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. 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.

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.

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 de-risked 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 one-time 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.

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. 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 dialogue 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. Seven basis points of the increase reflected the 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 a 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 and treasuries mature. The Scotiabank investment and our mid-September securities portfolio repositioning 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 the 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. 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 the 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 repositioning 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 six 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.

I will now turn the call back to the operator who will provide instructions for the Q&A portion of our call. And one moment please for your first question. Your first question comes from the line of Scott Siefers from Piper Sandler. Please go ahead.

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

Good morning. Hi, Scott.

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?

Hi, good morning, Scott. Thank you. We've been focusing on rate sensitivity, which is typically analyzed over about a 12-month timeframe. As many in the industry have noted, early rate cuts take some time to reflect in the figures. Specifically regarding deposits, we executed a bit more deposit action than planned, with betas in the low-30s, which we are pleased with. We anticipate that by 2025, we will return to more typical beta trends over time. Regarding the overall rate situation, the ideal scenario appears to be a soft landing, leading to a steepening yield curve. We are seeing some improvement in the term rates, nearing 4%. We believe the front end is declining. Therefore, a stable or slightly upward-sloping profile is favorable for us. Conversely, we took measures to move away from higher-cost wholesale funding and financed that with lower-cost deposits. We are confident in our deposit base and customer profile, and we believe we can manage pricing effectively over time. With the swaps positions unwinding, we are more optimistic about our overall rate sensitivity. Additionally, we had some initial concerns about the repositioning due to the anticipated cash holdings for a potentially long duration. This cash is quite sensitive to assets, so decreasing rates would affect us. We managed to place all of that into the market recently when term rates improved, achieving better-than-expected values. This will certainly enhance our rate sensitivity going forward, as we invested those proceeds in the 490 to 495 range with a duration just under four years. We feel very positive about this repositioning, and it will support us as we move ahead.

Thank you for the insight. I want to follow up on something related. Last month, you mentioned expecting a net interest income improvement next year of over 20%. I think that was before you were fully invested, following your announcement about the repositioning. The actual investment seems to have turned out better than anticipated, which should be beneficial. However, I would like to know if you still expect a net interest income improvement of over 20% for next year. Could you also elaborate on the main factors that will influence this outlook?

Sure, I want to start with a couple of important points. First, we are seeing a constructive macro environment that aligns with expectations of a soft landing. Second, we are currently planning for next year, and we will provide full guidance in January. Regarding the 20% increase, I would estimate that about half of that will come from the additional effects of the repositioning. This assumes we receive approval for the second phase of the repositioning, allowing us to implement it early in 2025. We believe that half of the expected increase will result from the complete repositioning when it is finalized. Additionally, we anticipate continued adjustments in fixed asset prices throughout the year, which include some swaps at rates below 2%. Our consumer portfolio is running down at around 3%, along with other fixed-rate securities that are slightly higher but will not perform as well due to decreasing rates. There remains some opportunity in this area. The last part of my remarks focuses on the stability of loans through 2025, acknowledging that this will be influenced by a decrease in consumer loans being offset by some growth in commercial loans. We do expect some commercial growth, which doesn't need to be substantial, but we need to see some progress. Our pipelines suggest this growth is on the horizon, although they have been indicating this for a couple of quarters. Most importantly, we have continued capacity to manage betas effectively. We have enhanced the positioning of our commercial book throughout the year by increasing deposits into indexed accounts. The use of our hybrid accounts and core treasury services will also provide benefits. Moreover, we have made adjustments to our consumer portfolio that give us confidence in managing betas effectively throughout 2025. All of these factors contribute to the other half of the anticipated 20% increase. At this moment, we feel optimistic that this goal is achievable, but we will provide a more detailed explanation when we return in January.

Perfect. All right, good. Thank you very much, Clark.

Yup.

Hi.

Hi, Mike.

Chris, you mentioned that M&A backlogs have increased by 10% quarter-over-quarter. What is the current situation? We've observed this trend among the major players, and there's been some discussion about whether capital markets activity is affecting loan growth or if they are unrelated. Are you noticing any shift from lending to capital markets in relation to KeyCorp? Thank you.

Thank you for your question. The main difference is that the private equity sector is becoming active in transactions. There is an inverse relationship between the holding period and returns. With the 10-year rate stabilizing around 4%, the private equity sector feels confident in pursuing deals, which is leading to an increase in mergers and acquisitions. I believe this trend will continue. Regarding disintermediation, I certainly see it happening. Last quarter, we raised $28 billion, and we have a clear view on the situation because we are placing a lot of securities in various markets. I have no doubt that some activities in the capital markets are bypassing the banks, and the private capital and private credit markets contribute to this. We are also involved in distributing securities in those areas.

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.

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.

Sure. The private equity sector accounts for about a third of all fees in the investment banking industry. Our situation is similar, and you are correct that the private equity firms releasing products into the market typically follow a process that takes about 12 months, in contrast to acquiring available businesses, which tends to have a shorter timeline. Thank you for your questions, Mike.

Hi, Chris. Hi, Clark.

Hi, Gerard.

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?

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.

Very good. You mentioned the outlook for loans, and from the H8 data released on Fridays, it seems that commercial and industrial loans have reached a low point and are beginning to increase slightly. Do you anticipate seeing similar trends soon, or will the situation in your customer locations remain flat or decline in the near term?

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 have 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?

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?

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.

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.

Great. Thank you.

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

Across the business, those are relatively good underlying drivers to reach the number you mentioned without being...

Hi, John.

So that's helpful. Thank you. And on the expense run rate, I think.

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

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?

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.

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.

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.

Thank you.

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

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?

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.

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.

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.

Great. Thanks for taking my questions.

Sure. Thank you.

Hi, good morning.

Good morning.

Hi, Manan.

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?

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.

One additional point I want to emphasize, which is embedded in Chris' comment, is that we advise against annualizing the Q4 number as we move into '25. I don't think that's the right approach. As Chris noted, we're focusing on higher fee growth, which will lead to a slight increase in incentive compensation, and our stock price is somewhat elevated. We have unique investment opportunities in the fourth quarter that we're considering to get a head start on '25. However, as Chris pointed out, it's important to reiterate that we don't see the advantage of higher earnings or investments as a reason to compromise our expense discipline.

I appreciate your comments on the near-term deposit betas. I'm interested in your perspective on the longer-term cycle. Should deposit betas decreasing align with those increasing, or given that loan growth is expected to be stronger this time compared to when rates were rising, will deposit betas likely decrease more gradually throughout the cycle?

It's a great question with no simple answer because there are several factors at play. The funding needs on the balance sheet drive the requirement for deposit balances, which in turn affects pricing. More broadly, the absolute levels of rates and the movement in rates are significant. If we reach a peak beta around mid-50s, 56%, on the way up, that's probably more than expected at the cycle's start, particularly since rates have risen over 500 basis points from zero. Starting from zero and moving up by 550 basis points is a substantial change, reaching the 5% level. I anticipate that as rates decline, the movement will be somewhat parallel, though we might not see the same mid-50s beta again; perhaps it would settle around 50%. It's unlikely to return to zero without an external event. If we reach a terminal rate of 2.5% to 3%, I expect to see beta deployment happening aggressively over time, but reaching the same levels is unlikely due to the magnitude of the increase being 50% to 60% on the way up. Additionally, we must consider loans and required balances for funding.

Got it. Thank you.

Next, we'll return to Mike Mayo from Wells Fargo. Please proceed.

Hi. Can you provide more details on the increase in non-performing loans? How many credits are we talking about? Is this a trend that raises concerns? Was this unexpected? Thank you.

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.

So next quarter, we shouldn't expect anything like that is what you're saying.

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

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.

You previously anticipated that net interest income would be 20% higher next year, and you sold $7 billion of securities at a high point. I assume that resulted in a nice increase in yield. While it could be seen as fortunate timing rather than just smart decisions, I’m curious why the expected 20% increase in net interest income from 2024 to 2025 wouldn't be higher due to this advantageous investment in those securities.

Yes, I can take either lucky or good. Just to remind you, Mike, the 20% we mentioned took into account the repositioning. What we are discussing is a slight improvement in the reinvestment. We are pleased with where we made those moves and capitalized on the increase in rates, but it is only a few basis points better compared to the 20% that already factored in the repositioning of that portfolio.

Still in fact contemplates the second piece.

Got it. Thank you.

Sure.

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

Good morning, and sorry about the technical problems earlier.

Not a problem. Good morning, John.

I have a couple of quick questions. Regarding the capital markets revenue, I know you've highlighted some strong pipelines and your expectation to reach the high end of the 600 to 650 guidance. Chris, in the past, when you've expressed this level of confidence, you've indicated the possibility of a record year the following year, and I recall you did that last year. Could you share your thoughts on 2025 and how the progression you’re observing might affect your capital markets revenues as you approach 2025?

Yes, that's a fair question. Clearly, our guidance for 2024 includes a projected increase in the fourth quarter, perhaps around $180 million if you calculate it. I feel confident about the growth trajectory. If the current environment continues with stable rates and active transactions, I am optimistic about 2025. We will provide more guidance on that after the year ends. However, it's important to consider that many of these pipelines have extended timelines, so we should enter 2025 with considerable momentum.

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?

We will provide more details on this, but generally, you can expect consumer loans to decrease by $2 billion to $3 billion over the year due to natural maturation and paydowns. This could vary depending on interest rates and mortgage market conditions, but it serves as a reasonable guideline. Regarding potential growth in commercial lending, I will share some insights and then Chris can elaborate. We see strength primarily in areas like affordable housing and renewables, which typically involve project-based transactions and construction. These projects develop over time, and we eventually convert them into permanent loans. In affordable housing, for example, we have been consistently involved and are observing a rise in activity. I believe there is an opportunity to expand in these areas, although these loans take time to fully put into action due to their scale and draw requirements. Overall, I remain confident about our capabilities and the market, as there are also broader opportunities to explore.

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.

Thanks, Chris. I have one final question. Regarding the loan loss reserve, you slightly reduced the reserve this quarter. Can you share your thoughts on the potential for additional releases as the credit situation evolves in light of the economic outlook?

We observe a slight decrease of 3 basis points in the allowance for credit losses, indicating stability. We have significantly increased it over recent quarters. Analyzing the loan portfolio could suggest that we might even be able to reduce it further. However, we are currently cautious about migration and the effects of late cycle trends. If interest rates continue to drop and the environment remains favorable, there might be opportunities for us. Nevertheless, we believe that maintaining stability is the best approach for now.

There are three main factors that influence this. First is your perspective on the macro environment, which you clearly have insights on. The second is specific individual factors, and if we were aware of these, we would be acting on the three loans we discussed today. The third factor is the size of our portfolio. Considering these three factors raises the question of where the reserve should be, and we will keep assessing it.

Good morning. I wanted to follow-up.

Hi, Peter.

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?

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.

Sure. And if I could just add, at the end of the day, no business relies only on one single source, right? We need to add new clients, grow our existing client base from lending, and some M&A growth and getting businesses higher at the end of the day. 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.

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.