Q3 2021 KeyCorp Earnings Call
And in doing so, creating new and deeper relationships across our franchise in our consumer business, we experienced record growth in net new households in the first nine months of the year or.
Our western franchise is growing at a rate of over two times, the rest of our footprint and younger.
Clients continue to be our fastest growing segment. Additionally.
Additionally, our consumer business generated a record $4 2 billion in loan originations for the quarter, which reflects growth from our consumer mortgage business and Laurel road through the first nine months of the year our.
Consumer mortgage originations have exceeded 2000, twenty's full year record level of $8 3 billion.
Laurel Road had another strong quarter as we continued to add and expand high quality relationships through our national Digital Bank.
<unk>, what really sets.
Laurel Road apart is our targeted client approach, which results in high value digital digital relationships nationally.
Currently 75% of our volume is coming from outside our footprint.
Laurel Road as part of a broader healthcare initiative across.
Company that has established key is one of the leading healthcare banks.
Moving onto our commercial businesses, we had another strong quarter, our investment banking business generated fees of 235 million a record third quarter level and the second highest quarter.
Ross R&D level in our history, we experienced growth across the entire platform.
Our broad and comprehensive platform has enabled this business to grow consistently over the past decade.
Our investment banking business has grown at an 11% compound annual growth rate over.
In the last 10 years.
We are on pace to generate double digit growth again in 2021.
Expenses this quarter reflect higher production related incentives and the investments we continue to make in our franchise.
Digital and analytics and in our team.
<unk>.
Year to date consolidated 73 branches or approximately 7% of our branch network.
These consolidations will drive future cost savings and support ongoing investments.
We will continue to look for opportunities to right size our footprint.
Shifting to credit quality, our trends remained very strong this quarter nonperforming loans and criticized loans were all down from the prior quarter and net charge offs to average loans were 11 basis points.
We continue to support our clients, while maintaining our moderate risk profile.
Which has and will continue to position the company to perform well through all business cycles. Finally, we have maintained our strong capital position, while continuing to return capital to our shareholders. Our common equity tier one ratio ended the quarter at nine six.
Above our targeted range of nine to nine 5%.
In the third quarter, we entered into an accelerated share repurchase program facilitated by the capital relief from the sale of our indirect auto portfolio the accelerated share repurchase program.
First part of our previously disclosed one $5 billion share authorization.
In total, we repurchased $593 million of common stock in the third quarter.
Dividends also remain a priority our dividend yield remains.
Is up 3% or.
Our board of directors will consider a dividend increase at our meeting next month.
I will close by restating that it was another strong quarter, we generated positive operating leverage by growing our top line and managing expenses, while continuing to make investments for.
<unk> about future.
As always we remain committed to our disciplined approach to risk management and returning capital to shareholders through both dividends and share repurchases I will now turn the call over to Don who will provide more details on the results of the quarter.
Don.
Thanks, Chris.
I'm now on slide five for the third quarter net income from continuing operations was 65 per common share our results reflected a net benefit from our provision for credit losses, which was largely driven by our strong credit metrics and positive economic outlook.
Importantly, we delivered positive operating leverage this quarter and as Chris said, we expect.
<unk> delivered positive operating leverage for the year.
Total revenues were up 8% compared to the same period last year.
We had year over year growth in both net interest income and noninterest income.
Turn on tangible common equity for the quarter was 18, 6%.
I'll cover the other items on this slide later.
<unk>.
Turning to slide six there are two major items that impacted loan growth this quarter.
<unk> loans and the sale of our indirect auto portfolio.
Average PPP loans declined $3 $3 billion this quarter as we helped clients take advantage of loan forgiveness.
We.
And my Friedel, our indirect auto portfolio last month, the sale impacted our third quarter average results by approximately $800 million and $3 $3 billion on an ending basis.
Average loans were down from the year ago period, reflecting the reduction in PPP balances and lower commercial line utilization.
Compared to the prior.
Higher quarter average loans were down 7% adjusting for the sale of the indirect auto portfolio, our loans were up approximately $100 million on average and up over $1 billion on an ending basis.
Adding to the comments on our core loan growth adjusting for both the indirect auto loan sale and PPP.
<unk> loans are linked quarter total loan growth would have been four 3%.
We continued to see strong consumer loan growth driven by Laurel Road and consumer mortgage on the commercial side, we were pleased to see a slight uptick in utilization.
Continuing on to slide seven.
Average deposits totaled $147 billion for the third quarter of 2021 up $12 billion or 9% compared to the year ago period and up 2% from the prior quarter.
The linked quarter and year ago comparisons reflect growth in both commercial and consumer balances.
The growth was partially offset by continued and expected.
And time deposits.
So interest bearing deposit costs came down one basis point from the second quarter. Following a two basis point decline last quarter.
We continue to have a strong stable core deposit base with consumer deposits accounting for approximately 60% of our total deposit mix.
The decline turning to slide eight.
Taxable equivalent net interest income was $1 <unk> 5 billion for the third quarter of 2021 compared to one six.
$6 billion, a year ago, and $1 3 billion from the prior quarter.
Our net interest margin was 247% for the third quarter.
'twenty, one compared to 262% for the same period last year and 252% for the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to a year ago period.
The larger balance sheet benefited net interest income but reduced.
<unk> net interest margin due to the significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter noninterest income increased $2 million and the margin declined five basis points.
Lower interest bearing deposit cost and the benefit of the day count were partially offset by lower earning asset.
Yields and continued elevated liquidity levels.
For the quarter total loan fees from PPP loans were $45 million compared to $50 million last quarter.
We've also included in the appendix additional detail on our investment portfolio and our asset liability positioning and.
In the third quarter our census.
Rising rates moved higher and we ended the period with over $25 billion in cash and short term investments.
Moving on to slide nine we continue to see strong growth in our fee based businesses, which have benefited from our ongoing investments.
Noninterest income was 790.
$7 million for the third quarter of 2021 compared to $681 million for the year ago period, and $750 million in the second quarter.
Compared to the year ago period, noninterest income increased 17%, we had a record third quarter for investment banking debt placement fees, which reached 235 million.
<unk>.
Driven by broad based growth across the platform, including strong M&A fees.
Additionally, corporate services income increased $18 million in commercial mortgage servicing fees increased $16 million.
Offsetting this growth was lower consumer mortgage fees due to lower gain on sale margin.
When compared to the second quarter noninterest income increased by $47 million. The largest driver of this quarterly increase was the record third quarter investment banking and debt placement fees.
I am now on slide 10, total noninterest expense for the quarter was 111 2 billion compared.
To <unk>, three 7 billion last year and $1 76 billion in the prior quarter our.
Our expense levels reflect higher production related incentives and the investments we have made to drive future growth.
The increase from the year ago period, primarily reflects higher incentive and stock based compensation attributed to a higher.
Production and Keith increased stock price.
The quarter over quarter increase in expenses was primarily driven by two areas.
The first personnel expense related to one additional day of salary expense in the quarter and slightly higher employee benefits the.
The second was an increase in other expense of 18 million.
Largely related to a pension settlement charge and higher charitable contributions.
Now moving to slide 11, overall credit quality continues to outperform expectations for the third quarter net charge offs were $29 million or 11 basis points of average loans.
Net charges.
Charge offs in the current quarter included $22 million related to the sale of the indirect auto loan portfolio.
Our provision for credit losses was a net benefit of $107 million. This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production.
Nonperforming loans.
<unk> were $554 million this quarter or 56 basis points of period end loans, a decline of $140 million or 20% from the prior quarter.
Now on to Slide 12, we ended the third quarter with a common equity tier one ratio of nine 6%, which places us above.
Our targeted range of 90% to 95%.
This provides us with the sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
We repurchased $593 million of common shares.
Above in the quarter and our board of directors approved a third quarter dividend at <unk> $18.05 per common share.
Of the $593 million and common share repurchases of $468 million were related to the initial settlement of our accelerated share repurchase program, representing 80% of the $585 million.
<unk>.
The remaining $125 million were purchased in the open market.
The remaining 20% of the ASR will be settled in the fourth quarter.
On slide 13, similar to prior years, we provided guidance for the fourth quarter relative to our third quarter results.
Our guidance ranges are listed at the bottom of slide in.
Importantly, using midpoint of this outlook would imply RP PNR is at or above our full year 2021 outlook provided last quarter.
We have adjusted our guidance to reflect our strong third quarter performance, especially in our fee based businesses as well as.
The continued strength in our credit quality.
Average loans will be up low single digits, excluding the impact of the sale of our indirect auto portfolio.
We expect continued growth in both our core commercial and consumer balances.
Average deposits should remain relatively stable in the fourth quarter.
Interest income is expected to be down low single digits, reflecting lower PPP forgiveness in the fourth quarter and the impact of the auto loan sale.
Noninterest income should be relatively stable off our record third quarter performance with momentum in most of our fee based businesses through year end.
We will also been.
<unk> from what we expect to be another record year for our investment banking business.
We expect noninterest expense to be down low single digits in the fourth quarter.
Moving on to credit quality, we expect our net charge offs to be below 20 basis points for the fourth quarter credit trends were strong in the third quarter and we expect.
Net a strong finish to the year.
And our guidance for our GAAP tax rate has remained unchanged at 20%.
Excuse me finally shown at the bottom of the slide our long term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving.
Our productivity and efficiency, which will drive returns.
Overall, it was another strong quarter and we remain confident in our ability to deliver on our commitments to all of our stakeholders.
With that I will now turn the call back to the operator for instructions on the Q&A portion of the call operator.
Okay.
Thank you and ladies and gentlemen, if you would like to ask a question on the call. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you May press, one then zero.
At this time.
And first one line of Steven Alexopoulos with Jpmorgan. Please go ahead.
Hey, good morning, everyone. Good morning.
I wanted to start so on the IP and debt placement fees. This has moved from I think you were $160 million per quarter pre pandemic now your.
Sure.
Running consistently over $200 million per quarter, and we know this is an unusual year for debt issuance. How should we think about this line over the intermediate term and do eventually just go back to $1 60.
So good morning, Steve.
Chris.
As we look at this line, we always look at it kind of on a trailing.
Ailing 12 basis, I don't think were going back to 160 over the last decade. We've grown this as I mentioned at a compound annual growth rate of 11%. We continue to add bankers. We continue to further penetrate these niches that we're in.
It's a unique business seven industry verticals.
<unk>, serving the middle market.
It is the deal business, but having said that we feel really good about the long term trajectory of the business I'll give you one statistic you might find interesting. This year, we added 5% in terms of incremental bankers and the call activity is up 20%. So.
I think we're in.
Sectors I think we continue to invest in the business and I think it's a unique business I don't think it's going back to 160 I do think over time, it will continue to be a double digit grower.
Okay.
We should consider this current run rate as a baseline Chris is that right.
Don't know if I would consider it as a baseline.
I always look at it on a trailing 12 basis, but I do think we can continue to grow it Steve.
Okay.
You guys are in the deal business too you can't sort of annualized one quarter, but I do think you can look at long term trends and we will continue to grow it.
Got you okay.
And on the P. P P can.
You guys give out what the fees recognized in the quarter were maybe Don do you have the balance end of period balances on PPP.
Can that the total loan fees realized this quarter were $45 million that was down from $50 million last quarter.
The average balance of our PPP loans was $4 2 billion and the ending.
$3 1 billion.
Okay.
For you, Chris there's been quite a bit of activity in M&A. This year, it's actually a record year have you been active at all in exploring M&A opportunities either bank or non bank. Thanks.
Steve we're always out there talking.
Talking to people, particularly in the non bank space.
We have a pretty good track record of buying entrepreneurial businesses and integrating them. Obviously this year, we bought <unk>, which is.
Analytics firm, we have a long history of investing in and partnering with Fintech companies. So we will continue.
Was it very very active around sort of niche businesses, whether its investment banking boutiques.
And then we're always out there our job is to always be out there in the marketplace and see what there is out there that could create a lot of value and so.
We are out there, but particularly focused on these niche businesses.
Great. Thanks for taking my questions.
And next we'll go to Ebrahim <unk> with Bank of America. Please go ahead.
Hey, good morning.
Morning.
So if you could.
Just to follow up a little bit on the.
Okay I'll call you've talked about positive operating leverage this year.
As we look beyond 2021, you mentioned an opportunity to right size the branch footprint give us some perspective on how big that is and as we look forward some of the BBB revenues being off how do you think about maintaining that positive operating leverage.
Banks talk about inflationary pressures impacting expenses.
So would love your perspective on that.
Sure well. Thank you for the question first of all operating leverage is very important to us. We're really proud of the fact that we have operating positive operating leverage on a year to date basis.
We will have positive operating leverage for the year of 2021, we have not yet.
Yet pulled together our plans for 2022, we will share that guidance with everybody in our January call.
But I can tell you positive operating leverage.
An important part of how we run the business. It's a huge area of focus when we have all of our business leaders and we're investing.
In these businesses, but we have to be able to get the growth for the investment and to date, obviously, we're getting that but we'll continue to focus on positive operating leverage.
You mentioned inflationary pressures.
Don't think Theres any question that there is inflationary pressures in the financial services industry and.
Within our customer base, we clearly are seeing those and those will be a challenge I think for everyone in the economy.
And I guess one for you.
So looking at your Aam's night disclosure again, just talk to us.
How are you managing the balance sheet as we think.
Heavily cash deployment, given the steepening and <unk> seen and where do you want the bank set up 12 months from now in terms of NII sensitivity to 100 basis points higher interest rates.
It's a great question and that's something we challenge all the time that you might see from the materials that this quarter we.
<unk> had some activity in our bond portfolio with purchases of traditional core investments of about $3 7 billion.
Compared to runoff of $2 $1 billion that we saw from the cash flows off the existing portfolio. In addition to that we bought some short term treasuries of about $4 billion and also the <unk>.
Auto.
The securitization transaction ended up increasing our overall bond portfolio by $2 $8 billion as well and so we ended the quarter at about $49 billion.
Total investments, which is up from the average of $43 billion.
What I would say is that we've seen a nice tick up in rates.
The purchases we made in the third quarter at an average yield of a $1 35, those same types of investments at the start of the fourth quarter and the $1 50 to 160 range and so that would probably give us some opportunity to lean a little heavier into portfolio purchases in the fourth quarter and beyond and we will continue to assess that.
We're sitting right now on $25 billion of excess liquidity compared with our cash positions.
In short term treasuries and we do plan to put that to work over time, and probably see a clip of something in that 4 billion to $5 billion range near term instead of the $3 7 billion that we purchased in the third quarter and maybe.
Moving that up as we get more and more comfortable with where our rates are positioned for the long term.
That's helpful and any changes.
On slide 19, you layout $36 billion portfolio of hedges is that what's rolling off is that number you expect it to stay steady state over the next year.
Of those hedges $22 billion really are true asset liability hedges. The remainder are both debt hedges and also some very specific security hedges.
For the maturities for the next 12 months for all of 2022, that's a $4 $6 billion number as far as the maturity of those swaps.
And so and just to put that perspective, the averaged received fixed rate for those.
$22 billion in swaps was one 2%.
In the current go to rate for us would be about one 1%. So we're seeing market start to rates start to pick up and close that gap that we have as far as that rollover.
Yes.
Thanks for taking my questions. Thank you.
And next we'll go to Scott <unk> with Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking a shot.
I was hoping to talk about loan growth or just secondly are certainly starting to see more of a recovery I would say the magnitude of <unk>.
So all the way through all the noise has maybe been a little bigger than some others out there.
To a degree things like Laurel Road, and mortgage which you guys have talked about quite a bit after the use some flexibility, but was hoping you could speak to the commercial side and sort of whats differentiating you guys there.
Maybe some comments about what youre seeing in terms of.
Rover structure those kinds of things please.
Sure. Let me, let me start and then Don I'm sure you'll have some comments on this as well we are pleased with the trajectory of our loan growth. Scott you mentioned on the consumer side. Our two growth engines. Those will both continue so we feel good about those as it relates specifically to the commercial side.
We've seen a lot of activity around around energy around affordable housing where significant players in healthcare and technology all of those sectors have been active in the pipelines look strong.
As it relates to pricing and structure, we are not giving on.
Pricing at all and I would say there has been sort of a continued erosion of pricing think about sort of from pre pandemic to current sort of triple b credit and erosion of maybe 25 basis points that would be kind of a good benchmark.
I would agree Chris and as.
On strike of commercial loans linked quarter absent PPP, we're seeing those balances up over $1 billion $5 I would say that about a half of $1 billion is coming from increased utilization rates that we saw it go up about 50 basis points, we saw a little bit of growth in our commercial real estate portfolio and.
And that really is aided by our focus.
On affordable housing in some other areas there that have been paying dividends for us than the core commercial portfolio itself grew by about half a billion dollars and I'd say that a good chunk of that is coming from a customer growth and we're seeing the benefit of the additional calling efforts that Chris mentioned and the addition of more bankers on.
On the street to help us drive that growth.
Okay perfect. Thank you very much and then.
Maybe Don just a question on the indirect portfolio sale does that have any bearing on what you think about sort of the steady state reserve level.
I can't imagine that would be huge just given the starting size of that portfolio, but just would be curious.
Here I mean any thoughts.
It really doesn't have a huge impact on it at all that if you look at the reserve levels. We had there they are a little bit less than the average for the overall loan book, but.
Generally.
In line, so not much of a change there that the.
Now the one thing we continue to watch as that our credit metrics continue.
Improve and exceed our expectations as far as the relative performance there and so that's been the main driver as far as some of the adjustments we've seen down as far as our overall reserve levels.
Yes perfect.
Perfect Alright, Thank you guys for taking the questions. Thanks Scott.
Next we'll go to bill.
<unk> with Wolfe Research. Please go ahead.
Good morning, Chris and Don.
Yeah.
I wanted to follow up on the operating leverage dynamics implicit specifically in the investment banking fee income line item clearly there is a relationship between that fee income and how you compensate your producers, but how does the rate of growth in revenues.
That line item compared to the corresponding expenses overtime, how accretive is it to to your.
<unk> operating leverage.
I would say that.
Historically, we've seen that operating margin holding fairly well for that business, even though we've been investing in it as we see variances from quarter to quarter.
We typically see an increase in incentive compensation to the about 30% of the change in revenues and while it's not a strict formula it tends to work out to be about that range and.
I would say as far as the efficiency ratio for this business.
Little higher than what the core would be overall, but that isn't too dilutive to the entire.
Tower company.
Got it that's helpful and then separately.
Can you give a little bit of color on how you would expect Laurel road's mortgage volumes and <unk>.
Mix to evolve.
In a higher mortgage rate environment.
Yes, so bill Thanks for your question. So just as you step back and you look at our mortgage business.
Broadly right now about 20% of our volume is is to doctors. So it's not an inconsequential piece across all of key. Additionally, our purchase volume right now is about 50%, we're up 60% year over year I think the MBA would say those.
A relatively flat so I would expect.
That will continue to grow.
Really aggressively on the purchase side as it relates to Laurel Road, and obviously as interest rates go up the refinance piece of it will obviously be impacted by that.
And also keep in mind our target.
<unk> for the Laurel Road business. It really is those doctors that are coming off the residency in locating to their permanent assignment.
So step one typically has to consolidate their student loans and step two would be to buy a house in and establish more of a permanent residents and so even though rates.
Custom going up.
We would expect to see some strong purchase volume coming from that targeted customer base as well.
Got it if I may squeeze in one last one was the strategic rationale behind them.
Exiting of indirect.
The indirect auto lending business simply a result of your desire to focus on direct relationships.
<unk> with your customers and with that sale.
Have you now fully exited indirect consumer lending.
Yes, So bill there is no question.
Youre correct. There I mean, we are a relationship bank and specifically we believe in targeted scale and if you think about that being really focused on who.
Ships business with and being a relationship bank clearly in the indirect auto business just is not a relationship business and so we made the decision to exit the business and then the transaction that we completed just recently with the accelerated share repurchase just made a whole lot of sense for us because it freed up capital had a great.
There are.
Frankly enabled us to eliminate the tail risk at a time when the.
Value of used automobiles was quite high so that was kind of the strategic logic between exiting the business and executing the transaction we did recently.
Understood that makes a lot of sense. Thank you for taking my questions.
Thank you.
Our next question is from Ken Houston with Jefferies. Please go ahead.
Hey, Thanks, good morning.
Don just a follow up on the swap comment you gave that $4 six number and talked about it but I just wanted to understand the broader strategy with the swap book, the 22 now and that $4.
And I'm, just wondering just how youre thinking about either replacing some of those.
And if you could remind us what the benefit was from hedge income hedge swap income in this quarter and how you would expect that to traject. Thank you.
Sounds good.
Now the whole of thought as to the size of the swap book is really to get to the end target as far as our asset sensitive.
Six months, we have been biasing, our position to be much more asset sensitive than we typically would.
We're now in a row.
We talked about a 6% asset sensitive position and our slide deck and Thats.
Would be traditionally.
Also available to us going forward into next year as the redeployment of liquidity.
So some of that.
<unk>, taking out the cash position, which is a variable rate asset low, earning variable rate asset, but still variable rate and replacing it with a long dated investment securities than we typically have about a four year average life for those securities and so we will have to take that in consideration as to whether or not we just do more of that or are we do additional.
We'll be the swaps right now we've not been replacing any of the swap maturities and we'll continue to reassess that going forward. So.
That's just generally how we would manage the overall asset sensitivity position of the company as far as the benefit from the swaps in the third quarter, we had about $76 million.
The replacement of net interest income coming from the swaps, we could see that come down slightly over the next couple of quarters and then the question will be going forward is what happens with rates and as the short term rates move up you would see that number come down, but we would have seen an offsetting impact from the rates on the commercial loans going up benefiting.
And those higher rates and so that's.
Again, just a summary of where we're positioned today and what impacts there might be going forward.
And as a follow up so if you were to just let's say all of that $4 six go and not replace.
Where that 6% asset sensitivity would turn into.
<unk> from <unk>.
I would say that would probably take us.
As far as asset sensitivity, but I don't have the exact right there and in one of the things we'll be monitoring is just what our outlook would be for rates overall in.
The other changes in the balance sheet.
Since those swaps are fairly short in duration it wouldn't have a huge impact and overall asset sensitivity, but just something prospectively that we'd have to evaluate.
Understood and if I could just ask that last clarifying one Don can you just.
Give us.
Total PPP income was this quarter versus last.
The total was.
Due to the interest on the individual loans was $56 million, including the $45 million in fees last quarter that was $69 million, including $50 million of fees and so that's just the relative change from quarter to quarter perfect.
Perfect. Thank you Don Thank you.
Next we'll go to <unk>.
<unk> O'connor with Deutsche Bank. Please go ahead.
Hi, good morning.
Good morning, a follow up on from individual fee categories service charges from you guys and others are bouncing back nicely.
Do you think that.
Obviously with some seasonality and just kind of inherent recovery, but do you think it might also.
Ought to be a bit of a leading indicator.
Some consumers are spending down their excess liquidity and consumer apparel and more or what do you think is driving that.
One if we look at the individual balances of our retail customers. We are seeing balances maintained if not growing across the board even the smallest.
Customers as.
Far as average deposit balances and so we're not seeing a lot of change there.
I would say that to your point some seasonality some activity level were seeing activity levels pick up and Thats driving service charge is up.
And more importantly for US is we're seeing household and customer growth in.
We've had record growth for.
For the first nine months of this year that exceeds what we had previously originated as far as net new households, and a full year and so we're seeing strong growth there, which also does translate to increased fee activity for us as well.
Yeah, Matt just to give you some numbers from the from the first quarter of 2020.
Our merchant business is up 49% purchase cards up 39% retail payments in general up 28% so to Don's point, there's a lot of velocity.
Okay, and then separately.
Trust fees were down a little bit.
Flat linked quarter and flat year over year obviously.
Obviously, a good backdrop and market.
What's going on there and then remind us how much money market waiver are embedded in those results as well for when rates rise and you recover that thank you.
As far as the trust fee income that the biggest driver there really with commercial brokerage activity and that was down.
Quarter and year over year, if you look at the core private banking revenues those were up for each of those periods in retail investment sales are down slightly linked quarter because of seasonality, but up year over year and so those are the main drivers there and then I'm sorry, Matt as far as your last question I forget what.
Linkov elegiac any.
Money market waiver.
That are embedded in that line.
Thrive youll recover.
We really don't have any money market waivers there at all but we don't we don't manage any money market funds and so that really doesn't.
Trip our revenues there.
Okay.
That was helpful things sort of mindset. Thank you.
Next question is from Peter Winter with Wedbush Securities. Please go ahead.
Good morning.
I wanted to I wanted to ask on capital.
I'm, just wondering with the improved credit risk.
Profile.
Outlook for the economy is getting better.
Do you consider moving the capital target maybe to the low end of 90 to 95 or even take it below the low end.
Peter we still believe that 9% to nine and a half is the right number.
As we think about our business.
Obviously.
The variables could.
Could we be in the lower portion of 9% to $9 five depending on the scenario, we could but we do not intend to lower the target of 9% to nine five of CET one.
Okay.
And then John if I can ask just.
In terms of the fourth quarter outlook could you talk about the average loan growth in the net interest income.
Excluding PPP and then also with the net interest income excluding the impact of the sale of the indirect auto.
Sure could that as far as the average.
Loan growth that we've talked about up low single digits up 1% to 3% excluding the impact of the indirect auto if we added on the impact of the PPP forgiveness in loan balance expectations. There that would add another $1 8 billion to the the overall loan growth so almost 2% so that.
It would take it from there.
A low single digit to mid single digit kind of growth expectation on a linked quarter basis, and so something similar to what we reported essentially.
This quarter as far as the NII outlook I would say that there is two things that are impacting NII outlook for the fourth quarter you.
You hit on one which is PPP in.
We would expect probably in the neighborhood of a $10 million or so type of.
Decline in PPP revenues. The other is the indirect auto loan sale that.
As a result of the sale our net interest income will be down but.
Income will be up we essentially received 75 basis points for servicing those loans and so you will see a decline in NII of about $10 million and an increase of fee income in the range of $5 million to help offset that and those are kind of the moving parts and pieces.
Great. Thanks for taking my questions. Thank you.
Next we'll go to Eric Chan with Wells Fargo Securities. Please go ahead.
Hi, guys.
I have a question that relates to tech.
As you guys have retooled the bank I was just wondering if you could speak a little bit about how.
Our fuels fintech partnerships have changed cookie.
And if possible, perhaps you can give us a number of Fintech partners that you guys currently work with.
Sure Eric Thanks for your question.
So our relationship with Fintech partners has really been both important and helpful for us as a bank we were in.
How the Rowley.
It's really helped us successfully execute our targeted scale strategy frankly, its helped us kind of with our client service strategy. Our sales strategy. It's also clearly contributed to our thinking as we developed our technology roadmap.
We are clearly tied into the entire fintech ecosystem.
In <unk>.
And our unique strategy is both known and understood by the Fintech community.
Which is helpful going to your question of how many relationships. We have I would say today, we have probably 10 client facing relationships, we literally have dozens of interest.
Echo structure relationships with Fintech.
Because we're sort of unknown and the whole ecosystem, we see a lot maybe 15 or 20 opportunities every single month that we kind of sort through.
Kind of if you step back and take a look and think about kind of from a strategic perspective, our targeted scale strategy.
Infrastructure, just makes us a great partner, because we have such distinct client groups and obviously as you are developing software. That's really helpful. What we have done at key is in lower road as we've built this national digital affinity bank, which is a relationship approach to digital banking what fintech really.
Our best that is really solving one pain point and doing it extremely well. So it's been it's been a good relationship probably for I can certainly say for us and I'm sure. It's been a good relationship for the Fintech as well.
Yes, that's that's helpful and then just just kind.
A follow up on to that so how do you guys determine which strategy to follow when it comes to actually building in house or.
Partnering with Fintech, so to say just kind of a like on a high level what are your thoughts there.
It starts with the client out we are a relationship driven bank and so we have these distinct.
Linked client groups that we're pursuing and to the extent we can partner invest.
With a fintech that can make us more impactful in the market serving that specific client set we will enter into some partnership will invest in them to the extent it doesn't help us compete and win in the.
Place and solve a specific pain point for our targeted customers. We take a pass now as I mentioned, that's on that's on the client facing stuff in.
In the infrastructure space, we have dozens and dozens in the obviously the criteria. There is is it cheaper and faster to buy it versus build it.
The market rate. Thanks, thanks, so much.
Thank you.
Next question is from Gerard Cassidy with RBC. Please go ahead.
Hi, Chris Hi, Don Good morning Gerard.
Can you guys give us some color credit obviously, it's been great for you and your peers.
Already given us guidance for the second quarter net charge off number which is lower than your long term numbers that you have for 40 to 60 basis points through the cycle. When do you think we start creeping up for renewal amount and I'm not talking about a recession, but can.
Can you think you'll stay at this lower level for another quarter or two and.
Yes.
Creeping up later in 'twenty, two or into 'twenty three.
So let me let me take a pass at that Gerard.
Answer is we don't know we've got really good clarity, obviously as we look into the fourth quarter. We gave guidance of 20 basis points interestingly enough. Our results this quarter, while we report.
And then we started 11 basis points, it's really closer to two when you take out the $22 million that relates to indirect auto I think we are in.
Speak for key I think the Derisking that we've gone about for the last 10 years is going to serve us extremely well, we won't stay at a level.
Level this low but.
But I actually think as we look into 2022, you're still going to see us below our targeted range of 40 to 60 basis points.
Gerard I would agree with Chris's comments, there are a couple of things to think about one is as far as our overall credit quality position.
<unk>.
For many of the metrics today were actually better than what we were pre pandemic. So if you look at nonperforming loans and nonperforming assets delinquency stats for consumer and commercial loans are all better than where they were pre pandemic. Our criticized and classified are a little higher than what they were before the pandemic, but coming down.
Down dramatically in.
And we've seen incremental improvements this quarter that are outpacing what we had seen before that and so that would suggest.
Just that things are going to be good for some time, but at the same time I would think that you are probably going to see the consumer start to turn a little sooner than they have been the beneficiary of so much stimulus.
If that starts to slow and go away like we would expect it to you would start to see some of that start to return to more normal levels over time as well and then the commercial customer while it is still flushed with liquidity, but.
We just arent seeing the early signs of that theres going to be some challenges down the road and so I think.
Think that we're going to be in a period for for some time, where we're going to see charge offs below the low end of guidance ranges across the industry.
Thank Gerard one of the first things Youll see us in the small business sector. The inability to pass through what are some pretty significant price and wage increases and I think.
That will be the beginning of a bit of a pressure on the commercial side, particularly with smaller customers that have less pricing power.
Very good and then as a follow up.
Chris.
Two things one.
When you look at your investment banking numbers, which of course were very strong record levels $2 35.
Again.
Can you give us a flavor for how does that breakout M&A advisory versus DCM et cetera, and compare that to first quarter last year, but then second in your prepared bullets. It looked like you pointed out that you retained 20% of the business and on the loans.
And I thought that seemed high because normally I thought you sold 90% of it or more off but if those two questions. Thank you.
Sure so of drug we've never broken out each of the different components.
Our investment banking fees I can tell you that our M&A business was extremely strong and you can imagine the equity business.
Business was very strong given that we have a focus on technology. So those were a couple just bright spots broadly as it relates to our mix of whats distributed in what we put on our balance sheet. It's actually been very consistent over a long period of time, we've always basically held of the credits that we take.
We've always held about 20% on our balance sheet. So we really haven't dialed that up at all.
Just maintaining our moderate risk profile and taking advantage of what are some pretty attractive markets out there.
Great. Thank you so much.
Next we'll go to John <unk> with Evercore ISI. Please go ahead.
Good morning, Good morning, John.
I appreciate the color you've given around the loan growth activity that you're seeing I'm curious, how you're thinking that interprets into 2022 in terms of the.
Of Oh.
On sheet loan growth that you could see I was just wondering if you can give us a little bit of color on how you're thinking about that and I'm curious how that how that could play into the full year.
John Thanks for your question, we will be addressing our view on 2022 and January.
But what's interesting.
Homebound about our model is there's a lot of variables and depending on what the market conditions are you could see us going back to the previous question you could see us maybe putting more on our balance sheet. If some of the markets went in there right now are functioning very very well went into dislocation, but we will have a will have.
First things affect view for you when we when we report in January.
Got it alright, Chris Thanks, and then.
Separately on the expense side and then you've.
You've talked about.
Wage inflation in.
How are you thinking about what it could add to expense levels as you look at.
So just look at full year expectations, I know, you're not giving 2022 guidance, but around the the wage inflation topic, specifically just curious about annual annualized expense impact how you think about that.
Yeah. So the biggest the biggest impact to date for US is obviously bad those.
As variable structures, principally in investment banking and in our mortgage business that are driven by business flows and the fact that those businesses have grown. Your question is a good one and that we have had two particularly at the low end of.
The entry level in throughout key and also.
And that kind of the junior banker area. We have in fact had to increase wages. There Don can you give us some specifics on what the impact of that is on an annualized basis.
Our total salary expense each year is about $1 billion three in.
I would say that those two components, probably cost us somewhere in the range of.
About $15 million to $20 million a year. So it's.
A little over a percent cost as far as the impact their overall, but some.
We'll continue to evaluate and as Chris highlighted that we're seeing that in the entry level type of positions.
And we're also starting to see some of that in other more special.
<unk> areas as well and so we'll have to assess as we go into next year.
Targets, we will have as far as salary expense overall.
Got it but that that 15 to 20 million per year, that's mainly on the lower end wages in the junior banker areas you got it yes got it okay alright.
Lastly, just one question around your tech side of the shop, just curious in terms of the <unk>.
If you can update us on your the size of your tech budget and.
How that's been growing.
You know annually and then perhaps how much is split between growing the bank versus running the bank.
Sure. So broadly our spend is about $800 million a year.
At about $200 million is spent.
On development of the 200 about half of it is client facing the other half is core one of the great things is we've been updating our core.
And then <unk> over a long period of time, and we actually have to spend a little less in that category, which frees up more dollars.
For some of the development on the front and the other thing that we also had been doing is we've been buying a lot of niche businesses that have actually brought a lot of technology to us obviously laurel.
The road would be an example of that <unk> would be an example of that and that's that's really tech investment that is outside of what we would think about in terms of our tech budget.
Got it very helpful. Thanks, Chris.
Sure.
And with no further questions I'll turn the call over to you Mr. Gorman for.
Our tech some comments.
Again, we thank you for participating in our call today. If you have any follow up questions. You can direct them to our Investor relations team to 106 six to eight 9% to one this concludes our remarks and we appreciate everybody's time. Thank you goodbye.