Q2 2024 KeyCorp Earnings Call

Participants

Brian Mauney; Head of Investor Relations; KeyCorp

Christopher Gorman; Chairman of the Board, President, Chief Executive Officer; KeyCorp

Clark Khayat; Chief Financial Officer; KeyCorp

Ebrahim Poonawala; Analyst; Bank of America

Scott Siefers; Analyst; Piper Sandler Companies

Ken Usdin; Analyst; Jefferies

Erika Najarian; Analyst; UBS

Gerard Cassidy; Analyst; RBC Capital Markets Wealth Management

John Pancari; Analyst; Evercore

Matt O'Connor; Analyst; Deutsche Bank

Manan Gosalia; Analyst; Morgan Stanley

Steve Alexopoulos; Analyst; JPMorgan

Mike Mayo; Analyst; Wells Fargo Securities, LLC

Peter Winter; Analyst; D.A. Davidson & Company

Presentation

Operator

(Operator Instructions)
Good morning, and welcome to KeyCorp's second quarter 2024 earnings conference call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the Head of Investor Relations, Brian Mauney. Please go ahead.

Brian Mauney

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's second 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 in 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 the statements speak only as of today, July 18, 2024, and will not be updated.
With that, I will turn it over to Chris.

Christopher Gorman

Thank you, Brian. And I'm on slide 2. This morning, we reported earnings of $237 million or $0.25 per share, which is down $0.02 from the year ago quarter, but up $0.05 sequentially. On a quarter-over-quarter basis, revenue was essentially flat as we offset the expected pullback in investment banking fees from a record first quarter with growth across the balance of the franchise.
Expenses remained well controlled and credit costs were stable. Importantly, we continued to deliver on our clearly defined path to enhanced profitability as we did that we detailed a little over a year ago. Net interest income grew from what we continue to believe will be this cycle's low in the first quarter, and we remain confident in our ability to deliver on our NII commitments for both the full year 2024 as well as the fourth quarter exit rate.
Deposit value creation continues to be a positive story for Key. This quarter deposits grew by 1% sequentially, while the pace of increase in deposit costs continued to decelerate. Additionally, non-interest bearing deposits stabilized at 20% of total deposits. We were also pleased to see client deposits up 5% year over year. Consumer relationship households are up 3.3% annualized year to date.
Finally, we continue to be very disciplined with respect to pricing. Our cumulative deposit beta stands at 53% since the Fed began raising interest rates. With respect to non-interest income, we have made continued progress against our most important strategic initiatives.
In our wealth management business targeting mass-affluent prospects production volumes hit another record in the second quarter as we added 5,600 households and over $600 million of household assets to the platform.
Since launching this business in March of last year, we have added over 31,000 households and about [$2.9 billion] of new household assets to keep. Within our existing customer base, we believe we have a great opportunity over [1 million] Key retail households have investable assets of over $250,000, and only about 10% are existing customers in our investment relations in our investment business.
Overall, as a company our assets under management have now reached $57.6 billion. In commercial payments, we continue to see strength in our commercial deposits with 9% growth year over year and a relatively flat beta since year end.
Cash management fees are growing at approximately 10%. Our primary focus has made this a core competency for us. We continue to see momentum as our clients are more focused than ever on working capital solutions and driving efficiency in their own businesses.
Additionally, our focus on verticals like healthcare, real estate and technology, create meaningful deposit opportunities and our embedded banking strategy was well timed given the growth we're seeing in that market.
In investment banking, as we have previously communicated, our second quarter fees were below those of the first quarter. Our positive outlook for the business, however, remains unchanged. Our pipelines are higher today than last quarter, year end and year-ago levels.
Our M&A pipeline remains near record levels and the near-term outlook for other investment banking fee revenue streams have improved. At this point, we expect a stronger second half of the year consistent with our prior guidance.
Our national third party commercial loan servicing business also continues to perform well. This is a countercyclical business that also gives us unique insight into the commercial real estate market. We continue to feel very good about our growth prospects for this business.
Lastly, on loans, broadly, loan demand remains tepid and the pricing environment remains competitive. It has also taken some time after our focus on improving our liquidity and capital ratios last year to get our machine fully up to speed.
Despite recent volume trends, we are optimistic we will start to see stabilization and potentially some growth in the back half of the year. Our pipelines are building in the middle market our pipelines are over 50% higher than last quarter, and in our institutional business engagements broadly are picking up as well.
Turning to capital, this quarter, our common equity Tier 1 ratio improved by roughly another 20 basis points to 10.5%. Our marked CET1 and tangible capital ratios also improved. As reported a few weeks ago, we have received the results of the Fed's stress test or deftest, which implied a preliminary stress capital buffer for Key of 3.1%, which is up 60 basis points from the SCB we received in 2022.
I'll make just a few comments first, even under this preliminary buffer, we have plenty of excess capital. Our 10.5% CET1 ratio compares to what would be a new 7.6% implied minimum. So the results continue to illustrate our strong capital position.
Secondly, we like others in our industry don't have insight into the Fed's models. The Fed's model loan losses for Key, particularly for our commercial real estate and first lien mortgage portfolios are inconsistent with our internally run stress tests.
We look forward to a continued constructive dialogue with our regulators on this topic. Looking forward, I am excited about what lies ahead for Key. We have been discussing our net interest income pivot for each of the last several quarters. The pivot is now upon us. NII headwinds that we have experienced will now become NII tailwinds as we go forward.
Concurrently, I'm also encouraged by the business momentum we continue to see across the franchise. We demonstrated momentum in wealth management and commercial payments again this past quarter, and we are driving meaningful client deposit growth across the entire franchise. Lastly, investment banking and loan pipelines are up meaningfully from prior periods.
With that, I'll turn the call over to Clark to provide more details on our financial results. Clark?

Clark Khayat

Thanks, Chris, and thank you, everyone, for joining us today. Now I'm in slide 4. So, the second quarter, as Chris mentioned, we reported earnings per share of $0.25, up $0.05 per share versus the first quarter or $0.03 per share adjusting for last quarter's FDIC special assessment.
Sequentially, revenue was essentially flat, down half of 1% as a 1.5% increase in net interest income was offset by a 3% decline in non-interest income, while expenses declined more meaningfully by 6% or 4% excluding FDIC assessment impacts.
Credit costs were stable and included roughly $10 million build to our allowance for credit losses this quarter. On a year-over-year basis, EPS declined driven by a tough net interest income comparison, but as we've shared previously, we expect NII will start to become a real tailwind next quarter and in the back half of the year.
Non-interest income grew 3%, while expenses were flat. Moving to the balance sheet on slide 5. Average loans declined about 2% sequentially to $109 billion and ended the quarter at about $107 billion. The decline reflects tepid client demand, a 1% decline in C&I utilization rates, our disciplined approach to what we choose to put on our balance sheet and the intentional runoff of lower-yielding consumer loans as they pay down and mature.
As Chris mentioned, we continue to have active dialogue with clients and prospects, and our loan pipelines are building nicely, which gives us optimism that balances will stabilize or begin to improve from June 30 levels.
On slide 6, average deposits increased nearly 1% sequentially to $144 billion, reflecting growth across consumer and commercial deposits. Client deposits were up 5% year over year as broker deposits have come down by roughly $5.8 billion from a year ago levels.
Both total and interest-bearing cost of deposits increased by 8 basis points during the quarter, a slower rate of increase compared to the first quarter as short-term rates have remained high. 3 basis points of the increase is due to the intentional addition of roughly $1.6 billion of time deposits, reflecting a more conservative approach as we prepare for anticipated changes in liquidity levels.
Non-interest bearing deposits stabilized at 20% of total deposits and when adjusted for non-interest bearing deposits in our hybrid accounts, this percentage remained flat linked quarter at 24%. Our cumulative interest bearing deposit beta was 53% since the Fed began raising interest rates.
Our deposit rates remained stable across the franchise with ongoing testing by product and market. Given higher rates through the year, we have not seen as much opportunity to reduce deposit rates. However, we've continued to attract client deposits without having to leave the market on rates nor have we been paying the cash premiums and many of our competitors are offering to attract new operating accounts.
Moving to net interest income and the margin on slide 7. Tax-equivalent net interest income was $899 million, up $13 million from the prior quarter. The benefit from fixed rate asset repricing mostly from swaps and short-dated US treasuries was partly offset by higher funding costs, lower loan balances and impact from roughly $1.25 billion of forward starting swaps that became effective this quarter.
You will recall that we put the swaps in place in 2023 at a then prevailing forward rate of 3.4% as we were managing the roll off of the 2024 swaps. Net interest margin increased by 2 basis points to 2.04%. In addition to the NII drivers just mentioned, the previously mentioned liquidity build this quarter impacted again by about 2 basis points.
Cash assets increased by roughly $3.5 billion sequentially. We continue to believe that our NIM bottomed in the third quarter of 2023 and NII bottomed in the first quarter of 2024.
Turning to slide 8. Non-interest income was $627 million, up 3% year over year. Compared to the prior year the increase was primarily driven by Trust & Investment Services, commercial mortgage servicing fees and investment banking fees.
This offset a 21% decline in corporate services income which has reverted to a more normalized level at 2022 and the first half of 2023 benefited from elevated LIBOR-SOFR related transition activity. Commercial mortgage servicing fees rose 22% year over year, reflecting growth in servicing and active special servicing balances.
At June 30, we service about $680 billion of assets on behalf of third-party clients, including about $230 billion of special servicing, $7 billion of which was in active special servicing. Trust and investment service fees grew 10% year over year as assets under management grew 7% to $57.6 billion.
We saw positive net new flows in the quarter and as Chris mentioned, sales production set another record in the quarter. Our investment banking fees were consistent with our prior guidance for the quarter. Across products, higher M&A and debt origination activity offset lower syndication and commercial mortgage activity.
On slide 9, second quarter non-interest expenses were $1.08 billion, flat year over year and down 4% sequentially excluding FDIC special assessments. This quarter, we incurred an additional $5 million FDIC charge on top of last quarter's $29 million offset.
On a year-over-year basis, personnel expenses were up due to Key tire stock price, offset by lower marketing and business services and professional fees. Sequentially, the decline was driven by lower incentive compensation and employee benefits from FICU seasonality in the first quarter.
Moving to slide 10, credit quality remained solid. Net charge-offs were $91 million or 34 basis points of average loans and delinquencies ticked up a few basis points. Non-performing loans decreased 8% sequentially and remained low at 66 basis points of period-end loans at June 30. And as expected, the pace of increase in criticized loans slowed markedly to 6% in 2Q following our deep dive in the first quarter.
We expect that to continue to moderate and flatten out by the end of the year, assuming no material macro deterioration.
Turning to slide 11, we continue to build our capital position with CET1 up 20 basis points in the second quarter to 10.5%. Our mark CET1 ratio rate, which includes unrealized AFS and pension losses improved to 7.3%, and our tangible common equity ratio increased to 5.2%.
The increases reflect work, we've done over the past year to build capital and reduce our exposure to higher rates. We have reduced our DV01 by 20% over the past 12 months. And at June 30, our balance sheet is effectively interest rate neutral over a 12 month run.
Quite higher rates, our AOCI improved by about $170 million to negative $5.1 billion at quarter end, including $4.3 billion related to AFS.
On the right side of this slide, we've extended our AOCI projections through 2026. As we've been doing, we show two scenarios the forward curve as of June 30, which assumes six cuts through 2026 and another scenario where rates are held at June 30 levels throughout the forecast time horizon.
With the forward curve we would expect AOCI to improve by $1.9 billion or 39% by year end 2026. The current remain -- rates remain in place we would still expect $1.7 billion of improvement given the maturities, cash flow and time.
Slide 12 provides our outlook for 2024 relative to 2023. Our P&L guidance remains unchanged across all major line items. We have updated our loan guidance to reflect the lack of demand we referenced. We now expect average loans to be down 7% to 8% in 2024 and for the year end 2024 loans to be down 4% to 5% compared to the end of 2023.
This implies fourth quarter loan balances are flat to up $1 billion from June 30 levels. We also have already revised our average deposit guidance to relatively stable from flat to down 2% with client deposit growth in the low single digit range. We continue to believe we can hit our full year 2024 and fourth-quarter exit rate net interest income commitments, even if loan volumes end up slightly short of our revised target.
On slide 13, we update the net interest income opportunity from swaps and short-dated treasuries maturing. The cumulative opportunity stood at about $950 million using the June 30 forward curve, little change from last quarter.
As at the end of the second quarter, we've realized approximately 50% of this opportunity, which is shown on the left side in the gray bars. This leads about $480 million annualized NII opportunity left, which we expect to capture over the next three quarters with the most meaningful benefits expected to occur in the fourth quarter and first quarter of 2025.
Moving to slide 14. We've laid out for you the path of how we intend to get from the $899 million of reported net interest income in the second quarter to a $1 billion-plus number by the end of the year under a couple of potential rate scenarios. In short, we believe we have about $130 million of tailwinds from lower fixed rate assets and swaps running off and from higher day count.
The rest largely net out that includes what we believe are relatively conservative assumptions around modest loan growth, deposit cost, funding mix in near term, negative NII impact from the Fed rate cut or two. In the top walk, we've laid out the drivers of the growth, assuming the Fed cuts once in December.
In this scenario, we expect about $80 million benefit from swaps and US treasuries. We also expect growth for redeployment of lower yielding assets more specifically, approximately $2 billion of other security cash flows in the back half of the year and about $1.5 billion of maturing consumer loans.
Day count and some pickup in loan fees drives the other $10 million to $15 million. In the bottom lock, we performed the same exercise, but this time, assuming the Fed cuts by 25 basis points in September and again in December, but we still believe we can comfortably achieve our full year NII target rate in this scenario, we do become a little tighter on fourth quarter exit rate, although we still think we'll hit that guide.
Keep in mind while two rate cuts this year would have a near-term impact on NII as it takes time to deploy deposit beta, we would expect to recapture that effect in 2025. It would also likely drive improved balance sheet dynamics as we would see benefit from the approximately $7 billion of forward starting received fixed swaps that come off in the first half of 2025 as we position ourselves to be modestly liability-sensitive next year.
In addition, rate cuts would most likely provide benefits beyond NII, higher client transaction activity, more demand for credit and improvements capital, so we would welcome this trade-off.
With that, I'll now turn the call back to the operator for instructions for the Q&A portion of our call. Operator?

Question and Answer Session

Operator

(Operator Instructions)
Ebrahim Poonawala, Bank of America.

Ebrahim Poonawala

Hey, good morning.

Christopher Gorman

Good morning, Ebrahim.

Ebrahim Poonawala

So I guess maybe just starting out with NII, I mean, it's a huge focus for the stock. I'm looking at slide 14, it seems like the $120 million is locked in no matter what so fourth quarter NII one or two. And then the upside from there is driven by how some of the second part of that or walk works out.
So give us a sense of on the downside risk on NII, if loan growth ends up being weaker or negative in the back half and implications, I guess more so for '25 versus '24, just talk to us in terms of the you've given good color on the Fed rates. I'm just wondering what weaker loan growth would imply in the scenario where we get to the [2.5 name versus the 2.4]?

Clark Khayat

Yeah. Okay. Thank you, Ebrahim. And maybe I'll just kind of reground everybody in the whole thing and then I'll get to your question because I'm sure this is not -- you're not unique in the NII question for the fourth quarter.
So first of all, I think we've been really consistent or tried to be that a lot of this pull through will happen in the second half of '24, which we would expect well materialize as you see on this slide and you noted. So we've talked a lot about the structural roll off and swaps and treasuries.
So just a reminder, $5.5 billion to treasuries maturing in the second half at an average yield of about 47 basis points, $3.8 billion of swaps at about 60 basis points, and then $2 billion of securities repricing at roughly a low to mid 2% yield.
So just that's the piece on the left that you referred to, there's another $10 million to $15 million in day count and fees. So again, we feel fairly good about that pulling through. We do expect deposit cost to continue to rise. So let's assume one cut coming in December, we guided to a mid-50s beta if there's no cuts. So a little bit of drift up if there's one cut in December, that will be impacted materially.
We will see some benefit on betas if there's a cut in September, but we will also see the impact obviously of loan yields coming down and that will happen in advance, not just because the loans reprice immediately. But so far will reflect that as you know, a little bit before that cut.
So there's a little bit of negative drag in 2024 if there's a first cut in September. As you commented, right, loan balances will be the variable. So we've been a little weaker in the quarter than planned. As Chris said, our pipelines are strengthening materially. I think that's a function of ongoing engagement with our teams, with clients and prospects.
As you said, middle market is up 50%-plus on the pipeline side. So we do expect and are starting to see some traction in the back half. I think if there's a little bit lighter loan growth than what we guided to, we'll still be okay getting there. I think if it's materially lower than yield that's a different conversation.
What the real implication is, I think and probably where your question is going is what does that mean for 2025 and the size of the balance sheet and the loan book going there. So look, I do think we all expect rate cuts to come, although I'm certainly not very good at predicting the economy.
So I've tried to do that, but should we get some rate cuts? We do think that will create more client activity were already as we talked about in pipeline and engagement dialogues seeing client interest in that. I think that means even if we start with a lower exit rate on loans, we will see good strong growth going into 2025 on loans.
In the 12 years, I've been a Key other than the last 12 months, we've been a leader on commercial loan growth. And I don't see anything today that would cause me to believe that will be different going forward. But I do think it's valuable maybe to add a couple pieces of content on 2025 that we really haven't covered we've been laser focused on 2024 swaps and treasuries.
So let me just add something that we've included in the appendix on slide 20, which just gives you some sense of maybe some repricing opportunity in '25 as well. And that is about $20 billion of additional asset repricing that comes next year.
Those yields are low 3%, and that comprised of $5.2 billion of swaps coming off of [1.80%. So some more swap pickup, not as meaningful as what we're seeing today, but not meaningful at those levels, another $11 billion-plus of fixed rate loan repricing that are coming off at 4.15% and then $4.2 billion of fixed rate securities that are about 2.75%].
So a definite opportunity there. You'll also get the full year move and impact of fourth-quarter treasuries that will come off the books and swaps. And then as rate cuts come in, we'll have the full year '25 to deploy that beta into our consumer book.
So I do think there are headwinds or tailwinds for us, sorry, as we get into 2025. And I think, we have confidence we'll be able to grow loans and add clients on the commercial side as well.

Ebrahim Poonawala

That's good color. Thanks, Clark for walking through. The other question, just on slide 10. You look at NPLs and criticized picking up sequentially, we are seeing a lot of banks talk more about losses coming from C&I. Remind us in terms of your outlook on sort of what you are seeing from your customers and C&I, any specific areas where you're seeing credit degradation that could lead to just higher NPLs going forward and charge-offs? Thank you.

Christopher Gorman

So Ebrahim, it's Chris. A couple of things. One, the normal migration from criticized to non-performers, it's playing out exactly as we would have expected it to. Stepping back for just a second, our C&I book, 53% of it is investment grade, 70% is secured. And so -- and most of them are have very low utilization in terms of borrowing. So we start from a pretty good place.
Your question's a good one, though, as to where sort of the action is and let me tell you where we're seeing some people impacted by the higher for longer scenario consumer goods, some business services, some equipment businesses.
On the other side of the equation, we're starting to see actually healing in the health care sector. So think about seniors housing, think about facilities based health care, we're seeing that kind of going in the other direction.
The other thing that we always look at is what's the mix of downgrades to upgrades and downgrades still exceed upgrades, but that ratio is starting to close. So that's kind of how we're thinking about it. Obviously, C&I is a very broad category in general, but that's kind of a sort of how we're thinking about it.

Clark Khayat

And the only other thing if we might just follow on from the financial standpoint, we built the reserve very strongly over the last 12 months. We came in, I think, solidly in net charge-off and provision in the quarter, we do expect some normalization.
So we'd expect net charge-offs to pick up in the back half. That's, I think, fairly consistent with where we've been we're comfortable in our 30 basis points to 40 basis points range. I did say last month, we probably tend to the higher end of that, but that's really a denominator issue on loans versus more charge-offs than expected.

Ebrahim Poonawala

Thank you for taking my questions.

Clark Khayat

Thank you.

Operator

Scott Siefers, Piper Sandler.

Scott Siefers

Morning, guys. Thanks for taking the question. So Clark, appreciate that sort of walk through on the NII, still have sort of NII related question. Maybe when you look at sort of the deposits that -- so the deposits base looks like it's going to come in better than you had anticipated previously. Can you maybe walk through what kinds of deposits are growing and what sort of what the spread looks like on those.
So I think there's probably some question if we dialed back the loan growth expectation, but we're still getting funds in that will go into something? Just sort of what that spread looks like in your view?

Clark Khayat

Yeah. So good thanks Scott, for the question. So one, I'd say we're always trying to grow operating accounts and checking accounts. So we're going to do that kind of regardless of what we think's happening on the asset side of the balance sheet.
We did mention we added a little bit of CDs intentionally just to get ahead of what we think are some tightening liquidity expectations. And if we don't see loan growth for whatever reason. Again, we don't expect that we do have some funding optimization, whether it's continuing to drive down the brokered CDs or FHLB advances.
So we think we'll have some opportunity to do that. We have built the cash position. So at the end of the quarter, we were kind of in the $15 billion range. So that gives you some indication of where that cash is sitting at the moment.
But I would say just on deposits, maybe highlight a couple of things on where we see the back half going one, I think, positively in the commercial book, we continue to have very active dialogue with clients about their accounts.
We've talked a lot about hybrids, for example, that continues to be a really good product for our clients and for Key. And we've actually moved pretty meaningfully the percentage of clients that we would deem as sort of index or index like so as we have dialogues, they talk about rates we've been able to move them to a more indexed like product or structure with obviously anticipation of down rates.
So we think that will benefit us when cuts start to come down. And we're continuing to shorten the CD maturities rates have stayed higher. So we haven't been as active driving those prices down. But we have been pulling in the maturities and we do have a decent amount coming due here in the fourth quarter that we'll be able to reprice to the extent rates do come down. So that's kind of the one view on that.
And we'd expect, we've been pretty clear conservatively on down betas if there's one type, if there's a second cut, we'll obviously have more opportunity to deploy that in the fourth quarter, but we still think we'll probably lag a little bit, but that will be a tailwind for '25.

Scott Siefers

Perfect. Okay. Thank you, Clark. And then a little bit of a ticky-tack question on the swaps commentary on slide 13. So you said the $950 million annualized opportunity, which was that down a little from $975 million last quarter. So I've gotten a couple of questions. Is that represent a reduction in expectations? Or is it that we've just already absorbed that difference in the 1950s? What's still remaining in the future?

Clark Khayat

It should be a function of just where rates are as we do the calculation, but I can -- we can follow up and give you this the detail on that. If the forward curves come down a little bit, that would impact that.

Scott Siefers

Okay. Perfect. All right, good. Thank you for taking the questions.

Clark Khayat

Yeah. Thanks, Scott.

Operator

Ken Usdin, Jefferies.

Ken Usdin

Hey, guys, good morning. Just to follow up on just of loans in the context of the whole balance sheet. So I'm just wondering if you could give us a little bit more color on just how much of the loan growth versus what we see in [H8]. We see appears just you guys just being more conservative.
And can you talk a little bit about like how much did you keep of your originated, did that change? And where specifically, when you mentioned earlier, Clark, the pipelines, like what areas do you see those pipelines coming in? Is it more just a straight-up commercial? Thanks.

Christopher Gorman

Sure, Ken. It's Chris, let me start by kind of sharing with you kind of what's going on out there in the marketplace because I think loan demand is pretty tepid, across the board and here's what we're talking to clients, I think these are the unknowns that are keeping people from borrowing in general.
One is just concerned about the economy, what's the trajectory? The next is rates and it's two things. One, obviously, the cost of capital has gone up significantly as Fed funds rose from 25 bps to 525 bps. But on top of that, we've just had a lot of volatility in the 10-year.
And so today, it's around 4.2%, I actually think will have higher for longer. And I think once that settles and people will borrow, but as I talk to clients, if they think that it's going to go down and they think rates are going to go down and go down precipitously, they're less inclined to make a move.
Also, there's kind of a 12 to 18 month lead time around most big CapEx and property plant and equipment projects and people have kind of been putting those on hold. I think the election I think that also is just another variable out there a lot of these closely held businesses because they think about things like tax policy and the ability to take accelerated depreciation. So I think all of those are in the mix.
The next thing that I think also impacts it is there's no question that the rate of inflation is coming down. And so people that were first during the pandemic motivated to kind of go long inventory because of the supply issues, then they were motivated to go long inventory because of inflation that's kind of wearing off. So what we actually saw was a contraction in our utilization rate by a percentage point.
going to your question about kind of what we keep on the balance sheet and what we place in the quarter just ended, we raised $23 billion for the benefit of our customers, and we kept 16% of it on our balance sheet.
And typically throughout our history, we typically would have 20%, 16% is up a bit from last quarter. So that kind of gives you a sort of a flavor of what's going on. There is I sat down with all of our senior credit officers yesterday and we are seeing in the marketplace some degradation in terms of structure and on as people compete for on the loans that are out there.
We clearly are not going to reach infrastructure at all. We don't feel like we need to do that. But that is an element but it's not the lion's share of what's going on. On the positive side, we're starting to see transactional finance starting to come into the pipeline, for example, in our real estate business, 30% of the pipeline right now is transactional, which is a big change. So maybe hopefully that's helpful, Ken, in terms of how we're thinking about it what's going on out in the marketplace.

Ken Usdin

Great. Thank you for that color. And second question is just when we think about just the entirety of the balance sheet, your RWAs have come down a lot over the last year or so. CET1 is growing CET1, even with AOCI we can see in slide 24 up to [7.3], the stress test went a little bit tougher.
So just how important is that is managing to that with AOCI number, if at all, relative to your 10, 3 regular way and just how you're thinking about just managing your capital position vis a vis the loan book and RWA growth? Thanks.

Christopher Gorman

Ken, we feel good about our capital position. Obviously, since the beginning of since the initial proposal, the Basel III endgame. Clearly, when the re proposal comes out, it will be pushed out and it will be less severe. We had said initially that we had a clear path to get to where we wanted to get to on both the CET1 and a marked CET1 and that really hasn't changed.
The other thing that I've said in the past is I think, as all these rules are applied and there's a lot of question marks because we've got the long-term debt proposal, we've got the Basel III endgame. I think when you put it all together, I'm not -- I won't be surprised that most people are where we are right now where you have kind of a mid-70s sort of loan to deposit ratio. But that remains to be seen because we are yet to know we'll have to see how it plays out on a couple of these rules.

Ken Usdin

Okay, got it. Thank you, Chris.

Christopher Gorman

Thank you, Ken.

Operator

Erika Najarian, UBS.

Erika Najarian

Hi, good morning. (multiple speakers) hey, I'm just on slide 14. So it's pretty clear that $899 million-plus let's call it $125 million you've got [$1.24 billion] in theory, quote in the bag for 4Q '24. And I'm wondering of those green bars question Chris and Clark in terms of improved funding mix and loan growth, and we just heard Chris talk about how perhaps the macro environment is not that great for loan growth.
Could you walk us through sort of the probability of those green bars being green and obviously, the last two will have everything to do with the rate curve rate. So and you gave us pretty good guardrails in terms of how to think about deposit costs. But tell us a little bit more about how you plan to achieve the improved funding mix in the loan growth to be net positive to that number?

Clark Khayat

Sure. So let me handle the first one, Erika. So look on improved funding mix. We're still sitting on something on the order of kind of $7 billion in FHLB advances. So we have some opportunity to continue to bring that down. We've brought brokered down close to $6 billion over the last year, but still some opportunity to manage that as well.
And then on the margin, we can kind of calibrate where we think overall deposit costs will be based on the size of the balance sheet and the loan book. So we do think we have some opportunity to do that and a little bit of leverage here in the back half of the year on maturities around things like CDs and MMDA.
So we're looking at that very dynamically. We're watching our loan pipelines as they materialize, and we feel like we should be able to pivot one way or the other based on how much traction we're getting on loans.

Christopher Gorman

Erika, where we would expect to get loan growth are in areas where we've always been able to get a lot of loan growth, things like renewables that are we're a market leader and those are project financings where we were not aggressive last year and now we are things like affordable similarly and also sort of a health care area where there's just a lot of consolidation.

Erika Najarian

Got it. And my second question is a follow-up to Ken's question about capital. I think what struck me on slide 11 is I'm not sure how different the forward rate versus flat rate scenario are interpreted, as declined by that much how much time versus rates, although granted you only have 25 basis points difference in terms of the belly of the curve here is really what's going to heal the AOCI.
And obviously the stress test is a was a bit of a sort of a negative surprise. As Clarke said, you guys have always been a premier grower in commercial and if macro comes back, you would think that Key is in a position to outperform peers.
So it's about and I guess, how much is this adjusted AOCI impacting if at all your growth plan, it seems to be impacting your multiple and how investors think about you, but perhaps, sort of square that for your investor base for us in terms of how your RMs are going to market versus this the sort of the difference between adjusted and reported.
And Clark, just quick confirmation, should we assume a flat balance sheet from the [$170.6 billion] to through the end of the year? Thank you.

Christopher Gorman

I'll start with the first part of that. The our AOCI position has no impact at all on our RMs out competing in the marketplace. That's just not a variable for them at all. And to your point under the two different rate scenarios we talked about the difference is only $200 million. So it is a function of time, but it doesn't impact how we run the business day-in and day-out.

Clark Khayat

Yeah. And I would just add to that, right, we do have consumer loans that continue to come down, and that gives us both liquidity and capital to redeploy into commercial there. So to Chris's point, right, that's not something we're viewing as a limiter in the field as far as the balance sheet through the rest of the year, I think going to relatively flat is a good place to start. As I said to you in response to your optimization question, that could move around a little bit, but I wouldn't expect it to be meaningfully large moves on earning assets.

Erika Najarian

So just to confirm, it feels like, obviously the go to market strategy you very firm, Chris, if that's not impacted in terms of managing the balance sheet for these wins, should we expect any RWA mitigation or credit risk transfers? Or do you feel like that's very much a 2023 story at this point?

Christopher Gorman

Yeah. I mean, and I appreciate your consistency on that particular item, Erika. Look, it's something we spend a lot of time looking at and understanding, but which I think a lot of us did we obviously had some peers do some things by the way in places where we had already made move.
So auto in particular, where we had exited back in '21. There are some opportunities for us to do that. But frankly, we don't see a huge value in getting that additional CET1 at the moment. If something were to change, we know how to execute the transaction like that.
We have a couple of portfolios that are likely prime candidates for that. But it's not clear to me at this moment that's not a lever that we need to pull to drive improved capital.

Clark Khayat

Obviously the better you think your portfolio is the more expensive the transaction as.

Erika Najarian

Got it. Thank you so much.

Clark Khayat

Sure. Thanks.

Operator

Gerard Cassidy, RBC.

Gerard Cassidy

Hi Chris. Hi Clark.

Christopher Gorman

Hey Gerard.

Gerard Cassidy

Chris, I know this is not really quantifiable, but obviously you've been at this for quite some time, but I took interest in your comments about your pipelines and how strong they are. Can you give us some confidence on those pipelines and those pipelines? How confident are you that these are real that they could pull through as you look at it over the next 12 months?

Christopher Gorman

Well, we as you can imagine, we have a pretty detailed review of our pipelines for just the reason that you mentioned and I look at pipelines, it's a combination of probability time to time times to be. We spent a lot of time looking at Oak will some fall away.
I'm sure they will, will some things appear that will be relatively short dated that will close expeditiously that will happen as well. But we sweat the details on these pipelines where we haven't been as tight -- as on some of the loan pipelines just because those that have a few more variables and people sometimes they those deals get done away from you.
But with respect to our investment banking pipelines, we're in good stead. Now if we have a huge downturn and all of a sudden the markets change significantly. Obviously, those pipelines can go away, but we feel good about the pipeline.

Gerard Cassidy

Very good. And then as a follow-up on the credit on your slide 10, I think you guys mentioned that there seems to be some improvement in the health care area. And in the C&I, I think you said it may have been durable consumer.
The question on the C&I portfolio. Obviously, you guys have been very strong in capital markets for a number of years. And part of that, I presume you work with your sponsors, the private equity guys and in earning the fees from those folks, they tend to also use your balance sheet.
Is there any evidence that on the private equity side or the loans to no depository financials that category and I know it includes insurance companies and less riskier borrowers. But is there any evidence that there's any credit concerns in that category of loans?

Christopher Gorman

No, there's not. And you asked specifically about loans to the private equity community. Obviously, those are in the category of leveraged loans and we are literally in this kind of rate increase. We're underwriting those literally every quarter. Are there are there some issues? Has there been some migration? Absolutely, but we're not concerned about that universe of borrowers.

Clark Khayat

And Gerard that portfolio that would drive kind of that financials concentration. We've been in that 20-ish years. And it may be there's one loss in that timeframe like literally one credit it's super clean great returns. And it is actually the portfolio that we entered into that forward-flow agreement with Blackstone, and that was entirely to manage the credit risk concentration, not for any concerns about the quality of that portfolio.

Gerard Cassidy

Got it. And Clark, well, I have you just a quick technical question on that slide 20, where you gave us the '25 refinancing some dollar amounts and the coupon on the what you're receiving. What's the increase for example, the [1.80%] on a weighted average rate received, if that was to convert today, what would it convert to same thing with the fixed rate loans?

Clark Khayat

Yeah. So today, we are putting forward starters on in 2025 for the purpose of getting a little bit liability sensitive going forward. And we're putting those on kind of in the 4% range. So obviously, that depends on how forward-starting and how long they are, but that compares to the [1.80% quite favorably obviously. And even the 2.78% that sits out there '26], so definite benefit there.
On the fixed rate consumer loans at [4.15%], those are probably well one the student loan market just is it there for a variety of reasons of rates and rates in the sort of given overhang and the forgiveness in the holiday from the government.
But if you were going to put on kind of that, the jumbo mortgage market, that's probably in the [6.5% to 7%] range, but that is an incredibly vibrant at the moment either. But those would be the kind of comparison points.
And then on your, yeah, [if you did C&1 you'd be at 7. So that would be the way we probably think about that replacement rate. And then on the securities that 2.74% today, it's coming on kind of 5.5 to 5.75-ish range].

Gerard Cassidy

Very, very good. Thank you, Clark.

Operator

John Pancari, Evercore.

John Pancari

Morning.

Clark Khayat

Morning, John.

John Pancari

As you're actually looking at the on the impact of the swap and treasury maturities and the benefit that NII and heavy focus on, the 4Q exit rate of demand and what it means. And clearly, that has a pretty positive impact on 2025.
And I believe from a revenue perspective, you could be looking at double digit revenue growth and mid-teens or so on NII next year in terms of growth, just given that dynamic. What type of how should we think about how much of that benefit really fall to the bottom line operating leverage for next year? Looks like, it could be anywhere in the ballpark of 800 basis points to 900 basis points positive operating leverage based on how consensus is thinking about it, if you're looking at a 2% expense growth rate.
So is it that wide of positive operating leverage that you're allowed to materialize and allow this to fall the bottom line or you think that we could be looking at something less than that.

Christopher Gorman

Hey John, it's Chris. We -- I don't disagree with your assumptions, but obviously, we're not yet coming out with sort of what are our view is of 2025.

John Pancari

Okay. All right. Thanks. And then separately on the deposit cost side, I know you indicated that you expect some incremental pressure on deposit costs may increase this quarter, but a little bit less than first quarter and you started to CDS actions on that front.
Can you maybe just help us think about the incremental upside that you think is likely under maybe a forward curve assumption when you look at deposit costs from here.

Clark Khayat

When you say upside, just so I understand you're talking about increase in rates or beta?

John Pancari

Increasing rates, yeah sorry.

Clark Khayat

Yeah. Look, so we guided to kind of mid-50s, if there were no cuts, one cut will have a maybe minor impact on that. If that cuts in December as you know, there's just not a lot of time to run to implement that. And the reality is, I guess, technically, if that kind of occurs the beta cycle sort of over. So the question is your beta on that first cut, positive or negative? I think it would be in December. Again, not a lot impact.
If we do get a cut in September as well as I said, I think on you're going to have a little bit of drift just by nature of the stickiness of the consumer book, but we'd think we have kind of a plus or minus 20 beta coming down.
What that does on the overall cost, again, you get kind of into the technical definition of data cycles ending. But I think you'd see in a September cut rate start to really flatten through the back half of the year, whereas with one cut in December, they may still be up a bit.

John Pancari

Got it. Okay, great. Thanks, Clark.

Clark Khayat

Yeah.

Operator

Matt O'Connor, Deutsche Bank.

Matt O'Connor

Good morning. Just to bring it all together on the investment banking fees, the strong kind of out of pipeline, how do you think about the back half of the year? I think you talked about $300 million to $350 million of revenues maybe last month. So how you're still you still feel comfortable about that range?

Christopher Gorman

Yeah, Matt, it's Chris that is the range that we would that we believe we'll do a our revenues will be in the back half of the year. We ended the first half of the year right around $300 million and we've guided all along to [$600 million to $650 million], and that's unchanged.

Matt O'Connor

Okay. And then sticking with fees, the trust investment management or investment services, obviously nice growth there some boost from the market, but just remind us what else is going on there that might drive growth beyond what the market's giving us here? Thank you.

Christopher Gorman

Well, one of the things we talked about in my initial comments is we're clearly really growing our massive flow of business. That was the business where we brought in 30,000 new customers and about $3 billion of total assets to Key. So that's really -- that's a big driver of that line.

Matt O'Connor

Okay. Thank you very much.

Christopher Gorman

Thank you, Matt.

Operator

Manan Gosalia, Morgan Stanley.

Manan Gosalia

Hey, good morning, guys. I just wanted to ask on the ACL ratio it's a larger coming down. You ratcheting up reserves from a dollar perspective to the ACL ratio has been going up fairly steadily. How do you think about those reserve levels and what's the right level here if the macro environment remains stable?

Christopher Gorman

So first, of all, thank you for the question of the three things that really drive that are, as you point out loan growth, your view of the macro economy and then idiosyncratic to the actual credits. I could see a scenario depending on how this plays out, where we evaluate, what the total reserve is.
But I think it's premature right now only because it's still unclear to us exactly what path the economy is going to take. But as we get more clarity, we'll continue to evaluate it.

Manan Gosalia

So I guess what you're saying is until there's uncertainty, probably keep the reserves at these levels. And then when you get a little bit more certainty, you can start to bring that down and right size that relative to your loan growth, is that as fair?

Christopher Gorman

Right. We'd constantly be looking at it adjusting it based on the three metrics that I just shared with you. One our view of the macro economy. Secondly, on the size of the book, which obviously is going down in this instance, and also just the idiosyncratic. What did things like migration and what we have in terms of non-performers and so forth.

Manan Gosalia

Got it. Thank you.

Christopher Gorman

Thank you.

Operator

Steve Alexopoulos, JPMorgan.

Steve Alexopoulos

Good morning, everyone.

Christopher Gorman

Hey Steve.

Clark Khayat

Hey Steve.

Steve Alexopoulos

I want to start that Clark. Thank you for all the detailed disclosures on NII, and we've obviously beat that horse on this call quite a bit. But just assuming that we get two cuts this year, just a September and December. What's your bias in terms of where you'll likely be in terms of the NII range for the year.

Clark Khayat

Look I think with two cuts, we're going to be closer to the bottom end of our range. But I would tell you just from an overall health of the business, I'd take the second cut because I think it drives more loan demand. I think a buys more from capital markets activity. I think it gets people more engaged in economic investments. So I think it's a trade we certainly would make going into 2025 versus, I guess, maximizing what's in the fourth quarter.

Steve Alexopoulos

Got it. Okay. Thanks. And for my follow-up question, I wanted to go back and ask John's question a little bit different on expenses. I know you're not going to give 2025 outlook at this point, but if you do achieve the expense outlook this year.
I think that's basically three years in a row where you're having and real expense growth. And I guess we're curious of your lots of ways to achieve that. One of them is just deferring expenses and projects until the environment is better.
It is that the can you just help us understand that? Is there a catch-up and expensive coming because you've been deferring and you have an expense growth for multiple years, or could the next year as the revenue environment gets better? Just looked like a more normal expense year for the company?

Christopher Gorman

So, Steve, the answer is as we look forward, it will be a more normal expense year for the company as we continue to come out of the position that we're in, we have been investing, though, and the reason we've been able to invest as we took $400 million of expenses out last year, just for the purposes of being able to invest in people and in technology and in the businesses that we're trying to grow, like our private client business our payments business, our investment banking business.
So expenses will go up in 2025, as you see the pull through of the earnings that we're talking about. But we have not starve the business. We've continued to invest in our migration to the cloud. We've continued to spend $800 million a year in our tech area.
So but in order to be able to continue to invest in the business. I think you can imagine that expenses will go up in 2025, but it's not because of deferred expenses it's just because our business is continues to grow.

Clark Khayat

Just to put it reiterate Chris's point there, it just investment will be stable to up. It's just the lack of a clear takeout to fund that, that will be the difference.

Steve Alexopoulos

Got it. Okay. That's great color. Thanks a lot.

Clark Khayat

Thanks, Andy.

Operator

Mike Mayo, Wells Fargo.

Mike Mayo

Hi, I think I'm missing something very basic and that is that you have the same no change to the fixed asset repricing. You have a less favorable loan growth guidance yet you still have the same NII guidance. So what am I missing and my logic?

Clark Khayat

Yeah. Look, I mean, it's part of it is there is a range, Mike. So where you land in the range is part of that. A lot of that, as we've talked about in the call, a lot of the increase is going to be structural to the fixed asset repricing.
So the plus or minus pieces on that, I think is largely going to be whether or not we have loan growth, but a little bit of that muted loan growth is offset by a little bit stronger deposit performance. So we hit both of those balance sheet components, one of the negative, one of the positive, and we think those are somewhat offsetting. So the amount of loan growth we see in the second half would be kind of the plus or minus on average.

Mike Mayo

You said middle market pipelines are up 50% quarter over quarter. Is that correct? And how much is middle market of your total commercial?

Christopher Gorman

The answer is the 50% quarter-over-quarter is correct. And middle market would be of total commercial probably 40%.

Mike Mayo

So even though you have such strong backlogs and seems like you have a certain degree of conviction, you still thought you should guide loan growth lower, is that correct?

Christopher Gorman

We did it. One of the things, one of the reasons we felt that way, Mike, is that our exit rate was lower than our average loan rate, which was part of our thinking there.

Mike Mayo

And then just a separate topic, Chris, in terms of the merger environment, I feel like the topic side down here recently, but you said that you'd be willing and able to pursue another First Niagara sort of deal. Is that still the case? No matter what circumstances do you think it would become more likely would be more likely after the election. What do you think the tone is in DC and what's your appetite?

Christopher Gorman

Sure. So as it relates to a depository, I don't see anything happening in the near future. I think the obstacles to completing a deal is first of all, can you get it approved? Secondly, if you can't get it approved, how long does it take and what's left of the business after you get it approved? As I mentioned earlier, I think there's some real questions on everyone seems to be coalescing around the soft landing.
I hope people are right. I'm not sure that that's a fait accompli. And so I think as you're thinking about buying a business, you're buying their book and of course, unrealized losses become realized losses. So for all those reasons, I don't see it happening in the near future.
What I had mentioned in the -- on the call that you would sponsor. As I said, with respect to First Niagara, we were able to keep the clients and keep the people and take 42% of the costs out of the business. And I think that's a pretty good business model in any industry.
So I think there will be consolidation. What I've shared with our team is I don't think there's going to be any consolidation until there's a lot. So I think that -- I think there will be consolidation where you will see us spending time is on these entrepreneurial businesses.
I'm really proud of our ability to buy entrepreneurial niche businesses and integrate them into our business. That's really hard for a big company to do. And I think we've done it pretty well. And that would be things that we'd be focused on in the near and medium term.

Mike Mayo

And then last question, investment banking I know your mix is different. You're more loan syndications, you have mergers, but relative to the big banks, I know it's not apples to apples completely, but it just doesn't really compares very favorably to them. On the other hand, you said you have record backlogs in investment banking. So what areas investment banking are you seeing the record backlogs.

Christopher Gorman

Sure. So the divergence I'll start with the divergence. We are focused because on certain industries, I think a lot of people had a pretty good quarter with respect to equities we did not particularly just because of one that's not a huge business for us.
And secondly, equities team tend to be issued in certain verticals at certain times. Where we have a strong backlog, and it's the most important place for us given our middle market franchise, like is in M&A because our M&A business pulls through a lot of things like loans like hedging. So that's where our pipelines are strong.
The other area we have a commercial mortgage business. And as rates come down, I think you're going to see that business -- as rates come down and stabilize. And I think you need both, candidly for all the reasons I talked about earlier, I think you're going to see that really a pickup in terms of what comes out of the pipe in the second half of the year.

Mike Mayo

Got it. Thank you.

Christopher Gorman

Thank you. Appreciate your questions.

Operator

Peter Winter, DA Davidson.

Peter Winter

Good morning.

Christopher Gorman

Good morning, Peter.

Peter Winter

Morning, that consumer loan growth was under quite a bit of pressure in the second quarter. I'm just wondering if you could talk about the outlook on the consumer side of the lending business?

Clark Khayat

Sure. Our consumer lending, we as Peter, we don't have a huge credit card book. It's really mortgage home equity, personal loans, student loans, not an enormous amount of volume in the mortgage market, the jumbo mortgage market or nonconforming market or the student loan market, which is generally what has been on balance sheet for us.
We continue to see more clients where we can, particularly in held for sale mortgages. But I would suspect as we go forward, you will see us do and rates come down and those businesses get a little stronger. You'll see us support those clients very actively, but probably do a little bit more of that off balance sheet.
So we'll view that a little bit more as a fee income generators, as we service those clients. We will always have some room on the balance sheet to accommodate good clients as it relates to nonconforming structures as an example. But that will be probably less so than it's been the last few years.

Peter Winter

Would you expect a just given the low yields, a similar type of decline going forward on the consumer side?

Christopher Gorman

In terms of what we see in this year.

Peter Winter

Just relative to the second quarter?

Christopher Gorman

Yeah. I mean, I'd have to go back and look for sure, but you have student loans and mortgages, right there just have structural paydowns every month. So we'll see that book continue to come down at a sort of normalized rate.
I think it will accelerate as rates come down. But they have to come down quite a bit, frankly, for a lot of refi. So I think what you're seeing is probably illustrative what you'd expect going forward. Okay, so differently I don't know of any unique thing that happened in the second quarter that would have driven consumer loan growth down more than expected.

Peter Winter

Okay. And then just on a different question. Just on buybacks, I know there are no plans to buy back stock this year. But Chris, I'm just wondering what are some of the parameters you're looking at to get back into the market to buy back stock?

Christopher Gorman

Well, the first parameter would be to really have a firm understanding of where the Basel III endgame is going to be because until we know what the phase-in period is and what capital is going to be required on that's just I think that's a very important piece of the equation.
And for us, obviously, we had mentioned we've been under earning and as our balance sheet deals, that will give us an opportunity at the appropriate time to revisit that but we've been very clear. We're not going to engage in any buybacks this year for sure, because we, in fact have a plan approved by the Board. But going forward, obviously, like everybody will be taking a look at it.

Peter Winter

And then just one more last clarification question, Clark on Steve's question about the NII range. You mentioned with two rate cuts closer to the bottom end of the range, does that mean closer to 2% down?

Clark Khayat

It closer to 5%, so would be the worse than the --

Peter Winter

Upper end of the downlink?

Clark Khayat

Yeah, we can wrestle on those semantics. But yes, closer to the 5% down.

Peter Winter

Got it. Thanks. Thanks for taking the questions.

Christopher Gorman

Thanks, Peter.

Operator

And I'll now turn the conference back to Chris Gorman for closing remarks.

Christopher Gorman

Again, thank you for participating in our call today. If you have any follow-up questions, you can direct them to Brian at our Investor Relations team. This concludes our remarks. Thank you.

Operator

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