KeyCorp (KEY) 10-Q2024 Q3 Quarterly report

0000091576us-gaap:InterestRateContractMember2023-07-012023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

This section reviews the financial condition and results of operations of KeyCorp and its subsidiaries for the quarterly periods ended September 30, 2024, and September 30, 2023. Some tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. When you read this discussion, you should also refer to the consolidated financial statements and related notes in this report. The page locations of specific sections and notes that we refer to are presented in the Table of Contents.

Throughout this discussion, references to “Key,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of KeyCorp and its subsidiaries. “KeyCorp” refers solely to the parent holding company, and “KeyBank” refers solely to KeyCorp’s subsidiary bank, KeyBank National Association. “KeyBank (consolidated)” refers to the consolidated entity consisting of KeyBank and its subsidiaries.

We want to explain some industry-specific terms at the outset so you can better understand the discussion that follows.

The acronyms and abbreviations identified below are used in the Management’s Discussion & Analysis of Financial Condition & Results of Operations as well as in the Notes to Consolidated Financial Statements (Unaudited). You may find it helpful to refer back to this page as you read this report.

From time to time, we have made or will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements do not relate strictly to historical or current facts. Forward-looking statements usually can be identified by the use of words such as “goal,” “objective,” “plan,” “expect,” “assume,” “anticipate,” “intend,” “project,” “believe,” “estimate,” “will,” “would,” “should,” “could,” or other words of similar meaning. Forward-looking statements provide our current expectations or forecasts of future events, circumstances, results or aspirations. Our disclosures in this report contain forward-looking statements. We may also make forward-looking statements in other documents filed with or furnished to the SEC. In addition, we may make forward-looking statements orally to analysts, investors, representatives of the media and others.

Forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, many of which are outside of our control. Our actual results may differ materially from those set forth in our forward-looking statements. There is no assurance that any list of risks and uncertainties or risk factors is complete. In addition, no assurance

can be given that any plan, initiative, projection, goal, commitment, expectation, or prospect set forth in this report can or will be achieved. Factors that could cause our actual results to differ from those described in forward-looking statements include, but are not limited to:

Any forward-looking statements made by us or on our behalf speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement to reflect the impact of subsequent events or circumstances, except as required by applicable securities laws. Before making an investment decision, you should carefully consider all risks and uncertainties disclosed in our 2023 Form 10-K, in Part II, Item 1A. "Risk Factors" of this report, and in any subsequent reports filed with the SEC by Key, as well as our registration statements under the Securities Act of 1933, as amended, all of which are or will upon filing be accessible on the SEC’s website at www.sec.gov and on our website at www.key.com/ir.

Our actions and results during the third quarter of 2024 support our long-term targets and corporate strategy described in the “Introduction” section under the “Corporate strategy” heading on page 50 of our 2023 Form 10-K.

In addition to the actions and results described above, we executed the following strategic actions during the third quarter of 2024:

Strategic Minority Investment by Scotiabank

On August 12, 2024, we entered into an Investment Agreement with Scotiabank pursuant to which Scotiabank agreed to make a strategic minority investment in KeyCorp of approximately $2.8 billion, representing approximately 14.9% pro forma common stock ownership of KeyCorp, for a fixed price of $17.17 per share. On August 30, 2024, Scotiabank completed the initial purchase of KeyCorp’s Common Shares with an investment of approximately $821 million in gross proceeds. With this investment, Scotiabank owns approximately 4.9% of KeyCorp’s common stock. The parties expect to complete the final purchase of approximately $2.0 billion of KeyCorp’s common stock in the first quarter of 2025, subject to Federal Reserve approval. Refer to Note 19 (“Shareholders’ Equity”) for additional information on this transaction.

Securities Repositioning

On September 6, 2024, we initiated a strategic repositioning of our available-for-sale investment securities portfolio by selling approximately $7.0 billion in market value of low-yielding mortgage-backed securities. The mortgage-backed securities that were sold had a weighted average book yield of approximately 2.3% and an average duration of approximately six years. Reinvestment of the proceeds from the sale was completed in October, with the new securities having an average book yield of approximately 4.95% and an average duration of approximately four years. During the third quarter of 2024, along with our customary sale of short-dated U.S. Treasuries set to mature within the quarter, we also sold approximately $3 billion in U.S. Treasuries yielding 50 basis points that were set to mature in the fourth quarter of 2024. The total pre-tax loss on sale of securities available for sale for the third quarter was $935 million of which $918 million was associated with the strategic repositioning.

Consistent with the forward guidance we provided on October 18, 2024, we expect these current year results, that is full year 2024 vs. full year 2023:

The Consumer Bank serves individuals and small businesses throughout our 15-state branch footprint and through our Laurel Road digital brand by offering a variety of deposit and investment products, personal finance and financial wellness services, lending, student loan refinancing, mortgage and home equity, credit card, treasury services, and business advisory services. In addition, wealth management and investment services are offered to assist non-profit and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.

The Commercial Bank consists of the Commercial and Institutional operating segments. The Commercial operating segment is a full-service, commercial banking platform that focuses primarily on serving the borrowing, cash management, and capital markets needs of middle market clients within Key’s 15-state branch footprint. The Institutional operating segment operates nationally in providing lending, equipment financing, and banking products and services to large corporate and institutional clients. The industry coverage and product teams have established expertise in the following sectors: Consumer, Energy, Healthcare, Industrial, Public Sector, Real Estate, and Technology. The Institutional operating segment is also a significant, national, commercial real estate lender and third-party servicer of commercial mortgage loans and special servicer of CMBS. The operating segment also includes the KBCM platform which provides a broad suite of capital markets products and services including syndicated finance, debt and equity capital markets, derivatives, foreign exchange, financial advisory, public finance, commercial payments, equipment finance, and commercial mortgage banking. Additionally, KBCM provides fixed income and equity sales and trading services to investor clients.

The following discussion provides a summary of recent regulatory developments and should be read in conjunction with the disclosure included in our 2023 Form 10-K under the heading “Supervision and Regulation” in Item 1. Business and under the heading “II. Compliance Risk” in Item 1A. Risk Factors as well as the disclosure included in Part II, Item 1A. "Risk Factors" of this report.

Regulatory capital requirements

KeyCorp and KeyBank are subject to regulatory capital requirements that are based largely on the Basel III international capital framework (“Basel III”). The Basel III capital framework and the U.S. implementation of the Basel III capital framework (“Regulatory Capital Rules”) are discussed in more detail in Item 1. Business of our 2023 Form 10-K under the heading “Supervision and Regulation — Regulatory capital requirements.”

Under the Regulatory Capital Rules, standardized approach banking organizations, such as KeyCorp and KeyBank, are required to meet the minimum capital and leverage ratios set forth in Figure 1 below. At September 30, 2024, KeyCorp’s ratios under the fully phased-in Regulatory Capital Rules were as set forth in Figure 1.

Revised prompt corrective action framework

The federal prompt corrective action (“PCA”) framework under the FDIA groups FDIC-insured depository institutions into one of five prompt corrective action capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In addition to implementing the Basel III capital framework in the United States, the Regulatory Capital Rules also revised the PCA capital category threshold ratios applicable to FDIC-insured depository institutions such as KeyBank, with an effective date of January 1, 2015. The revised PCA framework table in Figure 2 identifies the capital category thresholds for a “well capitalized” and an “adequately capitalized” institution under the PCA Framework.

As of September 30, 2024, KeyBank (consolidated) satisfied the risk-based and leverage capital requirements necessary to be considered “well capitalized” for purposes of the PCA framework. However, investors should not regard this determination as a representation of the overall financial condition or prospects of KeyBank because the PCA framework is intended to serve a limited supervisory function. Moreover, it is important to note that the PCA framework does not apply to BHCs, like KeyCorp.

KeyCorp is a Category IV banking organization subject to a supervisory stress test every other year. On June 26, 2024, the Federal Reserve announced the results of the supervisory stress test that it conducted of 31 BHCs having more than $100 billion in total consolidated assets (including KeyCorp). The Federal Reserve indicated that all BHCs subject to the stress test maintained capital ratios above the minimum required levels under the severely adverse scenario. The stress test results for individual BHCs (including KeyCorp) were used by the Federal Reserve to determine a BHC’s updated stress capital buffer requirement. The Federal Reserve published the updated stress capital buffer requirements on August 28, 2024. KeyCorp’s updated stress capital buffer is 3.1%. This stress capital buffer became effective on October 1, 2024 and will remain in effect until September 30, 2025, unless KeyCorp later receives an updated stress capital buffer requirement from the Federal Reserve.

See Item 1. Business of our 2023 Form 10-K under the heading “Supervision and Regulation - Regulatory capital requirements - Capital planning and stress testing” for a discussion of other developments concerning capital planning and stress testing requirements.

Deposit insurance and assessments

On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions (including KeyBank), to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points consistent with the Amended Restoration Plan approved by the FDIC on June 21, 2022. The FDIC indicated that it was taking this action in order to restore the DIF reserve ratio to the required statutory minimum of 1.35% by the statutory deadline of September 30, 2028. Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio. On March 10, 2023, and March 12, 2023, Silicon Valley Bank (“SVB”) and Signature Bank (“Signature”) were closed by the state banking authorities in California and New York, respectively, and the FDIC was appointed as receiver of SVB and Signature. All deposits of SVB and Signature were transferred to bridge banks established by the FDIC under the systemic risk exception to the least cost test in the FDIA so that the uninsured deposits as well as the insured deposits of both banks were protected by the FDIC. Under the FDIA, the loss to the DIF arising from the use of the systemic risk exception must be recovered through one or more special assessments.

On November 16, 2023, the FDIC issued a final rule to impose a special assessment on IDIs to recover the loss to the DIF resulting from the use of the systemic risk exception to protect the uninsured depositors of SVB and Signature. Under the final rule, the FDIC would collect a special assessment from IDIs at an annual rate of approximately 13.4 basis points over eight quarterly assessment periods, starting with the first quarterly assessment period of 2024. The assessment base for the proposed special assessment is equal to an IDI’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits held by the IDI. Because the estimated loss to the DIF from the use of the systemic risk exception will be periodically adjusted and because the total assessments collected may change due to corrective amendments filed by covered IDIs regarding the reported amount of uninsured deposits for the December 31, 2022 reporting period, the FDIC may cease collection of the special assessment early, extend the special assessment collection period, or impose a final shortfall special assessment.

In the final rule, the FDIC indicated that the special assessment is a tax-deductible operating expense for IDIs, and that it assumed that the effect on income of the entire amount of the special assessment would occur in one quarter for the IDIs subject to the assessment. The initial impact of the special assessment to Key was approximately $190 million in pre-tax expense, which was recognized upon issuance of the final rule in the fourth quarter of 2023.

The FDIC has indicated that the loss estimates to be recovered by the special assessment will be periodically adjusted as the FDIC (as receiver of the failed banks) sells assets, satisfies liabilities, and incurs receivership expenses. The FDIC said that it will provide any updates regarding the amount and collection period for the special assessment when it sends the quarterly deposit insurance assessment invoices to the IDIs subject to the special assessment. In the first quarter of 2024, the FDIC announced an increase in its estimate of losses from protecting the uninsured depositors of SVB and Signature and, therefore, increased the amount that it would collect through the special assessment. Because of this updated estimate, Key incurred an incremental pre-tax expense of $29 million in the first quarter of 2024. Based on the quarterly invoices Key received from the FDIC in June 2024 and September 2024, Key recorded an incremental pre-tax expense of $5 million in the second quarter of 2024 and a reversal of pre-tax expense of $6 million in the third quarter of 2024 to true-up initial estimates to invoiced amounts.

The FDIC’s final rule for a special assessment discussed above was not intended to recover the loss to the DIF from the failure of First Republic Bank in May 2023 (initially estimated as a $13 billion loss) or to the DIF from the failures of SVB and Signature that was not related to the protection of uninsured depositors (initially estimated as a $2.7 billion loss). The FDIC indicated that no further adjustments to assessments are contemplated at this time to recover those losses but that it will re-evaluate this issue in the future when it updates projections for the DIF balance and the reserve ratio in connection with its periodic review of the DIF Restoration Plan that was adopted in 2022. The FDIC updates these projections at least semiannually.

See Item 1. Business of our 2023 Form 10-K under the heading “Supervision and Regulation – FDIA, Resolution Authority and Financial Stability - Deposit insurance and assessments” for a discussion of other developments concerning deposit insurance and assessments.

Resolution and recovery plans

On June 20, 2024, the FDIC adopted a final rule to amend and restate its current resolution plan rule in order to clarify and strengthen resolution plan submission requirements and reflect lessons learned since the adoption of the FDIC’s current resolution plan rule in 2012. Among other things, the final rule (i) requires IDIs with more than $100 billion in total assets that are affiliated with a U.S. G-SIB to submit full resolution plans every two years, (ii) requires IDIs with more than $100 billion in total assets that are not affiliated with a U.S. G-SIB (including KeyBank) to submit full resolution plans every three years, (iii) requires IDIs with total assets between $50 billion and $100 billion to submit informational filings every three years, (iv) requires triennial filers to submit more limited supplements in the off years, (v) enhances and clarifies the requirements for the content of resolution submissions, (vi) codifies certain aspects of guidance and feedback provided to filers subject to the current rule, (vii) expands expectations regarding engagement and capabilities testing, and (viii) establishes an enhanced credibility standard for the evaluation of resolution submissions. The final rule was effective on October 1, 2024. KeyBank is required to file its next resolution plan by July 1, 2025, which will be its initial filing under the final rule.

On October 21, 2024, the OCC adopted revisions to its recovery planning guidelines. The OCC’s recovery planning guidelines require large OCC-regulated banks to develop and maintain a recovery plan that identifies triggers and options for responding to a wide range of severe internal and external stress scenarios so that the bank can be restored to financial strength and viability in a timely manner if it were to experience such stress situations. The OCC revised these guidelines to (i) expand the applicability of the guidelines to banks with at least $100 billion in average total consolidated assets, (ii) add a requirement for covered banks to test their recovery plans to ensure that their plans will be effective during periods of severe stress, and (iii) clarify that recovery plans should consider non-financial risks (including operational and strategic risks) as well as financial risks. KeyBank will be subject to the OCC’s revised recovery planning guidelines. KeyBank is required to be in compliance with these guidelines by January 1, 2026 except that KeyBank’s compliance with the testing requirement is delayed until January 1, 2027.

See Item 1. Business of our 2023 Form 10-K under the heading “Supervision and Regulation – FDIA, Resolution Authority and Financial Stability – Resolution plans” for a discussion of other developments concerning resolution and recovery plans.

The following chart provides a reconciliation of net income (loss) from continuing operations attributable to Key common shareholders for the three months ended September 30, 2023, to the three months ended September 30, 2024 (dollars in millions):

One of our principal sources of revenue is net interest income. Net interest income is the difference between interest income received on earning assets (such as loans and securities) and loan-related fee income, and interest expense paid on deposits and borrowings. There are several factors that affect net interest income, including:

To make it easier to compare both the results across several periods and the yields on various types of earning assets (some taxable, some not), we present net interest income in this discussion on a “TE basis” (i.e., as if all income were taxable and at the same rate). For example, $100 of tax-exempt income would be presented as $126, an amount that, if taxed at the statutory federal income tax rate of 21%, would yield $100.

Net interest income (TE) was $964 million for the third quarter of 2024 and the net interest margin was 2.17%. Compared to the third quarter of 2023, net interest income (TE) increased $41 million and net interest margin increased by 16 basis points. Both net interest income and the net interest margin benefited from the reinvestment of proceeds from maturing investment securities into higher yielding investments, the maturity of lower-yielding interest rate swaps with negative carry, and a shift in funding mix from higher-cost wholesale borrowings to lower-cost interest-bearing deposits. In addition, during the third quarter of 2024, Key began the repositioning of the available-for-sale portfolio, which involved the sale of approximately $7.0 billion in market value of lower-yielding mortgaged-backed securities and reinvestment of the proceeds into higher-yielding investments. These benefits were partially offset by a decline in loan balances and higher deposit costs relative to a year ago.

For the nine months ended September 30, 2024, net interest income (TE) was $2.7 billion, and the net interest margin was 2.08%. Compared to the same period in the prior year, net interest income (TE) decreased $266 million and the net interest margin decreased by 12 basis points. The decline in net interest income (TE) and the net interest margin reflects lower loan balances, in part due to Key’s balance sheet optimization efforts during the second half of 2023, and higher deposit costs, partly due to a shift in funding mix from noninterest-bearing deposits to higher-cost deposits. Net interest income (TE) and the net interest margin benefited from higher earning asset yields as a result of the higher interest rate environment, maturing interest rate swaps, and the reinvestment of proceeds from maturing investment securities into higher-yielding investments.

Average loans were $106.2 billion for the third quarter of 2024, a decrease of $11.4 billion compared to the third quarter of 2023, reflective of Key's planned balance sheet optimization efforts in 2023, and continued tepid client loan demand. The decline in average loans was mostly driven by a $8.5 billion decline in average commercial loans, due to lower commercial and industrial loans and commercial mortgage real estate loans. Additionally, average consumer loans declined by $2.9 billion, reflective of broad-based declines across all consumer loan categories.

Average deposits totaled $147.8 billion for the third quarter of 2024, an increase of $2.9 billion compared to the year-ago quarter, reflecting growth in both consumer and commercial deposits.

Figure 3 shows the various components of our balance sheet that affect interest income and expense and their respective yields or rates for the current periods and comparative year ago periods. This figure also presents a

reconciliation of TE net interest income to net interest income reported in accordance with GAAP for each of those quarters. The net interest margin, which is an indicator of the profitability of the earning assets portfolio less cost of funding, is calculated by dividing annualized TE net interest income by average earning assets.

Key’s provision for credit losses was $95 million for the three months ended September 30, 2024, compared to $81 million for the three months ended September 30, 2023. The increase from the year-ago period reflects continuing but slowing credit portfolio migration, higher net charge-offs and changes in economic outlook, partly offset by balance sheet optimization efforts. The provision for credit losses was $296 million for the nine months ended September 30, 2024, compared to $387 million for the nine months ended September 30, 2023.

As shown in Figure 4, noninterest income was a net loss of $269 million for the third quarter of 2024, compared to net income of $643 million, for the year-ago quarter. The net loss was driven by the $918 million loss on sale incurred from the strategic repositioning of our securities available for sale portfolio. Noninterest income was $1.0 billion for the nine months ended September 30, 2024, compared to $1.9 billion for the nine months ended September 30, 2023.

The following discussion explains the composition of certain elements of our noninterest income and the factors that caused those elements to change.

Trust and investment services income 

Trust and investment services income consists of brokerage commissions, trust and asset management fees, and insurance income. The assets under management that primarily generate certain trust and asset management fees are shown in Figure 5. For the three months ended September 30, 2024, trust and investment services income was up $10 million, or 7.7%, compared to the same period one year ago. For the nine months ended September 30, 2024, trust and investment services income was up $31 million, or 8.1%, compared to the same period one year ago. This increase for both periods was driven primarily by brokerage fee income and investment management fees associated with higher assets under management.

Investment banking and debt placement fees

Investment banking and debt placement fees consist of syndication fees, debt and equity securities underwriting fees, merger and acquisition and financial advisory fees, gains on sales of commercial mortgages, and agency origination fees. For the three months ended September 30, 2024, investment banking and debt placement fees were up $30 million, or 21.3%, compared to the same period one year ago, driven by debt and equity underwriting and syndication fees. For the nine months ended September 30, 2024, investment banking and debt placement fees increased $61 million, or 15.0%, compared to the same period one year ago. These increases were driven by debt and equity underwriting, mergers and acquisition, and syndication fees.

Service charges on deposit accounts

Service charges on deposit accounts decreased $2 million, or 2.9%, for the three months ended September 30, 2024, compared to the same period one year ago. For the nine months ended September 30, 2024, service charges on deposit accounts decreased by $9 million, or 4.4%, from the nine months ended September 30, 2023. The declines were driven primarily by decreased maintenance and overdraft fees slightly offset by increased account analysis fees.

Cards and payments income

Cards and payments income, which consists of debit card, prepaid card, consumer and commercial credit card, and merchant services income, decreased $6 million, or 6.7% for the three months ended September 30, 2024, compared to the same period one year ago. This decrease was primarily driven by a decrease in debit interchange fees and merchant services income. For the nine months ended September 30, 2024, cards and payment income decreased $10 million, or 3.9%, from the same period one year ago, primarily as a result of lower debit interchange fees and credit card fee income.

Other noninterest income

Other noninterest income includes operating lease income and other leasing gains, corporate services income,

corporate-owned life insurance income, consumer mortgage income, commercial mortgage servicing fees, and other income. Other noninterest income for the three months ended September 30, 2024, decreased $9 million, or 4.2%, from the year-ago quarter. For the nine months ended September 30, 2024, other noninterest income increased $13 million, or 2.1%, from the same period one year ago. These decreases were primarily due to the $918 million loss reflected in other income as a result of the securities repositioning activity undertaken in the third quarter of 2024, as well as decreases in corporate services income, with a slight offset from an increase in commercial mortgage servicing fees.

As shown in Figure 6, noninterest expense was $1.1 billion for the third quarter of 2024, compared to $1.1 billion for the third quarter of 2023. Noninterest expense was $3.3 billion for the nine months ended September 30, 2024, compared to $3.4 billion for the nine months ended September 30, 2023.

The following discussion explains the composition of certain elements of our noninterest expense and the factors that caused those elements to change.

Personnel

Personnel expense, the largest category of our noninterest expense, increased by $7 million, or 1.1%, for the three months ended September 30, 2024, compared to the same period one year ago. The increase reflects higher incentive and stock-based compensation from strong capital markets activity as well the impact of a higher stock price on stock-based compensation compared to one year ago. For the nine months ended September 30, 2024, personnel expense decreased by $6 million, or 0.3%, compared to the same period one year ago, driven primarily by a decrease in salaries expense from a reduction in head count from the prior period.

Nonpersonnel expense

Nonpersonnel expense includes net occupancy, computer processing, business services and professional fees, equipment, operating lease expense, marketing, and other miscellaneous expense categories. Nonpersonnel expense for the three months ended September 30, 2024, decreased $23 million, or 5.1%, from the year-ago quarter, primarily due to a decrease in marketing expense and other miscellaneous expenses, offset slightly by an increase in computer processing expense. For the nine months ended September 30, 2024, other nonpersonnel expense including the impact of the additional FDIC special assessment of $28 million, decreased $40 million, or 2.9%, from the nine months ended September 30, 2023, primarily due to decreases across most other expense categories, offset slightly by an increase in computer processing expense.

We recorded a tax benefit of $95 million for the third quarter of 2024 and tax expense of $65 million for the third quarter of 2023. The tax benefit recorded during the third quarter of 2024 resulted primarily from the $918 million loss on the sale of securities incurred as part of a strategic repositioning of our securities portfolio. We recorded tax expense of $26 million for the nine months ended September 30, 2024, compared to $204 million for the nine months ended September 30, 2023.

Our federal tax expense and effective tax rate differs from the amount that would be calculated using the federal statutory tax rate; primarily due to investments in tax-advantaged assets, such as corporate-owned life insurance, tax credits associated with low-income housing investments, and periodic adjustments to our tax reserves.

Additional information pertaining to how our tax expense (benefit) and the resulting effective tax rates were derived is included in Note 14 (“Income Taxes”) beginning on page 157 of our 2023 Form 10-K.

Summary of operations

Summary of operations

Commercial loan portfolio

Figure 8 provides our commercial loan portfolios by industry classification at September 30, 2024, and December 31, 2023.

Commercial and industrial loans totaled $52.8 billion at September 30, 2024, a decrease of $3.0 billion, or 5.4%, compared to December 31, 2023. The decrease was broad-based across most industry categories and reflects the residual impact of our balance sheet optimization efforts.

At September 30, 2024, commercial real estate loans totaled $16.7 billion, which includes $13.6 billion of mortgage loans and $3.1 billion of construction loans. Compared to December 31, 2023, this portfolio decreased $1.5 billion, or 8.3%, driven by decreases in nonowner-occupied. Nonowner-occupied properties, generally properties for which

As shown in Figure 9, our commercial real estate loan portfolio includes various property types and geographic locations of the underlying collateral. These loans include commercial mortgage and construction loans in both Consumer Bank and Commercial Bank.