sequentially to $106 billion and ended the quarter just above $105 billion. The decline reflects continued tepid client demand, flat utilization rates, our disciplined approach as to what we’re willing to put on the balance sheet and the intentional runoff of low yielding consumer loans as they pay down and mature.

Additionally, we built the business to be able to serve clients with on and off balance sheet solutions, whichever works best for them. This quarter, we raised $28 billion of capital for our clients. And as Chris mentioned, we had a very strong quarter of investment banking fees. At the end of the third quarter, we warehoused approximately $600 million of loans for commercial clients that you can see in loans held for sale. Additionally, throughout the quarter, we refinanced about $300 million of CRE loans off our balance sheet into permanent mortgages through our capital markets group. We continue to have active dialog with clients and prospects and our loan pipelines continue to build. On Slide 6, average deposits increased 2.5% sequentially to nearly $148 billion, reflecting growth across consumer and commercial deposits.

Client deposits were up about 4% year-over-year as we managed broker deposits down by roughly $2.2 billion from year ago levels. Reported noninterest-bearing deposits declined 1% to 19% of total deposits and when adjusted for noninterest-bearing deposits in our hybrid accounts, this percentage remained flat linked quarter at 24%. Both total and interest-bearing deposit costs increased by 11 basis points during the quarter. 7 basis points of the increase reflected reduction of roughly $4.5 billion of FHLB funding yielding almost 5.6% that was replaced with lower cost client deposits. Our overall interest-bearing costs increased just 1 basis point this quarter. As Chris mentioned, we’ve been proactive across our deposit book in preparation for the Fed easing cycle that we all anticipated would begin last month.

Ahead of the cut, we shortened CD tenors and took promo rates down. And on the commercial side, we moved significant amount of deposits into indexed accounts. Following the cut, we took rates down further across both front and back book in consumer. In commercial, we effectively passed along a majority of the cut to clients. Our deposit beta on the first rate cut is expected to be low to mid-30s, which would benefit our fourth quarter net interest income. Moving to net interest income and the margin on Slide 7. Tax equivalent net interest income was $964 million, up 7% or $65 million and the net interest margin increased 13 basis points from the prior quarter. Our well communicated net interest income opportunity is now providing more benefit as a greater portion of low yielding short-term swaps in treasuries mature.

Scotiabank investment and our mid-September securities portfolio reposition added roughly $12 million and about 2 basis points to third quarter NII and NIM respectively. Turning to Slide 8, reported noninterest income was negative $269 million and included a $918 million loss related to the securities repositioning as well as a $14 million Visa related charge. Adjusting for those items, noninterest income was up 3% year-over-year. Investment banking and debt placement fees increased over 20% from the prior year and 36% from the prior quarter, reflecting a strong quarter for syndication debt and equity underwriting fees. Commercial mortgage servicing had a record quarter, reflecting higher active special servicing balances and growth in the overall portfolio.

At September 30, we serviced about $690 billion of assets on behalf of third-party clients, including about $230 billion of special servicing, $7.5 billion of which was in active special servicing. Given lumpiness of some of these fees and as interest rates come down, we would expect fourth quarter commercial mortgage servicing fees to look more like the second quarter. Trust and investment services fees grew 8% year-over-year as assets under management grew to a record level of $61 billion. On Slide 9, second quarter noninterest expenses were $1.09 billion, up 1% quarter-over-quarter and down 1% year-over-year. On a year-over-year basis, higher personnel costs were more than offset by lower fraud losses, marketing expenses and a modest reduction in the estimated FDIC special assessment charge.

Sequentially, the increase was driven by higher incentive compensation from stronger investment banking fees. Moving to Slide 10, credit quality remained solid. Net charge-offs were $154 million or 58 basis points of average loans and 90-day delinquencies ticked up a few basis points. Net charge-offs were elevated due to three credits, two consumer goods companies and one equipment manufacturer that were largely reserved for. Nonperforming loans and assets were essentially stable, up 2.5% and 2% respectively compared to the prior quarter. NPAs as a percentage of loans remain low at 70 basis points. Criticized loans declined by 2% in third quarter, reflecting lower rates and increased loan modifications with credit enhancements. We believe NPAs are peaking and criticized loans will continue to decline from here, assuming no material macro deterioration.

Turning to Slide 11. We continue to build our capital position with the CET1 ratio up 35 basis points to 10.8% as of September 30. Our marked CET1 ratio, which includes unrealized AFS and pension losses improved nearly 130 basis points to 8.6%. Our AOCI improved by about $1.9 billion to negative $3.3 billion at quarter end, reflecting lower interest rates and the securities reposition in mid-September. We expect AOCI to further improve by about one-third by year end 2025 and about 40% by year end 2026, with approximately half of that improvement reflecting a second contemplated securities portfolio repositioning once the full investment from Scotiabank closes. Slide 12 provides our outlook for full-year 2024 relative to 2023. We currently expect net interest income to fall in the middle of the full-year guidance range of down 2% to 5%, albeit with about 150 basis points of positive impact from the Scotiabank investment and the securities portfolio restructuring this past month.

Net interest margin should come in around 2.4% for the fourth quarter. We are tweaking our year end loan forecast by 1% to down 5% to 6%. We are also positively revising our average deposit guidance to up 1.2% to 2%, including expectations for client deposits to grow by 3% to 4%. We now expect fees, excluding this past quarter’s securities portfolio restructuring to grow 6% or better this year, depending on how the capital markets environment plays out in the fourth quarter. Given the strong fee momentum and our higher stock price, we expect expenses to be up approximately 2% this year. This also includes the funding of our charitable foundation. As we previously communicated, we expect the full-year net charge-off ratio to be closer to the high end of the 30 basis point to 40 basis point range given lower loan balances than we had expected coming into the year.

For the full-year, we expect provision for credit losses to come in around $400 million, which is unchanged from what we’d expected back in January. Moving to Slide 13. The last time we are updating the net interest income opportunity from swaps and short dated treasuries maturing as we sold the remaining roughly $3 billion of treasuries yielding 50 basis points that were to mature in the fourth quarter at the end of September, meaning we now expect the final chunk of benefit from this opportunity to come in the fourth quarter. The cumulative annualized opportunity ended up being about $830 million, of which 80% has been achieved to date. Finally, on Slide 14, we’ve laid out for you the path of how we intend to get from the $964 million of reported net interest income in the third quarter to the fourth quarter exit rate that we had targeted at the beginning of the year.

Regardless of whether the Fed cuts 50 basis points or 75 basis points in the fourth quarter, we believe fourth quarter NII will be at least 10% higher year-over-year, which equates to $1.20 million or better in the fourth quarter. We expect about $40 million of incremental benefit from the September portfolio restructuring and initial tranche investment from Scotiabank. We expect another $50 million or so of benefit from fixed rate asset repricing, including from the accelerated sale of short-term treasuries I just described. We also think we can drive a modest amount of commercial loan growth and some further funding optimization, offset by some short-term impact from the expected Fed rate cuts. While fewer cuts would be better for fourth quarter NII, that is largely a timing impact.

Keep in mind that we would expect to capture more benefit of any rate cut over the ensuing 6 to 12 months. And rate cuts would likely provide benefits to other parts of our business, such as higher client transaction activity, more demand for credit and improvements to capital. With that, I will now turn the call back to the operator who will provide instructions for the Q&A portion of our call. Operator?

Operator: [Operator Instructions] And one moment please for your first question. Your first question comes from the line of Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers: Thank you. Good morning, everybody. Thanks for taking the question.

Christopher Gorman: Good morning. Hi, Scott.

Scott Siefers: I think you might have touched on this. Hi. You might have touched on this a bit towards the end of your remarks, but there’s been so much movement in your balance sheet over the last 90 days, not only the new capital and the repositioning, but now it looks like the funding profile is starting to look a little different with the improved deposit outlook as well. Maybe just some thoughts on the updated rate sensitivity of the company as a whole? And as you look at things, what would be sort of best and worst that you would like just in terms of what happens with the rate path?

Clark H. I. Khayat: Hi, good morning, Scott. Thank you. So look, we’ve been moving towards rate sensitivity. That’s obviously often viewed over kind of a 12-month period. So the — as all of us in the industry have talked about, the early cuts take a little bit of time to work their way through. Particularly on the deposit side, as we noted, we took a little bit more deposit action than we had previously planned, betas kind of low-30s or so, which we were very happy with. And we think over the course of 2025, we’ll be able to get back to more standard beta paths over time. I think on the overall rate profile, look, I think the best version of the world is the one we appear to be headed in if a soft landing is coming, which is a steepening curve right now.

We got some rally in the term rates. So nearing again 4%. We all think the front end is coming down. So something that’s flat to upward sloping, I think is the best profile for all of us. But on the flip side, I think we took some actions, as you noted, in getting out of higher cost wholesale funding, we funded that with deposits at a lower cost. We feel really good about that deposit base and the customer profile. We feel good about our ability to price that over time. And given that the swaps positions are coming off, we feel better just about our overall rate sensitivity. The other point I’d make is, we had a little bit of concern on the repositioning early just given the amount of cash we thought we’d be holding for potentially an extended period of time.

Obviously, that cash is pretty asset sensitive. So as those rates come down, that impacts us. And we were able to get all of that into the market in the last few weeks when rate — those term rates did rally and we did it at better-than-expected value. So that’s obviously going to help our rate sensitivity position going forward and we put that — those proceeds in kind of 490, 495 range in a duration that’s just under four years. So we felt very good about that repositioning. And that will — again, that will aid us going forward.

Scott Siefers: Yes. Perfect. All right. Thank you for that color. And then sort of related one. I think last month, you all had discussed an NII improvement next year in kind of the 20% plus range. I think that was before you were fully invested because if I’m recalling the timing correctly, that was when you had just announced the repositioning. So the actual investment, probably a little better than you thought, which presumably should be helpful. But I guess the rest of the question is just — we still thinking 20% plus NII improvement next year. And maybe just if you could expand a little on the sort of the main puts and takes to get there in your mind?

Christopher Gorman: Sure. So I’m going to start with a couple of qualifiers because I feel like that’s necessary. The first being a constructive macro environment kind of soft landing as folks expect. So that’s point one. Point two is, we’re in the middle of planning for next year. So we’ll give our full guidance here in January. But on the 20%, I’d say roughly half of that we think comes from the incremental impact of the repositioning. So assuming and this would be the other qualifier, assuming the second leg of this gets approved and we can do the repositioning early in ’25, so we can get the full-year impact of that. We think about half of that lift comes from the complete repositioning at completion. So that’s part of it.

The other components would be continued fixed price — fixed asset price — repricing through the course of the year, and that’s a combination of some swaps, not the ones we’ve been talking about, but some additional swaps still at rates kind of below 2%. We’ve got a consumer book that’s running down at rates like 3% and then we’ve got some other fixed rate securities that are a little bit higher that won’t be as valuable as they would have been previously with rates coming down. But we do have some continued opportunity there. And then the last piece, the last two pieces, and I’ll finish with the most important one, we do have at this point and again subject to change as we get through our planning process, relatively a view on relative stability of loans through 2025, but recall that, that is a mixing of consumer coming down and being replaced with commercial.

So we will need some commercial growth, not herculean efforts, but something. Our pipelines would tell us that should be coming, but in fairness, it’s been telling us that for a quarter or two. So we’ll see how that transpires. And then the most important piece is just continued ability to manage betas. We’ve talked a lot about how the commercial book is positioned. We’ve actually improved that throughout the year, getting more deposits into indexed. We think the use of our hybrid accounts and the treasury — core treasury services that are covered by deposits there will be a benefit as well. And we’ve taken some action in the consumer book that would give us confidence that we can get betas to the right level throughout the course of 2025.

So all those components kind of make up the other half of the 20. And at this point, we feel good that that’s achievable, but we owe you a more detailed explanation when we come back-in January.

Scott Siefers: Perfect. All right, good. Thank you very much, Clark.

Clark H. I. Khayat: Yup.

Operator: Your next question comes from the line of Mike Mayo from Wells Fargo. Please go ahead.

Mike Mayo: Hi.

Christopher Gorman: Hi, Mike.

Mike Mayo: Chris, you talked about M&A backlogs are up 10% quarter-over-quarter and what’s the change now? Why — we’ve seen this at the big players. And also, we’ve heard there’s a little debate on is the capital markets activity taking away from loan growth or is — are they separate? Are you seeing some disintermediation from lending to capital markets as it relates to KeyCorp? Thanks.

Christopher Gorman: Sure. Thanks for your question. I think the fundamental difference is the private equity universe is really starting to transact. I think they have a perspective, obviously, there is an inverse relationship between the whole period and the returns. And in addition to that with the 10 year, which is really what matters, sort of settling in somewhere around 4%, that is — that’s in an environment where I think the private equity world is very comfortable transacting. And as a consequence, I think you’re really starting to see a pickup on the M&A side. And I think that will continue, by the way. With respect to the disintermediation, there’s no question that it is. I mean, Mike, we raised $28 billion last quarter and we have a pretty good eye on this because we’re distributing a lot of paper in a lot of places.

And there’s no question in my mind that some of the capital markets activity does in fact disintermediate the banks. And I think the private capital, private credit markets do as well. And of course, we distribute paper to all those places.

Clark H. I. Khayat: And the only thing I might add to that, Mike, just a couple of specific examples, and we touched on this, but about $0.5 billion of loans we put directly into our warehouse. They’re on their way to the markets. And then another $300 million we refinance off the balance sheet into the market. So that’s always been our model. And we’ll continue to do what makes the most sense for clients. And I think you saw that this quarter in our strong investment banking fees.

Mike Mayo: And just a follow-up on the private equity comment. You said the private equity universe is starting to transact. I got the sense they’re deploying some of the dry powder, but not necessarily monetizing the investments, but you get different stories depending on who you ask. How much of your business is driven by private equity? And how do you see the private equity factor playing out because you’ve never had this much dry powder in a cycle like this? Thanks.

Christopher Gorman: Sure. So I think broadly, the private equity universe represents about a third of all the fees that are paid in the investment banking arena. Our mix wouldn’t be much different and your observation is good in that the private equity firms that are putting product out into the market, that’s a process that takes 12 months or so as opposed to buying businesses that are available, which is relatively — there’s a shorter timeline on that. Thanks for your questions, Mike.

Mike Mayo: All right. Thank you.

Operator: Your next question comes from the line of Gerard Cassidy from RBC. Please go ahead.

Gerard Cassidy: Hi, Chris. Hi, Clark.

Christopher Gorman: Hi, Gerard.

Clark H. I. Khayat: Hi, Gerard.

Gerard Cassidy: Chris, you mentioned in your opening remarks about the special servicing. I was curious or perked my interest, you mentioned how there seems to be an accelerated resolution to the inflows that may have come in six months ago or three months ago. Can you give us any color on how that resolution is going? Is it big price discounts and then being refinanced or what are your guys seeing on the resolution side to move these properties out?

Christopher Gorman: So it’s a combination of things, Gerard. If you go to the office market, frankly, there’s just some capitulation because there has to be and things are starting to trade, albeit at a significant discount. Not a lot of new capital coming in, frankly to the office market. I can speak to that in greater depth in a moment. On the other hand, with respect to multifamily, and we’ve said before, most of the multifamily projects that are in special servicing are concentrated in the Southeast. Most of them frankly are not financed by banks. Most of them were done relatively recently with some very aggressive assumptions, i.e., trending rates, having sub-debt in them, et cetera. In those instances, we are able to attract new capital on a restructuring basis. So it’s a little bit different for office vis-a-vis multifamily.

Gerard Cassidy: Very good. And then you guys talked about the outlook for loans or what you’re experiencing in loans and we’re seeing from the H8 data that comes out on Fridays that it seems like commercial and industrial loans have hit a bottom and are starting to creep up a bit. Any sense that you might be seeing that soon as well? Or is it just some of your — where you’re physically located in your customers is still going to be flat for flat to down, I should say, over the near-term?

Christopher Gorman: So there’s a few things going on. And first of all, we are without question growing clients. So there’s no doubt that we’re out there bringing on new clients. We have been obviously a bit frustrated by the lack of take up of our existing clients in terms of borrowing money. And I think what’s going on, Gerard, is a few things. On the positive side, I mentioned to Mike, there is transactional finance happening. So that’s a positive. On the negative side, you just have supply significantly exceeding demand. On the demand side, here’s some of the things that we need to see before we get significant growth from our existing customers. One, there hasn’t been a lot of investment in CapEx and that has typically a lead time of about 18 months based on all the uncertainties.

The next thing is utilization. And this one is a complex one. Everyone basically went long on inventory during the pandemic because there was a lot of inflation and there were supply chain issues. Now people are getting back to really managing their working capital. And I assume, obviously, rising rates has something to do with that as well. So I think there’s just been a fundamental adjustment there. So we do see it coming back. We see it coming back first on the transaction side. We’ll see it next, I think, on our clients engaging in CapEx. And I think the last piece that will happen is to really get a kick in utilization because for all the reasons I just described, these companies are throwing off a fair amount of cash as they get sort of top line declines and all the other things in the mix.

Does that answer your question, Gerard?

Gerard Cassidy: No, it does. It’s good, Chris. Just one real quick. You guys in the past have always had a comment or two on student lending. Any changes here in rates coming down a bit on your student lending platform?

Christopher Gorman: Yes. So that is an upside for us as rates continue to come down. We basically had a negligible amount of originations in the last quarter in our student loan business. We think a decline of 100 basis points to 150 basis points will get that business back to ramping up. To state the obvious, every quarter, every semester, there’s a bunch of new customers at different levels. But clearly with the hiking cycle, it’s going to take a while to work through that.

Clark H. I. Khayat: And we’re still peeling off the moratorium. So people are just getting used to paying their student loans again or maybe not yet used to paying their student loans again. So there’s probably a little bit of transition and just seeing that sticker shock a little bit and then going out and figuring out if there’s a better alternative.

Gerard Cassidy: Great. Thank you.

Operator: Your next question comes from the line of John Pancari from Evercore. Please go ahead.

John Pancari: Across the business, and so those are relatively good underlying drivers to get to the number you’re talking about without being —

Christopher Gorman: Hi, John. [technical difficulty]

Unidentified Company Representative: So that’s helpful. Thank you. And on the expense run rate, I think —

Christopher Gorman: Operator, can you move to the next.

Operator: Okay. Next we’ll go to the line of Matt O’Connor from Deutsche Bank. Please go ahead.

Nathan Stein: Hi, everyone. This is Nathan Stein on behalf of Matt O’Connor. So you talked about the rise in C&I net charge-offs this quarter, which were from the three credits that had been previously reserved for. I wanted to ask what industries were these loans in? And we saw the updated charge-off guidance for full-year ’24, but are you expecting other similarly sized losses in the coming quarters?

Christopher Gorman: So Nathan, this is Chris. So specifically the three credits, two of them were in consumer products. One of them was in equipment manufacturing having nothing to do with consumer products. So those were the three credits. Each had their own idiosyncratic issues that I don’t think you can get a huge read through on broad industries on those.

Nathan Stein: Okay, thank you. And then if I could just ask a question on the NIM. You flagged a 2.40 level in 4Q, just given all the moving pieces. I think in September, you guys had flagged a 3% NIM with just assuming a steeper yield curve down the road, not necessarily next year, but could you provide your updated thoughts on the long-term NIM just given the move in rates over the past few weeks and everything else going on at Key. Thanks.

Christopher Gorman: Well, Nathan, I think from a broad perspective, what we’ve said is and there’s obviously a bunch of puts and takes in this. We’ve said that based on our business model, there’s no reason by the end of 2025, we can’t be in a range of 2.8% to 3%. And obviously, we’re looking at different models every single day, but we still feel very comfortable with that.

Nathan Stein: Thank you.

Operator: Your next question comes from the line of Zach Westerlind from UBS. Please go ahead.

Zach Westerlind: Hi, good morning. This is Zach on for Erica. My question is just around deposit betas. We saw a decent uptick in the cost of interest-bearing deposits this quarter. Just kind of wanted to get your thoughts on how you’re thinking about the trajectory for that deposit beta going forward?

Clark H. I. Khayat: Yes, sure. So maybe just get to the quarter movement first and then transition to beta. So up 11 basis points, interest-bearing deposit costs in the quarter. 7 basis points of that was an intentional move into higher cost deposits, but deposits that were lower cost than wholesale funding. So we paid off about $4.5 billion of FHLB advances at a higher rate and I think the more important number versus the 11 basis points on deposit costs is overall funding costs only up a basis point. So at the end of the day, what we’re managing is the overall funding costs and obviously, deposits are a critical part of that. As it relates to betas, we had expected something in maybe low to mid-20s on the first cuts. We are expecting to be closer to low to mid-30s potentially.

Some of that is we just leaned into different portfolios a little bit more aggressively than we thought we could because we felt comfortable that we understood the dynamics of those. The other piece is the 50 basis point cut in September gave us a little bit more room to take action. If that had been 25, I think you would have seen a lower beta on that first cut. So as we say pretty frequently, I think the not only absolute level of rates, but how much they’re moving on any one cut tends to impact how much beta you can see as a reaction to that. So the 50 basis points on a net basis and creates a little bit more drag in 2024, but it also gave us the ability to take a little bit more aggressive action on deposit pricing.

Zach Westerlind: Helpful. Thank you. And just as a follow-up to that, on the noninterest-bearing deposit front, any color that you can share on that in terms of when you think that we’ll reach a bottom there or pivot to growth? Any thoughts there would be helpful. Thanks.

Clark H. I. Khayat: Yes. So maybe just a reminder there too. So our reported number shows down a tick around 19%. Recall that we used pretty actively a hybrid account for our commercial clients that has a fair bit of noninterest-bearing deposits in it. If you adjust for those, which we think is appropriate, you get pretty flat at 24% quarter-to-quarter. So I think in aggregate, it’s starting to stabilize. We would expect with rate cuts that it’s going to be stable. And if the rate cuts continue, we would expect it to potentially start to tick up. And some of that is frankly the way those hybrid accounts work. So over time, we were thinking this is at or near the bottom of that percentage.

Zach Westerlind: Great. Thanks for taking my questions.

Clark H. I. Khayat: Sure. Thank you.

Operator: Your next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.

Manan Gosalia: Hi, good morning.

Christopher Gorman: Good morning.

Clark H. I. Khayat: Hi, Manan.

Manan Gosalia: Hi, I apologize if this has already been covered. But can you talk about expenses for 2025? Just given that you have a lot more capital to work with now. I mean, growth should be accelerating next year. You have some investment spend to make, plus you have been pretty good with managing expenses over the past few years. So just given all of that, how should we think about expenses in 2025?

Christopher Gorman: Sure. Fair question. We’re obviously going through the planning cycle now. But I’ve mentioned before and this won’t change. We will be targeting kind of low to mid-single-digits for 2025. Our discipline around expenses won’t change in spite of the fact that we’re going to obviously have a significant amount of capital. You do see in the fourth quarter and we gave guidance on this that we’re investing a little bit in the fourth quarter and that’s really just some unique opportunities that we have to kind of advance the business in light of the tailwinds that we’re picking up from both on the rundown of our swaps and treasuries and also the repositioning of the balance sheet that Clark walked everyone through.

Clark H. I. Khayat: So the — maybe one additional point, just I think is embedded in Chris’ comment, but I just want to make it explicitly, Manan, which is we would tell you not to annualize that Q4 number going into ’25. I don’t think that’s appropriate. As Chris mentioned, we’re leaning into higher fee growth. So we’re going to see incentive comp go up a bit, stock price is a little bit higher. We’ve got some unique investment opportunities we’re assessing in the fourth quarter that we’re interested in taking to get a head start on ’25. But I think the underlying point that Chris made is worth repeating, which is we don’t see the benefit of higher earnings or the investment as a path to losing our expense discipline here.

Manan Gosalia: Perfect. And then I appreciate the comments on the near-term deposit betas. But wanted to get your thoughts on just longer-term as you think through the cycle, should deposit betas on the way down match deposit betas on the way up? Or given that loan growth will be stronger this time than it was when deposit — when rates were going up, will deposit betas likely be a little bit slower through the cycle?

Clark H. I. Khayat: Yes. Great. It’s a great question with no simple answer because you hit a bunch of the moving parts. So subject to funding needs on the balance sheet that obviously drives the requirement to have deposit balances, which in effect then hit your pricing. What I would say maybe more broadly is, I think the absolute level of rates matter and the amount of movement in rates matter. So if we hit kind of peaked at mid-50s, 56%, I think, beta on the way up, I think that’s more than probably you would have expected at the beginning of the cycle, but it’s also a function of rates moving up over 500 basis points off of zero. So your relative starting point zero, you’re moving up by 550 basis points. That’s a huge move and you’re getting obviously to that 5% level.

I think on the way down, I would expect it to be somewhat parallel, but probably not getting to the mid-50s. Maybe it’s a 50 number because you’re not likely to get back to zero unless some exogenous event occurs. So if we hit some terminal rate path that’s 2.5%, 3%, I think you’re going to see beta deployed and beta deployed over time fairly aggressively, but I don’t think you get to the same levels just because the magnitude of the change is 50% to 60% of the way up. And that — then you have to account for the other element, which is loans and required balances for funding.

Manan Gosalia: Got it. Thank you.

Operator: [Operator Instructions] Next, we’ll go back to the line of Mike Mayo from Wells Fargo. Please go ahead.

Mike Mayo: Hi. Can you comment on the increase in NPLs a little bit more? Is that — like how many credits is that? Is that a trend? Is that something that you guys are worried about? Was that unexpected? Thanks.

Christopher Gorman: Yes. Mike, it’s Chris. We think that’s sort of peaking. There’s nothing in particular, it’s kind of broad based. And as we said in our opening comments, we don’t think it’s material or reflect. I don’t think there’s any read through from that.

Mike Mayo: So next quarter, we shouldn’t expect anything like that is what you’re saying.

Christopher Gorman: Well, I think NPLs will be pretty flat as we go forward. I mean, that would be what I would assume for your models.

Clark H. I. Khayat: If you’re talking NCOs, Mike, the three credits, then yes, we don’t expect that to recur the benefit to the extent there is some there is that those were almost entirely reserved and that was a big portion of the release as well.

Mike Mayo: And then one last cleanup question. So you had already thought that NII would be 20% higher next year and then you sold $7 billion of the securities near high. So I assume you got a nice yield pickup. So better lucky than smarter, maybe it was — maybe you have some great timing there. But so why wouldn’t that 20% number or the increase in NII in 2025 versus 2024 go higher because of that fortuitous investing of those securities?

Clark H. I. Khayat: Yes. So I’ll take lucky or good either. But the — just to remind you, Mike, the 20% that we shared contemplated the repositioning. So what we’re talking about is marginal improvement on the reinvestment. We’re really happy with where we did it and we took advantage of that pickup in rates, but that’s relative to maybe it’s a handful of basis points better, not that 20% wasn’t — had already contemplated the repositioning of that portfolio. So again, I think —

Christopher Gorman: Still in fact contemplates the second piece.

Clark H. I. Khayat: Yes, correct. So it is a marginal benefit, which we’ll take, but it isn’t the entire magnitude of that trade that is added on top of the 20.

Mike Mayo: Got it. Thank you.

Clark H. I. Khayat: Sure.

Operator: Your next question comes from the line of John Pancari from Evercore ISI. Please go ahead.

John Pancari: Good morning, and sorry about the technical problems earlier.

Christopher Gorman: Not a problem. Good morning, John.

John Pancari: Good morning. A couple of real quick questions. On the capital markets revenue side, I know you flagged some very solid pipelines in building pipelines there and your expectation to hit the high end of the 600 to 650 guide. Chris, I know when you’ve had this type of confidence in the past, you actually called out the likelihood of a — of a record year the following year as well. I believe you did that last year. Could you maybe provide your thoughts on 2025 here and just given the progression you’re seeing, maybe how we see that playing out in terms of your capital markets revs as you look at heading into ’25.

Christopher Gorman: Yes. Fair question. So clearly sort of embedded in our guidance for 2024, if you kind of do the math is another step up in the fourth quarter, maybe $180 million or so, if you kind of just back into it. I feel good about the trajectory. I think if we continue to have this kind of an environment where rates are stabilizing and people are able to transact, I’m optimistic about 2025. We’ll give more guidance on that, John, when we gather after the end of the year. But I think you should assume that a lot of these pipelines have pretty long tails. And so we should run — we should go into 2025 with a fair amount of momentum.

John Pancari: That’s helpful. Thanks, Chris. And just two more quick ones. On the loan growth front, I believe you mentioned relative stability as you look into 2025, given the trends you’re seeing given consumer likely declining, but commercial increases. Are you able to give us a better idea of the piece of growth that you think is reasonable? And what type of growth more specifically on the commercial side do you think that can help offset consumer pressure?

Clark H. I. Khayat: So we’ll provide a little bit more color there, but just maybe broadly think about consumer loans coming down $2 billion to $3 billion in a year just by natural kind of maturity and paydown. Now that could change based on rate levels and mortgage markets, but that’s kind of a decent rule of thumb there. And as it relates to where we would see some pickup in commercial, I’ll make a couple of comments and then Chris can add on to it. But in places where we have demonstrated strength and I think mostly of like affordable and renewables, which are tend to be project transactions, they tend to be construction in nature. So they build through time and then we perm them out in some form. Those I think are places where we’re starting — in affordable, we’ve been pretty consistent, but we’re seeing pick up there.

I think the opportunity to build that over time. And those loans do take time to materialize just because they are large projects. They do build from a draw standpoint before they’re ready to be fully drawn and sold. So those are two places where I just continue to feel confident about our abilities and the market. But there’s some broader based opportunities I think as well.

Christopher Gorman: Yes. The only thing I’d add, Clark, as I mentioned earlier, I think the transaction business will generate loans because that’s picking up. It’s sort of the wildcard that all of us are watching is what’s going to happen with our existing client base in terms of really investing in CapEx and what’s going to happen with utilization. And I think that’s just a watch point for all of us.

John Pancari: Got it. Thanks, Chris. I do have one last one, sorry about that. On the loan loss reserve you did on a loans to — on a reserve ratio basis, you did bleed the reserve modestly this quarter. Can you perhaps provide us a little bit of thoughts around the potential for incremental releases here as you see credit playing out given the economic outlook?

Clark H. I. Khayat: Look, so we view — you’re right, 3 basis points, I think, down on the ACL, so pretty stable. We’ve built it up quite significantly over the last several quarters. I think if you did a loan kind of portfolio by portfolio mix, it might dictate that we’d be — we could even be lower. But right now, we’re still looking at — we’re being cautious around migration and where some of the late cycle pieces of this are taking us. I think if rates continue to come down. And as Chris noted, the environment remains constructive that may give us some opportunity. But right now, we feel like stability is probably the right place.

Christopher Gorman: I mean, John, there’s really three things that drive these. One is your view of the macro and you obviously have a perspective on that. The next is sort of idiosyncratic. And obviously, if we were aware of idiosyncratic things, we would be — as we aggressively took on the three loans that we talked about today, we’d be moving on those. And the third element is the size of the book. So those are kind of the three elements. And so if you think about each of those three, obviously, it begs the question of where should the reserve be and we’ll continue to evaluate it.

John Pancari: Great. Thanks, Chris. Appreciate it.

Operator: Your next question comes from the line of Peter Winter from D.A. Davidson. Please go ahead.

Peter Winter: Good morning. I wanted to follow-up.

Christopher Gorman: Hi. Peter.

Peter Winter: I wanted to follow-up on John’s questions on the loans just for the fourth quarter. You didn’t change the full-year guidance for the average, which would imply that there’s going to be some decent growth in the fourth quarter. And I was just wondering if you could talk about maybe just what you’re expecting for fourth quarter loan trends?

Clark H. I. Khayat: Yes. So I mean, we took the ending point down a bit. I think that will take us to the overall kind of lower end of the average guide. Look, I think we’re expecting some stability on the loan side at this point, not a huge amount of growth, I’d say some modest growth. But whether or not we get that, I don’t think really impacts our view on NII in the quarter, we’d obviously like to start seeing some loan growth. So at this point, I’d say it’s more stabilizing than it is really picking up.

Peter Winter: Okay. And then, Chris, if I could just ask one big picture question. Obviously, you’re getting the second tranche of the investment from Scotia, the focus would be the securities restructuring along with organic growth. But just with — now that you’ve built up your capital levels, just can I ask how you think about bank M&A going forward?

Christopher Gorman: Sure. So the premise of your question is right. So think about us raising $2.8 billion and we basically in the aggregate spend $1.4 billion on the restructuring, then we have an additional $1.5 billion. And on a pro forma basis, I think you’ll see our CET1 at, say, 12% and you’ll see our marked CET1 at, say, 10%. So clearly, we’ll have dry powder that be able to — if there’s dislocation in the market, we’ll be able to take advantage of that. We’ll probably run with a little higher capital on just in the near-term until there’s finalization of the Basel III endgame, the liquidity rules, the long-term debt. But I do believe, Peter, that there will be consolidation in our industry. There certainly hasn’t been for all the reasons that you are well aware of.

I think last year, there were three significant deals completed. My experience with consolidation is when it happens, it happens kind of in waves. And clearly, with this additional capital, I think we’d be well positioned if and when that were to happen. It’s not something we’re focused on now, however.

Peter Winter: Got it. Thanks for taking the questions.

Christopher Gorman: Sure.

Operator: Your next question comes from the line of Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers: Hi, guys, thank you for taking the follow-up. Clark, if possible, I wanted to just revisit the expense outlook, particularly in the fourth quarter. It seems to be generating a lot of traffic this morning. I know you said higher stock price will impact incentive comp. And then I think you said some kind of proactive investments as well. But at a point, I think I might have heard the foundation contribution as well. Are you able to sort of parse if we’re going to see maybe $100 million of total expense lift in the fourth quarter? How much of that is ongoing stuff versus what people might sort of pull out as transitory? And then also appreciate that you suggested already not to annualize that, but just hoping for a little more deep dive in there as possible.

Clark H. I. Khayat: Yes, it’s a good question. I think the annual — the main point which you picked up on which was don’t annualize that number. I think the fair point is some of our business is variable in nature based on performance. So hard to quantify that. But frankly, if we have the revenues that dictate we should be paying compensation on that, we would take those like at any day of the week. So I think you have to think about some of that expense growth in the context of the revenue that’s driving it. As Chris said, we’re potentially leaning into some unique opportunities in the quarter. Those are going to be by their nature, not necessarily recurring. And I don’t have a specific number for you, but clearly, it’s not appropriate to take the full amount of that.

And I think we just — we got to fine tune a little bit of how much expense rolls into the run rate quarter and a lot of that’s going to be based on how much revenue we think it’s supporting. So we just need to do a little bit more work to give you a clean look. But I do think the — again, the appropriate guide at this point would be mid-to-single-digits for next year. And we owe you, as I said, more detail when we come back at the end of the year.

Scott Siefers: Got you. Okay. Perfect. Thank you, again.

Operator: And at this time, there are no further questions. I’d now like to turn the call back to Chris Gorman for any closing comments.

Christopher Gorman: Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to Brian and our Investor Relations team. We appreciate everyone’s interest in Key and hope everyone has a great day. Goodbye.

Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.