[Call Starts Abruptly] and Mark Midkiff, our Chief Risk Officer. On Slide 2, you will find our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call. I'm now moving to Slide 3.

This morning, we reported another strong quarter with net income of $616 million or $0.65 a share. We delivered positive operating leverage and expect to generate positive operating leverage for the full year. We delivered record third quarter revenue, which was up 8% from the year ago period.

Our results were driven by growth in both net interest income and noninterest income. Noninterest income reached a record third quarter level, up 17% from the same period last year. The increase was driven by broad-based growth across our fee-based businesses, including investment banking, which was up 61%.

I am especially proud of the way our teammates continue to serve our communities and clients; and in doing so, creating new and deeper relationships across our franchise. In our consumer business, we experienced record growth in net new households in the first 9 months of the year.

Our Western franchise is growing at a rate of over 2x the rest of our footprint and younger clients continue to be our fastest-growing segment. Additionally, our consumer business generated a record $4.2 billion in loan originations for the quarter, which reflects growth from our consumer mortgage business and Laurel Road.

Through the first 9 months of the year, our consumer mortgage originations have exceeded 2020's full year record level of $8.3 billion. Laurel Road had another strong quarter as we continue to add and expand high-quality relationships through our national digital bank.

Importantly, what really sets Laurel Road apart is our targeted client approach, which results in high-value digital relationships nationally. Currently, 75% of our volume is coming from outside our footprint. Laurel Road is part of a broader healthcare initiative across our company that has established Key as 1 of the leading healthcare banks.

Moving on to our commercial businesses. we had another strong quarter. Our Investment Banking business generated fees of $235 million, a record third quarter level and the second highest quarterly level in our history. We experienced growth across the entire platform.

Our broad and comprehensive platform has enabled this business to grow consistently over the past decade. Our investment banking business has grown at an 11% compound annual growth rate over the last 10 years. We are on pace to generate double-digit growth again in 2021.

Expenses this quarter reflect higher production-related incentives and the investments we continue to make in our franchise in digital, in analytics and in our teammates. Year-to-date, we consolidated 73 branches or approximately 7% of our branch network. These consolidations will drive future cost savings and support ongoing investments.

We will continue to look for opportunities to right-size our footprint. Shifting to credit quality. Our trends remained very strong this quarter. 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 1 ratio ended the quarter at 9.6%, above our targeted range of 9% to 9.5%. In the third quarter, we entered into an accelerated share repurchase program facilitated by the capital relief from the sale of our indirect auto portfolio.

The accelerated share repurchase program is part of our previously disclosed $1.5 billion share authorization. In total, we repurchased $593 million of common stock in the third quarter. Dividends also remain a priority. Our dividend remains above 3%. Our Board of Directors will consider a dividend increase at our meeting next month.

I will close by restating that it was another strong quarter. We generated positive operating leverage by growing our top line and managing expenses while continuing to make investments for our future.

As always, we remain committed to our disciplined approach to risk management and returning capital to shareholders through both dividends and share repurchases. I will now turn the call over to Don, who will provide more details on the results of the quarter.

Don?.

the first, personnel expense related to 1 additional day of salary expense in the quarter and slightly higher employee benefits; the second was an increase in other expense of $18 million, largely related pension settlement charge and higher charitable contributions. Now moving to Slide 11.

We Overall, credit quality continues to outperform expectations. For the third quarter, net charge-offs were $29 million or 11 basis points of average loans. Net charge-offs in the current quarter included $22 million related to the sale of the indirect auto loan portfolio. Our provision for credit losses was a net benefit of $107 million.

This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production. Nonperforming loans were $554 million this quarter or 56 basis points of period-end loans, a decline of $140 million or 20% from the prior quarter. Now on to Slide 12.

We ended the third quarter with a common equity Tier 1 ratio of 9.6%, which places us above our targeted range of 9% to 9.5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.

Importantly, we continue to return capital to our shareholders in accordance with our capital priorities. We repurchased $593 million of common shares during the quarter and our Board of Directors approved a third quarter dividend at $0.185 per common share.

Of the $593 million in common share repurchases, $468 million were related to the initial settlement of our accelerated share repurchase program, representing 80% of the $585 million authorization. The remaining $125 million were purchased in the open market. The remaining 20% of the ASR will be settled in the fourth quarter.

On Slide 13, similar to prior years, we provided guidance for the fourth quarter relative to our third quarter results. Guidance ranges are listed at the bottom of the slide. Importantly, using midpoints of this outlook would buy PPNR is at or above our full year 2021 outlook provided last quarter.

We have adjusted our guidance to reflect our strong third quarter performance especially in our fee-based businesses as well as the continued strength in our credit quality. Average loans will be up low single digits, excluding the impact of the sale of our indirect auto portfolio.

We expect continued growth in both our core commercial and consumer balances. Average deposits should remain relatively stable in the fourth quarter. Net interest income is expected to be down low single digits, reflecting lower PPP forgiveness in the fourth quarter and the impact of the auto loan sale.

Noninterest come should be relatively stable off our record third quarter performance with momentum in most of our fee-based businesses through year-end. We will also benefit from what we expect to be another record year for our investment banking business. We expect 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 a strong finish to the year. And our guidance for our GAAP tax rate has remained unchanged at 20%.

Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile in 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?.

[Operator Instructions]. And first with the line of Steven Alexopoulos with JPMorgan..

I wanted to start. So on the IB and debt placement fees, right, this has moved from, I think, you were $160 million per quarter pre-pandemic. Now you're running consistently over $200 million per quarter. And we know this is an unusual year for debt issuance.

How should we think about this line over the intermediate term? And do we eventually just go back to $160 million?.

So Steve, it's Chris. As we look at this line, we always look at it kind of on a trailing 12 basis. I don't think we're going back to $160 million. In 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, 7 industry verticals serving the middle market. It is the deal business. But having said that, we feel really good about the long-term trajectory of the business. I'll give you 1 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 the right sectors. I think we continue to invest in the business, and I think it's a unique business. I don't think it's going back to $160 million. I do think, over time, it will continue to be a double-digit grower..

Okay.

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

I don't know if I would consider it as a baseline. I mean we always look at it on a trailing 12 basis. But I do think we can continue to grow it, Steve. As you know, you guys are in the deal business, too. You can't sort of annualize 1 quarter, but I do think you can look at long-term trends, and we'll continue to grow it..

Yes. Got you. Okay.

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

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

Okay. That's helpful. If I could squeeze 1 more in for you, Chris. There's been quite a bit of activity in M&A this year. It's actually a record year.

Have you been active at all in exploring M&A opportunities either bank or nonbank?.

We -- Steve, we're always out there talking to people, particularly in the nonbank space. We have a pretty good track record of buying entrepreneurial businesses and integrating them. Obviously, this year, we bought AQN, which is an analytics firm. We have a long history of investing in and partnering with fintech companies.

So we'll continue to be very, very active around sort of niche businesses, whether it's investment banking, boutiques. And then we're always out there. Our job is to always be out there in the marketplace and see what there is out there that could create a lot of value. And so, we're out there, but particularly focused on these niche businesses..

And next, we'll go to Ebrahim Poonawala with Bank of America..

I guess, if you could just follow up a little bit on the outlook. You've talked about positive operating leverage this year. As we look beyond 2021 you mentioned an opportunity to right-size the branch footprint. Give us some perspective on how big that is.

And as we look forward, some of the PPP revenues tail off, how do you think about maintaining that positive operating leverage you heard other 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 2021. We have not yet pulled together our plans for 2022.

We will share that guidance with everybody in our January call. But I can tell you, positive operating leverage is a very important part of how we run the business. It's a huge area of focus when we have all of our business leaders in, we're investing heavily in these businesses, but we have to be able to get the growth for the investment.

And to date, obviously, we're getting that, but we'll continue to focus on positive operating leverage. You mentioned inflationary pressures. I don't think there's any question that there's inflationary pressures in the financial services industry. And within our customer base, we clearly are seeing those.

And those will be a challenge, I think, for everyone in the economy..

And I guess 1 for you.

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

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 had some activity in our bond portfolio with purchases of traditional core investments of about $3.7 billion compared to runoff of $2.1 billion that we saw from the cash flows off the existing portfolio.

In addition to that, we bought some short-term treasuries of about $4 billion and also the auto securitization transaction ended up increasing our overall bond portfolio by $2.8 billion as well. And so we ended the quarter at about $49 billion of total investments, which is up from the average of $43 billion.

What I would say is that we've seen a nice tick up in rates that the purchases we made in the third quarter had an average yield of 135. Those same types of investments at the start of the fourth quarter in the 150 to 160 range.

So that would probably give us some opportunity to lean a little heavier into portfolio purchases in the fourth quarter and beyond, and we'll continue to assess that. We're sitting right now on $25 billion of excess liquidity compared with cash positions and short-term treasuries, and we do plan to put that to work over time.

And probably see a clip of something in that $4 billion to $5 billion range near term instead of the $3.7 billion that we purchased in the third quarter and maybe moving that up as we get more and more comfortable with where rates are positioned for the long term..

That's helpful. And any changes, Don, on Slide 19, I think you lay out $36 billion in portfolio hedges.

Is that what's rolling off? Is that number expected to stay steady state over the next year?.

Of those hedges, $22 billion really are true asset liability hedges. The remainder are both debt hedges and also some very specific security hedges for the maturities for the next 12 months, for all 2022. That's a $4.6 billion number as far as the maturity of those swaps.

And so -- and just to put that in perspective, the average received fixed rate for those $22 billion in swaps is 1.2%, and the current go-to rate for us would be about 1.1%. So we're seeing markets start to -- rates start to pick up and close that gap that we have as far as that rollover risk..

And next, we'll go to Scott Siefers with Piper Sandler..

I was hoping you talk about loan growth for just a second, you're certainly starting to see more of a recovery. I'd say the magnitude of yours once you sort of wait 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, offers you some flexibility. But I was hoping you could speak to the commercial side and what's differentiating you guys there. And maybe some comments about what you're seeing in terms of pricing structure, those kinds of things, please..

Sure. Let me start, and then Don, I'm sure you'll have some comments on this as well. We are pleased with the trajectory of our loan growth, Scott. You mentioned on the consumer side, our 2 growth engines. Those will both continue. So we feel good about those.

As it relates specifically to the commercial side, we've seen a lot of activity around energy, around affordable housing. We're significant players in healthcare and technology. All of those sectors have been active, and the pipelines look strong. As it relates to pricing and structure, we are not giving on structure at all.

And I would say there's been sort of a continued erosion of pricing. Think about sort of from pre-pandemic to current sort of a BBB credit and erosion of maybe 25 basis points, that would be kind of a good benchmark..

I would agree, Chris. And as far as the commercial loans linked quarter absent PPP, we're seeing those balances up over $1.5 billion. I would say of that, about $0.5 billion is coming from increased utilization rates that we saw up about 50 basis points.

We saw a little bit of growth in our commercial real estate portfolio, and that really is aided by our focus on affordable housing and some other areas there that have been paying dividends for us. Then the core commercial portfolio itself grew by about $0.5 billion. And I'd say that a good chunk of that is coming from customer growth.

And we're seeing the benefit of the additional calling efforts that Chris mentioned and the addition of more bankers on the street to help us drive that growth..

Okay. Perfect. And then maybe, Don, just a question on the indirect portfolio sale. Does that have any bearing on what you think about sort of the steady-state reserve level.

I can't imagine it will be huge just given the starting size of that portfolio, but just would be curious to hear any of your thoughts?.

It really doesn't have a huge impact on it at all. If you look at the reserve levels we had there, they were a little bit less than the average for the overall loan book, but generally in line. So not much of a change there.

The 1 thing we continue to watch is that our credit metrics continue to improve and exceed our expectations as far as the relative performance there. And so that's been the main driver as far as some of the adjustments we've seen down as far as our overall reserve levels..

Next, we'll go to Bill Carcache with Wolfe Research..

Wanted to follow up on the operating leverage dynamics, specifically in the investment banking fee income line item.

Clearly, there's a relationship between that fee income and how you compensate your producers, but how does the rate of growth in revenues in that line item compare to the corresponding expenses over time? How accretive is it to your consolidated operating leverage?.

I would say that historically, we've seen that operating margin held in fairly well for that business, even though we're investing in it. As we see variances from quarter to quarter, we typically see an increase in incentive compensation to about 30% of the change in revenues.

And while it's not a strict formula, it tends to work out to be about that range. And I would say as far as the efficiency ratio for this business, it's a little higher than what the core would be overall, but isn't too dilutive to the entire company..

Got it. That's helpful.

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

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 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 [MDA] would say those are relatively flat. So I would expect that we'll continue to grow fairly aggressively on the purchase side as it relates to Laurel Road. And obviously, as interest rates go up, the refinance piece of it will obviously be impacted by that..

And also keep in mind, our target customer for the Laurel Road business. It really is those doctors that are coming off the residency and locating to their permanent assignment. And so step 1 typically is to consolidate their student loans and step 2 would be to buy a house and establish more of a permanent residence.

And so even though if rates are going up, we would expect to see some strong purchase volume coming from that targeted customer base as well..

Got it. If I may squeeze in 1 last one.

Was the strategic rationale behind the exiting of indirect auto lending business, simply a result of your desire to focus on direct relationships with your customers? And with that sale, have you now fully exited indirect consumer lending?.

Yes. So Bill, there's no question, you're correct there. I mean we are a relationship bank. And specifically, we believe in targeted scale. And if you think about that being really focused on who you do business with and being a relationship bank, clearly, the indirect auto business just is not a relationship business.

And so we made the decision to exit the business and then the transaction that we completed just recently with the accelerated share repurchase, just made a whole lot of sense for us because it freed up capital, had a great IRR and frankly, enabled us to eliminate the tail risk at a time when the value of used automobiles was quite high.

So that was kind of the strategic logic between exiting the business and executing the transaction we did recently..

Our next question is from Ken Usdin with Jefferies..

Don, just a follow-up on the swap comment, you gave that 4.6 number and talked about it. But I just wanted to understand the broader strategy with the swap book. The 22 now and that [4.6 billion].

Just wondering just how you're thinking about either replacing some of those? And if you could remind us what the benefit was from hedge income -- swap income in this quarter and how you'd expect that to traject?.

Sounds good. The whole thought to the size of the swap book is really to get the end target as far as our asset sensitivity that we have been biasing our position to be much more asset sensitive than we typically would. We're now in our -- we talk about a 6% asset-sensitive position in our slide deck, and that's higher where it would be traditionally.

But also available to us going forward in the next year is the redeployment of liquidity.

So some of that will be taking out the cash position, which is a variable rate asset, low earnings variable rate asset, but still variable rate and replacing it with long-dated investment securities, and we typically have about a 4-year average life or for those securities.

And so we'll have to take that in consideration as to whether or not we just do more of that or we do additional replacements of the swaps. Right now, we've not been replacing any of the swap maturities and we'll continue to reassess that going forward. So that's just generally how we would manage the overall asset sensitivity position of the company.

As far as the benefit from the swaps in the third quarter, we had about $76 million of net interest income coming from the swaps. We could see that come down slightly over the next couple of quarters. And then the question will be going forward is what happens with rates.

And as the short-term rates move up, you would see that number come down, but we would have seen an offsetting impact from the rates on the commercial loans going up, benefiting from those higher rates. And so that's again, just a summary of where we're positioned today and what impacts there might be going forward..

Yes.

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

I would say that, that would probably take us up as far as asset sensitivity, but I don't have the exact rate there. And 1 of the things we'll be monitoring is just what our outlook would be for rates overall and what's the other changes in the balance sheet.

So since those swaps are fairly short in duration, it wouldn't have a huge impact in overall asset sensitivity, but just something prospectively that we'd have to evaluate..

Understood. And if I could just ask a last clarifying one, Don.

Can you just give us what the total PPP income was this quarter versus last?.

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

Next, we'll go to Matt O'Connor with Deutsche Bank..

A couple of follow-ups on some individual fee categories. Service charges for you guys and others are bouncing back nicely. Do you think that's -- obviously, there's some seasonality and just kind of inherent recovery.

But do you think it might also be a bit of a leading indicator that some consumers are spending down their excess liquidity and could start borrowing more? Or what are you driving that?.

One, if we look at the individual balances of our retail customers, we're seeing balances maintained, if not growing across the Board, even though the smallest customers as far as average deposit balances.

And so we're not seeing a lot of change there that I would say that, to your point, some seasonality, some activity level, we're seeing activity levels pick up, and that's driving service charges up. And more importantly for us is we're seeing household and customer growth.

And we've had record growth for the first 9 months of this year that exceeds what we had previously originated as far as net new households in a full year. And so we're seeing strong growth there, which also does translate to increased fee activity for us as well..

Matt, just to give you some numbers from the first quarter of 2020, our merchant business, up 49%; purchase cards up 39%; retail payments in general are up 28%. So to Don's point, there's a lot of velocity..

Okay. And then separately, the trust fees were down a little bit and flat linked quarter and flat year-over-year. Obviously, a good backdrop in markets. What's going on there? And then remind us how much money market waivers are embedded in those results as well for when rates rise and you recover that..

Yes. As far as the trust fee income that the biggest driver there really was commercial brokerage activity, and that was down linked quarter and year-over-year.

If you look at the core private banking revenues, those were up for each of those periods, and retail investment sales are down slightly linked quarter because of seasonality but up year-over-year. And so those are the main drivers there. And then -- I'm sorry, Matt, your last question, I forget what that was. I apologize..

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

I really don't have any money market waivers there at all. We don't manage any money market funds, and so that really doesn't trip our revenues there..

Next question is from Peter Winter with Wedbush Securities..

Chris, I wanted to ask on capital. I'm just wondering with the improved credit risk profile, the outlook for the economy is getting better.

Would you consider moving the capital target maybe to the low end of 9 to 9.5 or even take it below the low end?.

Peter, we still believe that 9 to 9.5 is the right number as we think about our business. There's obviously a lot of variables. Could we be in the lower portion of 9 to 9.5? Depending on the scenario we could, but we do not intend to lower the target of 9 to 9.5 of CET1..

Okay.

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

Sure, could. But 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 and loan balance expectations there, that would add another $1.8 billion to the overall loan growth.

So almost 2%, so that would take it from a low single digit to a mid-single-digit kind of growth expectation on a linked quarter basis. And so something similar to what we reported essentially this quarter. As far as the NII outlook, I would say that there's 2 things that are impacting NII outlook for the fourth quarter, you hit on one, which is PPP.

And we would expect probably in the neighborhood of a $10 million or so type of decline in PPP revenues. The other is the indirect auto loan sale that as a result of the sale, our net interest income will be down, but our fee income will be up. We essentially 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..

Next, we'll go to Eric Chan with Wells Fargo Securities..

I have a question that relates to tech.

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

Sure, Eric. Thanks for your question. So our relationship with fintech partners has really been both important and helpful for us. As a bank, we were in early. And I think it's really helped us successfully execute our targeted scale strategy. Frankly, it's helped us kind of with our client service strategy, our sales strategy.

It's also clearly contributed to our thinking as we developed our technology road map. We are clearly tied into the entire fintech ecosystem. And our unique strategy is both known and understood by the fintech community, which is helpful.

Going to your question of how many relationships we have, I would say, today, we have probably 10 client-facing relationships we literally have dozens of infrastructure relationships with fintechs because we're sort of known in the whole ecosystem, we see a lot, maybe 15 or 20 opportunities every single month that we kind of sort through.

Kind of if you step back and take a look and think about kind of from a strategic perspective, our targeted scale strategy, it just makes us a great partner because we have such distinct client groups. And obviously, as you're developing software, that's really helpful.

What we have done at Key is in Laurel Road as we've built this national digital affinity bank, which is a relationship approach to digital banking. What fintechs really are best at is really solving 1 pain point and doing it extremely well.

So it's been a good relationship probably for -- I can certainly say for us, and I'm sure it's been a good relationship for the fintechs as well..

Yes, that's helpful. And then just kind of 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 of fintechs, so to say, just kind of like on a high level, what are your thoughts there?.

It starts with the client out. We are a relationship-driven bank. And so we have these distinct client groups that we're pursuing. And to the extent we can partner, invest with a fintech that can make us more impactful in the market serving that specific client set. We will enter into some partnership. We'll invest in them.

To the extent it doesn't help us compete and win in the marketplace and solve a specific pain point for our targeted customers, we take a pass. Now as I mentioned, that's on the client-facing stuff. In the infrastructure space, we have dozens and dozens. And obviously, the criteria there is it cheaper and faster to buy it versus build it..

Next question is from Gerard Cassidy with RBC..

Can you guys give us some color? Credit obviously has been great for you and your peers. You've already given us guidance for the second quarter net charge-off number, which is lower than your long-term numbers that you have 40 basis points to 60 basis points through the cycle.

When do you think we start creeping up for a normality? And I'm not talking about a recession, but do you think you stay at this lower level for another quarter or 2, and then we start creeping up later in '22 or into '23?.

So let me take a pass at that, Gerard. The answer is, we don't know. We've got really good clarity. Obviously, as we look into the fourth quarter, we gave guidance of 20 basis points. Interestingly enough, our results this quarter, while we report 11 basis points, it's really closer to 2 when you take out the $22 million that relates to indirect auto.

I think we are in -- I can speak for Key. I think the 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 this low. But I actually think, as we look into 2022, you're still going to see us below our targeted range of 40 basis point to 60 basis points..

Gerard, I would agree with Chris' comments there. A couple of things to think about. One is as far as our overall credit quality position, for many of the metrics today, we're actually better than what we were pre-pandemic.

So if you look at nonperforming loans, nonperforming assets, the delinquency stats for consumer and commercial loans are all better than where they were pre-pandemic. Our criticized and classified are a little higher than what they were before the pandemic, but coming down dramatically.

And we've seen incremental improvements this quarter that are outpacing what we've seen before that. And so that would suggest that things are going to be good for some time. But at the same time, I would think that you're probably going to see the consumers start to turn a little sooner. They've been the beneficiary of so much stimulus.

And if that starts to slow and go away like we would expect it to, you would start to see some of that start to return to more normal levels over time as well. And then the commercial customer, while it's still flushed with liquidity, but we just aren't seeing the early signs of that there's going to be some challenges down the road.

And so I think that we're going to be in a period for some time where we're going to see charge-offs below the low end of guidance ranges across the industry..

I think, Gerard, 1 of the first things you'll see is in the small business sector, the inability to pass through what are some pretty significant price and wage increases. And I think that will be the beginning of a bit of a pressure on the commercial side, particularly with smaller customers that have less pricing power..

Very good. And then as a follow-up, Chris, 2 things.

One, when you look at your investment banking numbers, which, of course, were very strong, record levels, $235 million, can you give us a flavor for how does that break out M&A advisory versus DCM, et cetera, and compare that to first quarter last year? But then second, in your prepared bullets, it looked like you pointed out that you retained 20% of the business on the loans.

And I thought that seemed high because normally, I thought you sold 90% of it are more off, but if any of those 2 questions..

Sure. So Gerard, we've never broken out each of the different components, our investment banking fees. I can tell you that our M&A business was extremely strong. And you can imagine the equity business was very strong, given that we have a focus on technology. So those were a couple just bright spots broadly.

As it relates to our mix of what's distributed and what we put on our balance sheet, it's actually been very consistent over a long period of time. We've always basically held of the credits that we take on. We've always held about 20% on our balance sheet. So we really haven't dialed that up at all.

We've been just maintaining our moderate risk profile and taking advantage of what are some pretty attractive markets out there..

And next, we'll go to John Pancari with Evercore ISI..

I appreciate the color you've given around the loan growth activity that you're seeing. I'm curious how you're thinking that interprets into 2022 in terms of the type of on-balance sheet loan growth that you could see.

Just wondering if you can give us a little bit of color on how you're thinking about that and curious how that could play into the full year?.

John, thanks for your question. We will be addressing our view on 2022 in January. But what's interesting about our model is there's a lot of variables.

And depending on what the market conditions are, you could see us -- going back to the previous question, you could see us maybe putting more on our balance sheet if some of the markets went in, they're right now functioning very, very well, went into dislocation. But we'll have a specific view for you when we report in January..

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

Just curious about annualized expense impact, how do you think about that?.

Yes. So the biggest impact to date for us has obviously been those variable structures, principally in investment banking and in our mortgage business that are driven by business flows and the fact that those businesses have grown.

Your question is a good 1 in that we have had to, particularly at the low end of the entry level in -- throughout Key and also in the kind of the junior banker area. We have, in fact, had to increase wages there.

And Don, can you give us some specifics on what the impact of that is on an annualized basis?.

Our total salary expense each year is about $1.3 billion. And I would say that those 2 components probably have cost us somewhere in the range of about $15 million to $20 million a year. So it's a little over 1% cost as far as the impact there overall. But it's something we'll continue to evaluate.

And as Chris highlighted, we're seeing that in the entry-level type of positions. And we're also starting to see some of that in other more specialty areas as well. And so we'll have to assess as we go into next year, what kind of targets we'll have as far as salary expense overall..

Got it.

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

You got it. Yes. Got it..

Okay. All right. And then lastly, just 1 question around your tech side of the shop.

Just curious in terms of -- if you can update us on your -- the size of your tech budget and how that's been growing annually? And then perhaps how much is split between growing the bank versus running the bank?.

Sure. So broadly, our spend is about $800 million a year. Of that, about $200 million is spent on development. Of the $200 million, about half of it is client facing. The other half is core.

One of the great things is we've been updating our technology over a long period of time, and we actually have to spend a little less in that category, which frees up more dollars for some of the development on the front end.

The other thing that we also have been doing is we've been buying a lot of niche businesses that have actually brought a lot of technology to us. Obviously, Laurel Road would be an example of that, AQN would be an example of that. And that's really tech investment that is outside of what we would think about in terms of our tech budget..

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

Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team, 216-689-4221. This concludes our remarks, and we appreciate everybody's time. Thank you. Goodbye..