Q1 2024 KeyCorp Earnings Call

April 18, 2024

One then zero on your telephone keypad, you will hear an acknowledgment on that your line has been placed in Q. As a reminder, this conference is being recorded I would now like to turn the conference over to Brian Mani <unk>.

<unk> Corp, 's director of Investor Relations. Please go ahead.

Okay.

[music].

Thank you operator, and good morning, everyone I'd like to thank you for joining key Corp's first 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 Dot com website.

In the back of the presentation, you will find our statement on forward looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call actual results may differ materially from forward looking statements and those statements speak only as of today April 18th 2024 and will not be update.

With that I will turn it over to Chris. Thank you Brian I'm on slide two this morning, we reported earnings of $183 million or <unk> 20 per share, which incorporates <unk> <unk> per share impact from an additional FDIC special assessment charge this quarter I would characterize our.

Thank you everyone for.

Speaker Change: Standing by and welcome to the 2025 first quarter earnings call. At this time, all participants are in a listen only mode.

Speaker Change: Later, we will conduct a question and answer session. If he would like to ask a question. Please press. The one then zero on your telephone keypad, you will hear an acknowledgment on that your line has been placed in Q. As a reminder, this conference is being recorded I would now like to turn the conference over to Brian Pony.

Underlying results as solid revenue was essentially flat sequentially. Despite expected first quarter seasonality as investment banking reported its best first quarter result in our company's history.

Fees were up 6% against both the prior quarter and prior year.

Keycorp's director of Investor Relations. Please go ahead.

Brian Pony: Thank you operator, and good morning, everyone I'd like to thank you for joining key Corp's first 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 Dot com website.

Retail relationship households were up two 5% year over year and commercial clients were up 6%.

Customer deposits were up 2% year over year, and essentially flat on a sequential basis.

We continued to reduce our reliance on higher cost brokered Cds and wholesale borrowings.

Brian Pony: In the back of the presentation, you will find our statement on forward looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call actual results may differ materially from forward looking statements and those statements speak only as of today April 18th 2024 and will not be upped.

Expenses remained well controlled at $1 $1 billion.

Nonperforming assets and credit losses remained low.

Additionally, we continued to build our credit reserves this quarter.

Our capital ratios, including tangible common ratios were flat to improved across the board. Despite the impact of higher interest rates on the fair value of our available for sale Securities. We ended the quarter with a common equity tier one ratio of 10, 3%.

Brian Pony: With that I will turn it over to Chris. Thank you Brian I'm on slide two this morning, we reported earnings of $183 million or <unk> 20 per share, which incorporates <unk> <unk> per share impact from an additional FDIC special assessment charge this quarter I would characterize our.

<unk> up 120 basis points from a year ago, representing our fastest rate of organic capital build over a 12 month period since the industry began tracking this metric.

Christopher Marrott Gorman: Our underlying result is solid revenue was essentially flat sequentially. Despite expected first quarter seasonality as investment banking reported its best first quarter result in our company's history.

I'm also encouraged by the momentum we are seeing in areas, where we have a differentiated advantage and have been investing.

Christopher Marrott Gorman: Fees were up 6% against both the prior quarter and prior year.

While only one quarter I am encouraged by the strong broad based results, we saw in our capital markets business across M&A equity and debt capital markets and our commercial mortgage group.

Christopher Marrott Gorman: Retail relationship households were up two 5% year over year and commercial clients were up 6%.

Christopher Marrott Gorman: Customer deposits were up 2% year over year, and essentially flat on a sequential basis.

We also are seeing broad momentum across our targeted industry verticals, such as healthcare power industrials and renewables.

Christopher Marrott Gorman: We continued to reduce our reliance on higher cost brokered Cds and wholesale borrowings.

Christopher Marrott Gorman: Expenses remained well controlled at $1 1 billion.

While I would expect to see some pullback in fees in the second quarter. Our pipelines are up from a year ago and from year end levels market conditions are clearly starting to normalize.

Christopher Marrott Gorman: Nonperforming assets and credit losses remained low.

Christopher Marrott Gorman: Additionally, we continued to build our credit reserves this quarter, our capital ratios, including tangible common ratios were flat to improved across the board. Despite the impact of higher interest rates on the fair value of our available for sale Securities. We ended the quarter.

We also continue to raise significant capital on behalf of our clients in the first quarter, we raised over $22 billion holding 12% on our balance sheet and distributing the balance in the capital markets.

Christopher Marrott Gorman: With a common equity tier one ratio of 10, 3% up 120 basis points from a year ago, representing our fastest rate of organic capital build over a 12 month period since the industry began tracking this metric.

To this end last month, we announced a strategic forward flow origination partnership with Blackstone. This partnership will allow us to accelerate growth and manage credit concentration risk within our differentiated commercial platform and is another example of how <unk>.

I'm also encouraged by the momentum we are seeing in areas, where we have a differentiated advantage and have been investing.

We are delivering best in class execution for our clients.

This deal also further validates our distinctive underwrite to distribute model in that one of the largest private credit providers has recognized our platform for its ability to originate soundly underwrite and service at volume with our high quality clients.

Christopher Marrott Gorman: While only one quarter.

Christopher Marrott Gorman: Encouraged by the strong broad based results, we saw in our capital markets business across M&A equity and debt capital markets and our commercial mortgage group. We also are seeing broad momentum across our targeted industry verticals, such as healthcare power industrials and renewables.

As markets evolve, we will continue to evaluate the potential for arrangements with other leading providers like this one which allow us to offer a distinctive experience for our clients while concurrently managing our risk.

Christopher Marrott Gorman: <unk>.

Christopher Marrott Gorman: While I would expect to see some pullback in fees in the second quarter. Our pipelines are up from a year ago and from year end levels market conditions are clearly starting to normalize.

Turning to wealth management, we recently launched key private client, where we have the opportunity to penetrate a large growing mass affluent segment within our consumer base and with our commercial business owners in.

Christopher Marrott Gorman: We also continue to raise significant capital on behalf of our clients in the first quarter, we raised over $22 billion holding 12% on our balance sheet and distributing the balance in the capital markets.

This mass affluent segment, we enrolled another 6000 households in this quarter and doubled production volumes compared to last year.

Christopher Marrott Gorman: Because this end last month, we announced a strategic forward flow origination partnership with Blackstone. This partnership will allow us to accelerate growth and manage credit concentration risk within our differentiated commercial platform and is another example of how we.

This new business has added over $2 billion of household assets and just over a year.

Overall, our assets under management have now surpassed $57 billion.

Before I turn it over to Clarke I wanted to touch briefly on credit quality as I mentioned earlier, our nonperforming loans net credit losses, and delinquencies remain at low historical standards with credit losses below our full year 2024 and through the cycle targets.

Christopher Marrott Gorman: We are delivering best in class execution for our clients.

In the first quarter, we saw an uptick in criticized loans, which was driven by our belief which by the way. We've held for some time now that we will remain in a higher for longer environment as inflation remains sticky with that in mind. This quarter, we performed a deep dive on over 90% of our clients.

Christopher Marrott Gorman: As markets evolve, we will continue to evaluate the potential for arrangements with other leading providers like this one which allow us to offer a distinctive experience for our clients while concurrently managing our risk.

<unk> that we believe would be most impacted under a higher for longer scenario encompassing over 80% of our non investment grade commercial exposures.

Christopher Marrott Gorman: Turning to wealth management, we recently launched key private client, where we have the opportunity to penetrate a large growing mass affluent segment within our consumer base and with our commercial business owners.

Performing this deep dive confirmed our view that there will be low loss content in these loans.

Christopher Marrott Gorman: This mass affluent segment, we enrolled another 6000 households in this quarter and doubled production volumes compared to last year.

Approximately 96% of accruing criticized commercial loans are current.

Christopher Marrott Gorman: This new business has added over $2 billion of household assets and just over a year.

And 93% are current when also including non accruing loans.

Over 85% of our criticized real estate loans have recourse.

Christopher Marrott Gorman: Overall, our assets under management have now surpassed $57 billion.

I continue to feel very good about our ability to hit our net charge off guidance of 30 to 40 basis points. This year.

Christopher Marrott Gorman: Before I turn it over to Clarke I wanted to touch briefly on credit quality as I mentioned earlier, our nonperforming loans net credit losses, and delinquencies remain at low historical standards with credit losses below our full year 2024 and through the cycle targets.

In summary, while it's still early in the year, we are on pace to deliver against the commitments that we detailed at the beginning of this year.

<unk> is back to playing offense and I remain excited about our future and our ability to generate sound profitable growth moving forward.

Clarke: In the first quarter, we saw an uptick in criticized loans, which was driven by our belief which by the way. We've held for some time now that we will remain in a higher for longer environment as inflation remains sticky with that in mind. This quarter, we performed a deep dive on over 90% of our clients.

Also want to take a moment to thank our teammates for their continued commitment to our clients and our communities.

I'm very proud to share with you that for the 11th consecutive exam cycle since the passage of the regulation and $19 77 key received an outstanding rating from the OCC for meeting or exceeding the terms of the community Reinvestment Act. This achievement reflects our collective commitment.

Clarke: <unk> that we believe would be most impacted under a higher for longer scenario encompassing over 80% of our non investment grade commercial exposures.

Clarke: Performing this deep dive confirmed our view that there will be low loss content in these loans.

<unk> to our purpose and an enormous amount of hard work and dedication from every teammate at key with that I'll turn it over to Clarke to provide more details on the results of the quarter Clark.

Clarke: Approximately 96% of accruing criticized commercial loans are current.

Clarke: And 93% are current when also including non accruing loans.

Thanks, Chris and thank you everyone for joining us today I'm now on slide four for.

Clarke: Over 85% of our criticized real estate loans have recourse.

For the first quarter, we reported earnings per share of <unk>, including <unk> impact from the FDIC Special assessment. This quarter is $29 million pre tax assessment represented a 15% add on to the charge we had taken in the fourth quarter relating to the bank failures last spring.

Clarke: I continue to feel very good about our ability to hit our net charge off guidance of 30 to 40 basis points. This year.

Clarke: In summary, while it's still early in the year, we are on pace to deliver against the commitments that we detailed at the beginning of this year.

As expected our taxable equivalent net interest income declined $4 five sequentially within the range of down 3% to 5% that we provided in January.

Clarke: He is back to playing offense and I remain excited about our future and our ability to generate sound profitable growth moving forward.

Noninterest income increased 6% compared to both the prior year and quarter, primarily driven by strong investment banking performance.

Clarke: Also want to take a moment to thank our teammates for their continued commitment to our clients and our communities.

Reported expenses were down excluding selected items expenses were up slightly linked quarter and essentially flat year over year at approximately $1 1 billion.

Clarke: I'm very proud to share with you that for the 11th consecutive exam cycle since the passage of the regulation and $19 77. He received an outstanding rating from the OCC for meeting or exceeding the terms of the community Reinvestment Act. This achievement reflects our collective <unk>.

Provision for credit losses of $101 million was roughly flat to the fourth quarter and included $81 million of net loan charge offs and $20 million of credit reserve build.

Our common equity tier one ratio increased to 10, 3%, while tangible book value declined 1% sequentially, reflecting the impact of higher rates on <unk> this quarter.

Clarke: <unk> to our purpose and an enormous amount of hard work and dedication from every teammate at key with that I'll turn it over to Clarke to provide more details on the results of the quarter Clark.

Moving to the balance sheet on slide five.

Average loans declined two 6% sequentially to $111 billion in loans ended the quarter at about 110 billion down approximately $2 7 billion from year end.

Clarke: Thanks, Chris and thank you everyone for joining us today I'm now on slide four for.

The decline reflects the expected follow on impacts of intentional actions. We took in 2023 to reduce low return lending only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature.

Lower balances are also a function of lower client demand driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off balance sheet structures.

Clarke: As expected our taxable equivalent net interest income declined $4 five sequentially within the range of down 3% to 5% that we provided in January.

We also remained disciplined and intentional about what we're putting on our balance sheet.

Clarke: Noninterest income increased 6% compared to both the prior year quarter, primarily driven by strong investment banking performance.

Very active with clients and prospects and still expect new loan origination to come back throughout 2024.

Clarke: Reported expenses were down excluding selected items expenses were up slightly linked quarter and essentially flat year over year at approximately $1 1 billion.

On slide six.

Average deposits declined about one 5% sequentially in line with recent historical seasonal patterns and within that decline, we reduced brokered deposits by roughly $1 billion.

Clarke: Provision for credit losses of $101 million was roughly flat to the fourth quarter and included $81 million of net loan charge offs and $20 million of credit reserve build.

Client deposits were up 2% year over year.

Both total and interest bearing cost of deposits rose by 14 basis points during the quarter, primarily reflecting repricing of existing Cds and money market deposits as they come up for maturity and some continued migration out of noninterest bearing when.

Clarke: Our common equity tier one ratio increased to 10, 3%, while tangible book value declined 1% sequentially, reflecting the impact of higher rates on <unk> this quarter.

When adjusted for the noninterest bearing deposits and our hybrid commercial accounts or percentage of noninterest bearing to total deposits dropped from 25% to 24% linked quarter.

Clarke: Moving to the balance sheet on slide five.

Clarke: Average loans declined two 6% sequentially to $111 billion in loans ended the quarter at about 110 billion down approximately $2 7 billion from year end.

Our cumulative interest bearing deposit beta was just below 52% since the fed began raising interest rates up about three percentage points from last quarter.

Clarke: The decline reflects the expected follow on impacts of intentional actions. We took in 2023 to reduce low return lending only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature.

On the bottom left of the page we split out for you our deposit mix by product type and for interest bearing by business, including how much of our commercial book is indexed or manage to benchmark rates. We hope you'll find this information useful as you think through potential beta sensitivities.

Clarke: Lower balances are also a function of lower client demand driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off balance sheet structures.

Moving to net interest income and margin on slide seven taxable.

Taxable equivalent net interest income was $886 million down four 5% from the prior quarter.

Clarke: We also remained disciplined and intentional about what we're putting on our balance sheet.

Approximately $40 million of benefit from fixed rate asset repricing, mostly from swaps and short dated U S. Treasuries was more than offset by lower loan volumes higher deposit cost and deposit mix migration Daytona.

Clarke: Very active with clients and prospects and still expect new loan origination to come back throughout 2024.

Clarke: On slide six.

Clarke: Average deposits declined about one 5% sequentially in line with recent historical seasonal patterns and within that decline, we reduced brokered deposits by roughly 1 billion.

<unk> impact was about $7 million.

Net interest margin declined by five basis points to 220% to 2% driven by higher deposit costs lower than expected loans and changing changes in funding mix.

Clarke: Client deposits were up 2% year over year.

Both our net interest income and margin continued to reflect headwinds from prior balance sheet positioning our short dated swaps in U S. Treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter.

Clarke: When adjusted for the noninterest bearing deposits and our hybrid commercial accounts or percentage of noninterest bearing to total deposits dropped from 25% to 24% linked quarter.

That said, we affirm our prior commitments that our NIM bottomed in <unk> 23, and that this first quarter of 2024 reflects the low point for net interest income.

Clarke: For accumulative interest bearing deposit beta was just below 52% since the fed began raising interest rates up about three percentage points from last quarter.

Turning to slide eight noninterest income was $647 million up 6% quarter over quarter and year over year.

Clarke: On the bottom left of the page we split out for you our deposit mix by product type and for interest bearing by business, including how much of our commercial book is indexed or manage to benchmark rates. We hope you'll find this information useful as you think through potential data sensitivities.

Compared to the prior year. The increase was primarily driven by investment banking fees, which grew 17% to $170 million a record first quarter.

Strong performance was broad based across products and industries.

Clarke: Moving to net interest income and margin on slide seven taxable.

Commercial mortgage servicing fees rose, 22% year over year, reflecting growth in servicing special servicing and active special servicing balances.

Clarke: Taxable equivalent net interest income was $886 million down four 5% from the prior quarter.

At March 31, we service about $660 billion of assets on behalf of third party clients.

Clarke: Approximately $40 million of benefit from fixed rate asset repricing, mostly from swaps and short dated U S. Treasuries was more than offset by lower loan volumes higher deposit cost and deposit mix migration day.

Finally trust and investment services grew by 6% year over year as assets under management grew 7% to 57 billion.

Clarke: Day, count impact was about $7 million.

We're seeing strong momentum in key private client as well as tailwind from higher market levels.

Clarke: Net interest margin declined by five basis points to 220% to 2% driven by higher deposit costs lower than expected loans and changing changes in funding mix.

Conversely on a year over year basis, corporate services income declined by 9% given elevated LIBOR to sofa related transaction activity in the first.

Clarke: Both our net interest income and margin continued to reflect headwinds from prior balance sheet positioning our short dated swaps in U S. Treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter.

A year ago.

And the 5% decline in cards and payments fees reflects slowing spend volumes and lower interchange rates in credit card and merchant.

That said, we affirm our prior commitments that our NIM bottomed in <unk> 23, and that this first quarter of 2024 reflects the low point for net interest income.

On slide nine total noninterest expense for the quarter was $1 1 billion and included $29 million related to the FDIC Special assessment increase.

Excluding selected items in all periods expenses were flat compared to a year ago and up one 5% from fourth quarter.

Clarke: Turning to slide eight noninterest income was $647 million up 6% quarter over quarter and year over year.

Personnel expenses were flat year over year as a 7% decline in head count offset impact from inflation and merit and higher incentive compensation associated with our strong fee revenue results and the impact of appreciation of our stock price associated with equity awards.

Clarke: Compared to the prior year. The increase was primarily driven by investment banking fees, which grew 17% to $170 million a record first quarter.

Clarke: Strong performance was broad based across products and industries.

Linked quarter higher personnel costs also reflects seasonal benefits costs. In addition to the factors just list.

Clarke: Commercial mortgage servicing fees rose, 22% year over year, reflecting growth in servicing special servicing and active special servicing balances.

Moving to slide 10 credit quality remains solid net charge offs were $81 million or 29 basis points of average loans below our target of 30% to 40 basis points for the full year 2024.

Clarke: At March 31, we service about $660 billion of assets on behalf of third party clients.

Clarke: Finally trust and investment services grew by 6% year over year as assets under management grew 7% to $57 million.

Delinquencies increased just two basis points this quarter and nonperforming loans increased 15%, but remained low at 60 basis points of period end loans.

Clarke: We're seeing strong momentum in key private client as well as tailwind from higher market levels.

As Chris mentioned criticized loans increased and represented 6% of loans at quarter end roughly two thirds of the increase came from our C&I portfolio with the rest primarily in commercial real estate.

Clarke: Conversely on a year over year basis, corporate services income declined by 9% given elevated LIBOR to sofa related transaction activity in the first quarter a year ago.

Our internal ratings are driven by primary repayment sources as loans were moved to criticized we reaffirmed our collateral coverage reappraise properties further engage with borrowers to understand operating pressures, if any and analyzed secondary payment sources on these loans based on that thorough review, we feel good about the loss content in these loans and as Chris shared remain comfortable.

Clarke: And the 5% decline in cards and payments fees reflects slowing spend volumes and lower interchange rates in credit card and merchant.

Clarke: On slide nine total noninterest expense for the quarter was $1 1 billion and included $29 million related to the FDIC Special assessment increase.

Clarke: Excluding selected items in all periods expenses were flat compared to a year ago and up one 5% from fourth quarter.

With our prior loss guidance for 2024 to 30 to 40 basis points.

Clarke: Personnel expenses were flat year over year as a 7% decline in head count offset impact from inflation and merit and higher incentive compensation associated with our strong fee revenue results and the impact of appreciation of our stock price associated with equity awards.

On slide 11, given this was a fairly unique quarter in terms of the ins and outs. We provided you with a walk of how we derived a roughly $20 million build in our credit loans. This quarter, we added roughly $170 million to account for the quarter as credit migration, partially offset by a $98 million release to account for an improved macro outlook.

Clarke: Linked quarter higher personnel costs also reflects seasonal benefits costs. In addition to the factors just list.

Even with this quarter's proactive deep dive, our net upgrades or downgrades ratio across the entire commercial book improved this quarter as the velocity of downgrades have slowed.

Clarke: Moving to slide 10 credit quality remains solid net charge offs were $81 million or 29 basis points of average loans below our target of 30% to 40 basis points for the full year 2024 <unk>.

As a result, our allowance for credit losses continued to build and represented 166% period end loans at the end of March when.

Clarke: Delinquencies increased just two basis points this quarter and nonperforming loans increased 15%, but remained low at 60 basis points of period end loans.

When you analyze our levels of reserves by loan type Youll find that we compare similarly or better versus our peers, and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non owner occupied CRE loans.

Clarke: As Chris mentioned criticized loans increased and represented 6% of loans at quarter end roughly two thirds of the increase came from our C&I portfolio with the rest primarily in commercial real estate.

Turning to slide 12, we continue to build our capital position with CET, one of 24 basis points to 10, 3% or 330 basis points above our required minimum including our stress capital buffer.

Clarke: Our internal ratings are driven by primary repayment sources as loans were moved to criticized we reaffirmed our collateral coverage reappraise properties further engage with borrowers to understand operating pressures, if any and annualized secondary payment sources on these loans based on that their overview, we feel good about the loss content on these loans and as Chris shared remain comfortable.

Our marked CET, one ratio, which includes unrealized FX and pension losses increased 13 basis points to seven 1% and our tangible common equity to tangible assets ratio held steady down just two basis points at five 4%.

Clarke: With our prior loss guidance for 2024 to 30 to 40 basis points.

This outcome, despite the roughly 40 basis points increase in five year rates during the quarter reflects work we've done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration and putting on roughly $7 billion of paid fixed swaps, while terminating about $7 5 billion of fixed cash flow swaps last.

Clarke: On slide 11, given this was a fairly unique quarter in terms of the ins and outs. We provided you with a walk of how we derived a roughly $20 million build in our credit loans. This quarter, we added roughly $170 million to account for the quarter's credit migration, partially offset by a $98 million release to account for an improved macro outlook.

Fall.

Clarke: Even with this quarter's proactive deep dive, our net upgrades or downgrades ratio across the entire commercial book improved this quarter as the velocity of downgrades that slowed.

We've reduced our <unk> by 27% over the past 12 months.

Our <unk> was negative $5 3 billion at quarter end, including $4 3 billion related to NFS as we shared with you in the past the right side of this slide shows key go forward expected reduction in our <unk> Merck based on two scenarios. The forward curve as of March 31, which assumes fixed rate cuts through 2025 and another city.

Clarke: As a result of our allowance for credit losses continued to build and represented 166% period end loans at the end of March when.

Clarke: When you analyze our levels of reserves by loan type Youll find that we compare similarly or better versus our peers, and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non owner occupied CRE loans.

<unk> where rates hold at March 31 levels through the end of next year.

And the foreign curve scenario, the ASC market is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1 7 billion of capital build through that timeframe.

Clarke: Turning to slide 12, we continue to build our capital position with CET, one of 24 basis points to 10, 3% or 330 basis points above our required minimum including our stress capital buffer.

And the flat scenario, we still accrete $1 3 billion of capital driven by maturities cash flows and time.

Our Mark CET, one ratio, which includes unrealized FX and pension losses increased 13 basis points to seven 1% and our tangible common equity to tangible assets ratio held steady down just two basis points at five 4%.

Slide 13 provides our outlook for 2024 relative to 2023 and short our guidance is unchanged from what we shared in January.

Theres one commitment, we think will be a little more challenging to hit it will be ending loan balances given the impact of rate increases on client demand and our own selectivity of wounds.

Clarke: This outcome. Despite the roughly 40 basis point increase in five year rates during the quarter reflects work we've done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration and putting on roughly $7 billion of paid fixed swaps, while terminating about $7 5 billion of fixed cash flow swaps lab.

But as we will show you in a minute. We don't believe this will impact our ability to deliver on our net interest income commitments both for the full year in the fourth quarter exit rate.

On slide 14, we updated the net interest income opportunity from swaps and short dated treasuries maturing.

Clarke: Fall.

Clarke: We've reduced our <unk> by 27% over the past 12 months.

Forward rates have moved higher this quarter as cumulative opportunity has increased to $975 million from the roughly $900 million, we estimated last quarter.

Clarke: Our <unk> was negative $5 3 billion at quarter end, including $4 3 billion related to NFS as we shared with you in the past the right side of this slide shows key go forward expected reduction in our Aoc Ari Merck based on two scenarios. The forward curve as of March 31, which assumes fixed rate cuts through 2025 and another city.

Of course, some of this incremental benefit will be offset by higher funding costs and higher for longer environment.

As of the end of the first quarter, we've realized a little over 30% of this opportunity to date, which is shown on the left side of the slide in the gray bars.

This leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months.

<unk> where rates hold at March 31 levels through the end of next year.

Clarke: And the foreign curve scenario, the ASC market is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1 7 billion of capital build through that timeframe.

Moving to slide 15, we wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year and the <unk>.

Clarke: And the flat scenario, we still accrete $1 3 billion of capital driven by maturities cash flows and time.

Top work, we've laid out the drivers of growth assuming rates generally follow the forward curve and the fed cuts twice later this year once in September and again in December.

Clarke: Slide 13 provides our outlook for 2024 relative to 2023 in short our guidance is unchanged from what we shared in January.

In this scenario, we see about $120 million benefit from the swaps in U S. Treasuries in line with what we showed you on the previous slide.

Clarke: Theres one commitment, we think will be a little more challenging to hit it will be ending loan balances given the impact of rate increases on client demand and our own selectivity of wounds.

We also have another roughly $1 $1 billion of projected fixed rate cash flows rolling every quarter currently yielding in the low 2% range that will get reinvested at higher rates.

Clarke: But it will show you in a minute we don't believe this will impact our ability to deliver on our net interest income commitments both for the full year in the fourth quarter exit rate.

This offset the immediate impact of rate cuts would have on our variable variable rate loans and other short term floating rate investments.

Clarke: On slide 14, we updated the net interest income opportunity from swaps and short dated treasuries maturing as.

We'd see some modest benefit in year from lower funding costs, particularly from our index commercial deposits and wholesale funding.

Clarke: As forward rates have moved higher this quarter as cumulative opportunity has increased to $975 million.

We would also expect the net interest margin to improve meaningfully to the two 4% to 5% range in the fourth quarter with about 75% of the improvement driven by the treasuries and swaps and the other 25% through lower funding costs.

Clarke: The roughly $900 million, we estimated last quarter.

Clarke: Of course, some of this incremental benefit will be offset by higher funding costs and a higher for longer environment.

Clarke: As of the end of the first quarter, we've realized a little over 30% of this opportunity to date, which is shown on the left side of the slide in the gray bars.

In the bottom walk we hold rates flat to where they are at March 31.

In this scenario, we get more earning asset repricing benefit because variable rate loans and other short term instruments do not reprice lower that is partially offset by deposit betas continuing to creep a little higher.

Clarke: Leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months.

Clarke: Moving to slide 15, we wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year.

As we've said, we expect to support clients and prospects to drive high quality loan growth throughout the year should loan demand remained softer than expected we would still expect to meet our Q4 net interest income guidance in either scenario I just described.

Clarke: And the top work, we've laid out the drivers of growth assuming rates generally follow the forward curve and the fed cuts twice later this year once in September and again in December.

With that I will now turn the call back to the operator for instructions for the Q&A portion of our call operator.

Clarke: In this scenario, we see about $120 million benefit from the swaps in U S. Treasuries in line with what we showed you on the previous slide.

Thank you and ladies and gentlemen, if you wish to ask a question. Please press London zero on your Touchtone phone you will hear an acknowledgement that you've been placed in the queue and you may remove yourself from queue at any time by repeating the Wednesday Ahmed.

Clarke: We also have another roughly $1 $1 billion of projected fixed rate cash flows rolling every quarter currently yielding in the low 2% range that will get reinvested at higher rates.

On a speakerphone please pick up your handset before pressing the number once again if you have a question. Please press munden simo.

Clarke: This offset the immediate impact of rate cuts would have on our variable variable rate loans and other short term floating rate investments.

Next question is from the line of Ken Houston from Jefferies. Please go ahead.

Clarke: We see some modest benefit in year from lower funding costs, particularly from our index commercial deposits and wholesale funding.

Thanks, Good morning.

Clarke wondering if you can kind of start where you just finished and just looking at those two scenarios on slide 15.

Clarke: We would also expect the net interest margin to improve meaningfully to the two 4% to 5% range in the fourth quarter with about 75% of the improvement driven by the treasuries and swaps and the other 25% through lower funding costs.

Hear you that it still seems like Theres a lot of ways to get to that 1 billion plus just wondering how you can help us understand the variance of those outcomes.

Maybe a way to think about how much those two cuts mean on their own or some of the other kind of moving parts that would change that or is it or is it really just like a pretty narrow answer whatever the cut scenario is in terms of where that fourth quarter exit Lance yes, thanks, Kevin great great.

Clarke: In the bottom walk we hold rates flat to where they are at March 31 <unk>.

Clarke: In this scenario, we get more earning asset repricing benefit because variable rate loans and other short term instruments do not reprice lower that is partially offset by deposit betas continuing to creep a little higher.

Clarke: As we've said, we expect to support clients and prospects to drive high quality loan growth throughout the year should loan demand remained softer than expected we would still expect to meet our Q4 net interest income guidance in either scenario I just described.

Great question I would point you to <unk> and just say if you look at the two wins the swap in U S T roll off that.

A pretty predictable number we think.

Good about disclosing the details there that's I think pretty.

Speaker Change: With that I will now turn the call back to the operator for instructions for the Q&A portion of our call operator.

Pretty straightforward math, it'll be a little bit better than a no cut cut scenario as you know but.

Speaker Change: Thank you and ladies and gentlemen, if you wish to ask a question. Please press London zero on your Touchtone phone you will hear an acknowledgement that you've been placed in the queue and you may remove yourself from queue at any time by repeating the Wednesday Ahmed.

It's within our bound range. When you think about two cuts versus zero and then on the other side the impact from loan growth, which again, we think is coming but will be a little bit backend loaded as a relatively minimum in year impact. So the range of outcomes on loan growth well, we'd have we'd rather have more in year I don't think is a huge driver in this.

Speaker Change: Our next speaker phone please pickup your handset before pressing the number once again if you have a question. Please press from London zero.

Speaker Change: Next question is from the line of Ken Houston from Jefferies. Please go ahead.

So it really is those two pieces in the middle and the trade between how much more you get from Essent re pricing net of loan yields if there are cuts versus what the impact of funding is another sort of work to offset each other a little bit but in a way that we think is relatively muted for the course of the.

Kenneth Michael Usdin: Thanks, Good morning.

Kenneth Michael Usdin: Mark I'm wondering if you can kind of start where you just finished and just looking at those two scenarios on slide 15.

Kenneth Michael Usdin: Hear you that it still seems like Theres, a lot of ways to get to that $1 billion plus just wondering how you can help us understand the variance of those outcomes.

Year.

Kenneth Michael Usdin: Maybe the way to think about how much those two cuts mean on their own or some of the other moving parts that would change that or is it more is it really just like a pretty narrow answer whatever the cut scenario is in terms of where that fourth quarter exit Lance yes.

And then just the other point I'd make is the 86 well on the low end for the quarter was within the guide and obviously when we gave you. The guide for Q1, we had in mind hitting the not only the full year guide, but importantly in the fourth quarter exit rate and we continue to confirm our ability to do that that helpful.

Yeah. Thanks, Kevin Great. Great question I would point you to 15, and just say if you look at the two wins the swap in U S T roll off that.

Yes. It is thank you and as a follow up on that loan growth point I'm just wondering.

In the prepared remarks, Chris talked about the new agreement with Blackstone and I am just wondering if that dynamic and how that plays into the combination of loan growth investment banking fees and kind of like.

Kenneth Michael Usdin: A pretty predictable number we think we've been.

Good about disclosing the details there that's I think pretty straightforward math, it'll be a little bit better than a no cut that.

And then cut scenario as you know, but it's within a bound range. When you think about <unk> versus zero and then on the other side the impact from loan growth, which again, we think is coming but it will be a little bit backend loaded as a relatively minimum in year impact so the range of outcomes on loan growth.

What that means for how you originate versus how you distribute.

Well good morning, Ken.

It's a good question, let me, let me hit the loan growth kind of head on.

Kenneth Michael Usdin: We'd have we'd rather have more in year I don't think is a huge driver in this number. So it really is those two pieces in the middle and the trade between how much more you get from asset re pricing net of loan yields if there are cuts versus what the impact of funding is another sort of work.

One you'll see it in kind of flat utilization among other things and not a lot of investments. The second thing is it has to be at our clients best interest for us to in fact provide those loans.

Kenneth Michael Usdin: Offset each other a little bit but in a way that we think is relatively muted for the course of the year.

And you probably noticed that we raised $22 billion, let alone put 12% on our balance sheet and that's because we can better serve our clients whether it's through a forward flow arrangement with Blackstone that you referenced or variety of other markets in the.

Kenneth Michael Usdin: And then just the other point I'd make is the <unk> hundred 86, well on the low end for the quarter was within the guide and obviously when we gave you. The guide for Q1, we had in mind hitting the not only the full year guide, but importantly in the fourth quarter exit rate and we continue to confirm our ability to do that.

The third thing is that they have to loans that are available to put on our balance sheet has to fit our risk profile and they have to fit our return requirements.

Kenneth Michael Usdin: Helpful.

Right.

Right now theres not a lot of loans like that from our perspective, having said that what's interesting about bank loans as Intel's theres excess capacity, but the best time to make bank loans is when there's a downturn in our house view is we are going to see a downturn and that'll be a great time for us to really use our balance sheet.

Speaker Change: Hey, guys. Thank you.

Speaker Change: As a follow up on that loan growth point I'm just wondering.

Speaker Change: In the prepared remarks, Chris talked about the new agreement with Blackstone and I am just wondering if that dynamic and how that plays into the combination of loan growth investment banking fees and kind of like.

Speaker Change: What that means for how you originate versus how you distribute.

Your question, though the implications to your question really have are broader than than just the loan growth. Let me just spend a little bit of time talking about how were positioning key.

Speaker Change: Well good morning, Ken.

Kenneth Michael Usdin: So it's a good question, let me, let me hit the loan growth kind of head on.

We have always demonstrated an ability to grow loans, having said that sort of three things all have to be present for us to grow loans. One there has to be demand right. Now there is not a lot of loan demand out there. So that's why you see it in kind of flat utilization among other things and not a lot of investment.

We think that no matter, how things play out all banks like key youre going to have to carrying more capital and is required as a consequence of that what we're focusing on is really serving our clients through capital light type businesses, specifically payments, which we've invested in for a long time investment banking, which we <unk>.

Kenneth Michael Usdin: The second thing is it has to be in our clients' best interest for us to in fact provide those loans.

<unk>, our wealth business, which we think we have an opportunity to really grow and lastly, something that we frankly haven't capitalized on the degree that we could or should have to date and thats business banking, we're really good commercial bank, we've never really capitalized on the opportunity in my opinion to gather the deposit.

Kenneth Michael Usdin: And you probably noticed that we raised $22 billion, but only about 12% on our balance sheet and that's because we can better serve our clients whether it's through a forward flow arrangement with Blackstone that you referenced or variety of other markets and the third thing is that they have to have loans that are available to put on our balance sheet have to fit our risk profile and the.

That's a business. Thank you very deposit centric business. So.

Kenneth Michael Usdin: I have to fit our return requirements.

Just wanted to give you some insight of how we're thinking about the business model going forward and how we continue to reposition key.

Kenneth Michael Usdin: And right.

Kenneth Michael Usdin: Right now theres not a lot of loans like that from our perspective, having said that what's interesting about bank loans is in Tulsa has excess capacity for the best time to make bank loans is when there's a downturn and.

Thank you Chris.

Sure.

Thank you and our next question is from John Kim from Evercore. Please go ahead.

Kenneth Michael Usdin: Our house view is we are going to see a downturn and that'll be a great time for us to really use our balance sheet.

Good morning.

Good morning, John.

Kenneth Michael Usdin: Your question, though the implications to your question really have are broader than than just the loan growth and let me just spend a little bit of time talking about how we're positioned in key.

First on the loan growth topic Mou have also indicated you do expect loan originations to pick up.

We look through 2024 and.

Kenneth Michael Usdin: We think that no matter, how things play out all banks like youre going to have to carrying more capital and is required.

And what areas do you think that youre going to be able to see the better opportunities begin to emerge I know demand is modest as you just said in line utilization weaker.

Kenneth Michael Usdin: Consequence of that what we're focusing on is really serving our clients through capital light type businesses, specifically payments, which we've invested in for a long time investment banking, which we referenced our wealth business, which we think we have an opportunity to really grow and lastly, something that we frankly haven't <unk>.

What areas do you see that anecdotal evidence of a pick up that could drive.

Accelerating originations and balance sheet growth as you look through 'twenty four.

Sure. So the first area that I would say would be people doing strategic things, so sort of a whole transaction business, which is just starting to get legs under it.

Capitalized on the degree that we could or should have to date and thats business banking, we're really good commercial bank, we've never really capitalized on the opportunity in my opinion to gather the deposits at the business.

<unk> backlog for example in M&A.

That would be an opportunity John other businesses that are really capital intensive where we have leadership positions are things like renewables I was out calling with our renewables team last week incredible amount of opportunity by the way. This was partially inflationary because theres a published stimulus around green energy.

Kenneth Michael Usdin: Thank you very deposit centric business so I'm.

Kenneth Michael Usdin: I just wanted to give you some insight of how we're thinking about the business model going forward and how we continue to reposition key.

Speaker Change: Thank you Chris.

<unk>.

That's a huge opportunity affordable housing still a huge unmet need that is very very capital intensive and then I think youll start to see people really start to invest in property plant and equipment. If we continue to get an acceleration in <unk> and.

Speaker Change: Sure.

Speaker Change: Thank you and our next question is from Dan can carry from Evercore. Please go ahead.

Speaker Change: Good morning.

Speaker Change: John.

Dan Carry: Just first on that loan growth topic. I know you have also indicated you do expect loan originations to pick up as you look through 2024.

And inflation Youre going to see people start to go a little long on inventory.

Dan Carry: And what areas do you think that youre going to be able to see the better opportunities begin to emerge I know demand is modest since you just said in line utilization weaker.

The areas, where I think there'll be opportunities for loan growth.

We're not really seeing those right now, but I think they will I think they will.

<unk> will develop over the course of the year Sean.

Dan Carry: What areas do you see that anecdotal evidence of a pick up that could drive.

Got it thanks for that Chris just related to that is any of the weakness related to bond market disintermediation right now.

Dan Carry: Accelerating originations and balance sheet growth as you look through 2000 and for.

For sure.

Dan Carry: Sure. So the first area that I would say it would be people doing strategic things, so sort of a whole transaction business, which is just starting to get legs under it and we have a significant backlog for example in M&A.

You have record issuance of investment grade debt and you have spreads that continue to grind down.

No question that that plays a role.

Okay. Thanks, and then lastly on the <unk>.

Capital markets revenues.

Dan Carry: That would be an opportunity John other businesses that are really capital intensive where we have leadership positions.

I know you indicated that you do expect some pullback in fees in the second quarter.

Dan Carry: Are things like renewables I was out calling with our renewables team last week.

What areas is that in the IBD area, just given the levels that you saw this quarter and maybe if you can help quantify the magnitude of that pullback you could you could see in the second quarter, yes.

Dan Carry: <unk> amount of opportunity by the way this is partially inflationary because theres a ton of stimulus around green energy.

Yes, So let me let me just kind of start at the top.

Dan Carry: That's a huge opportunity affordable housing still a huge unmet need that is very very capital intensive.

From from a from a backlog perspective, we are at record backlogs in our M&A business. Our backlogs are above where they were a quarter ago and they are above where they were at year end, having said that.

Dan Carry: And then I think youll start to see people really start to invest in property plant and equipment. If we continue to get an acceleration and.

In the 10 year is gyrating around as it is if the 10 year was just at four six I think there'd be a lot of transactions, but I think anytime. There's this kind of volatility it causes pause on certain transactions and so.

Dan Carry: And inflation Youre going to see people start to go a little long on inventory.

Dan Carry: The areas, where I think there'll be opportunities for loan growth.

Dan Carry: We're not really seeing those right now, but I think they will I think.

Dan Carry: I will develop over the course of the year John.

That was really the premise of my comment as we look at what will come out of the of the backlog in the second quarter and I am sure because the.

John: Got it thanks for that Chris just related to that is any of the weakness related to bond market disintermediation right now.

Speaker Change: For sure.

The first quarter was actually hospitable to getting transactions done I'm sure. Some that would have been in the second quarter actually went into the first quarter.

John: Do you have a record issuance of investment grade debt and you have spreads continue to grind down.

Speaker Change: There's no question that that plays a role.

Speaker Change: Okay. Thanks, and then lastly on the <unk>.

Okay, great. Thank you.

Speaker Change: Capital markets revenues.

Sure.

Thank you next question is from Scott Cyphers from Piper Sandler. Please go ahead.

Speaker Change: I know you indicated that you do expect some pullback in fees in the second quarter.

Good morning, everyone. Thanks for taking the question, Chris I was hoping you could address in a bit more detail the decision to build the reserve a bit more.

Speaker Change: What areas is that in the IBD area, just given the levels that you saw this quarter and maybe if you can help quantify the magnitude of that pullback you could you could see in the second quarter. Yes. So let me let me just kind of start at the top from from a from a backlog perspective, we are at record back.

Like from your prepared remarks, just sort of trying to be out in front of anything you might see in a higher for longer environment, rather than anything you are actually seeing today is that the right way to think about it.

The nuances in there yet.

Yes, actually it was completely proactive I just.

Speaker Change: <unk> in our M&A business, our backlogs are above where they were a quarter ago and they are above where they were at year end, having said that when the 10 year is gyrating around as it is if the 10 year was just at four six I think there'd be a lot of transactions, but I think anytime there's this kind of volatility.

Some of them are a mindset that we're in this higher for longer and as a consequence, we have been stressing all of our portfolio.

Anytime we do that we start with anything thats leverage because thats most vulnerable and we also focus a lot on real estate and so as we go through and we make assumptions that.

Speaker Change: It causes pause on certain transactions and so.

Speaker Change: That was really the premise of my comment as we look at what will come out of the of the backlog in the second quarter and I am sure because.

Perhaps these rates will stay where they are for some time.

That's what's driving it and.

And also we made some assumptions about.

Speaker Change: The first quarter was actually hospitable to getting transactions done I'm sure. Some that would have been in the second quarter actually went into the first quarter.

My view is we probably will have a recession.

<unk>.

That's part of my macro view as part of that part of the calculus as well.

Okay perfect. Thank you and then maybe we can talk to expenses for a quick second so just.

Speaker Change: Okay, great. Thank you.

Speaker Change: Sure.

Just curious around how youre thinking about expenses sort of holistically for the year in so far as.

Speaker Change: Thank you next question is from Scott Cyphers from Piper Sandler. Please go ahead.

Unknown Executive: Good morning, everyone. Thanks for taking the question, Chris I was hoping you could address in a bit more detailed decision to build the reserve a bit more.

We definitely are getting a more normalizing.

Banking environment, which is great, but there could be cost accompanied with that.

Within the expense outlook, what kind of provisions have you made for that.

Unknown Executive: Like from your prepared remarks, just sort of trying to be out in front of anything you might see in a higher for longer environment, rather than anything you are actually seeing today is that the.

I'd recovery and would you still be kind of comfortable with the guide even if that recovery comes back even more more powerfully.

Christopher Marrott Gorman: Right way to think about it.

Christopher Marrott Gorman: What are the nuances in there yes.

Then Dennis currently contemplated.

Christopher Marrott Gorman: Yes, actually it was completely proactive I just.

Yes, Hey, Scott Clark Thanks for the thanks for the question.

<unk>.

So look we feel good on the guide kind of relatively.

Christopher Marrott Gorman: A mindset that we're in this higher for longer and as a consequence, we have been stressing all of our portfolio.

Stable plus or minus 2% that incorporates as we talked about.

Progression towards normalization.

Christopher Marrott Gorman: Anytime we do that we start with anything thats leverage because thats most vulnerable and we also focus a lot on real estate and so as we go through and we make assumptions that.

If we get something Fuller.

We can absorb that obviously, we werent expecting coming into the year that additional FDIC charge of that.

Christopher Marrott Gorman: Perhaps these rates will stay where they are for some time.

That's an extra component we will.

That's what's driving it and.

Continue to look at ways to absorb that intelligently, but we think we can cover.

Christopher Marrott Gorman: And also we made some assumptions about.

Christopher Marrott Gorman: My view is we probably will have a recession.

<unk>.

Christopher Marrott Gorman: <unk>.

The impact of a strong investment banking here, which again, we expect to see even if the even if the second quarter is a little bit lighter. So we did account we think for that pretty well.

Christopher Marrott Gorman: It's part of my macro view as part of that part of the calculus as well.

Speaker Change: Okay perfect. Thank you and then maybe we can talk to expenses for a quick second so.

Speaker Change: Just curious around how youre thinking about expenses sort of holistically for the year in so far as.

Perfect. Okay. Thank you very much.

Yes.

And the next question is from Manan <unk> with Morgan Stanley. Please go ahead.

Speaker Change: We definitely are getting a more normalizing.

Speaker Change: Banking environment, which is great, but there could be cost accompanied with that.

Hi, good morning.

Speaker Change: Within the expense outlook, what kind of provisions have you made for.

Right.

I wanted to follow up on that.

Speaker Change: Ivy recovery and would you still be kind.

Blackstone's, Bob initiative, and just in general with.

Speaker Change: We are comfortable with the guide even if that recovery comes back even more powerfully.

With with partnerships with towards private credit.

In terms of underwriting the launch.

Speaker Change: Then Dennis currently contemplated.

Do you underwrite the loans.

Dennis: Yes, Hey, Scott Clark Thanks for thanks for the question.

Is it your sole decision.

Speaker Change: So look we feel good on the guide kind of relatively stable plus or minus 2% that incorporates as we talked about.

Private credit thought come in and how does it impact spreads and.

And structure.

As you do more of these relationships.

Dennis: Progression towards normalization.

Yeah, Hey, Matt it's mark Thanks for the question.

Dennis: If we get something Fuller.

First of all I think it's just important to understand the rationale behind the partnership and that is largely to support more clients not too.

Dennis: I think we can absorb that obviously, we werent expecting coming into the year that additional FDIC charge of that.

Dennis: That's an extra component we will.

Dennis: Continue to look at ways to absorb that intelligently, but we think we can cover.

Manage capital or move loans off the balance sheet, it's really for us.

Largely in our specialty finance area, that's been growing very aggressively it's been an outstanding business.

Dennis: <unk>.

Dennis: The impact of a strong investment banking here, which again, we expect to see even if the even if the second quarter is a little bit lighter. So we did account we think for that pretty well.

But we do think thoughtfully about managing credit concentrations and this is the opportunity to do that and not limit the amount of clients. We can serve so I think that strategic rationale is really important as it relates to underwriting we.

Speaker Change: Perfect. Okay. Thank you very much.

Speaker Change: Yes.

Speaker Change: And the next question is from Manan <unk> from Morgan Stanley. Please go ahead.

We basically run the business due to underwriting Blackstone has an option to participate in these credits if they fit their box, but obviously, if we entered and announce a relationship we've been very deep with them on what the box.

Manan: Hi, good morning.

Right.

Manan: I wanted to follow up on that.

Manan: Blackstone's, Bob finish it up and just in general with.

And what it reflects what we think our business reflects market conditions as does their appetite. So we would expect this to go well, it's a one year deal and we will.

Manan: With with partnerships with towards private credit.

Manan: In terms of underwriting the loans.

Bob: Do you underwrite the loans and <unk>.

Bob: Is it your sale decision.

Test the relationship over the course of the year, we hope it goes very positively because if it does we're supporting a lot more clients and prospects.

Bob: Private credit thought come in and how does it impact spreads and structure.

And growing our business and again, given our we think differentiated distribution model, we don't necessarily always need to grow the balance sheet to grow the business.

Bob: As you do more of these relationships.

Bob: Yeah, Hey, Matt it's mark Thanks for the question.

Mark: First of all I think it's just important to understand the rationale behind the partnership and that is largely to support more clients not too.

But this is a case, where we would expect to actually do both we would expect to continue to grow this portfolio, but moderate some of that growth with the partner will get.

Mark: <unk>.

Mark: Manage capital or move loans off the balance sheet, it's really for us.

Our modest asset management fee to do that one that we think it makes sense to both sides and again, we will test it through the year and if there is more opportunities to do this with Blackstone or others will investigate those where they allow us to serve more clients and serve them better.

Speaker Change: Largely in our specialty finance area, that's been growing very aggressively it's been an outstanding business.

Speaker Change: But we do think thoughtfully about managing credit concentrations and this is the opportunity to do that and not limit the amount of clients. We can serve so I think that strategic rationale is really important as it relates to underwriting.

So in addition to the fee side does it also help you with deposits because you can have more relationships with larger culprits.

Yes.

Speaker Change: We basically run the business due to underwriting Blackstone has an option to participate in these credits if they hit their box, but obviously, if we entered and announced the relationship we've been very deep with them on what the box looks like and what it reflects and we think our business reflects market conditions as does there.

Last I checked Blackstone it wasn't in the business of taking deposits or providing payment services and we are so we like those kind of deals.

Fair enough.

Okay, and then as a follow up on the loan review.

Can you throw some more light on what you learned in specific industries, which are the industries that are seeing more pressure and then.

Speaker Change: Appetite. So we would expect this to go well, it's a one year deal and we will.

Our role is as a special servicer as well on the commercial real estate side.

Can you shed some more light on what Youre seeing there.

Speaker Change: Test the relationship over the course of the year, we hope it goes very positively because if it does we're supporting a lot more clients and prospects.

Sure. So let me start if I could on what we're seeing in our in our servicing business our servicing business as you can imagine we look at what goes in and out of active special servicing and as you can well imagine.

Speaker Change: And growing our business.

Speaker Change: Given our we think differentiated distribution model, we don't necessarily always need to grow the balance sheet to grow the business.

But this is a case, where we would expect to actually do both we would expect to continue to grow this portfolio, but moderate some of that growth with the partner will get.

Office continues to be.

The largest area by far we have seen some multifamily start to go into our active special servicing and those are typically deals that were done at very low cap rates that we're highly leveraged to and as a consequence are very sensitive to the significant rise in interest.

Speaker Change: Modest.

As it relates to our strategic review as I mentioned, we are we start with anything that's leveraged but a few industries that I would bring out to your attention.

One obviously has real estate, we spent a lot of time looking at real estate very sensitive to interest rates. The other one is healthcare healthcare is an area, where we have a very significant strategic hold and there is no question that there's going to be a lot of consolidation in healthcare because a lot of health care companies are under a myriad of cost pressures.

The other.

Thing area, where we saw some was just consumer services broadly.

Those are the areas.

Great. Thank you.

Sure.

The next question is from Ebrahim <unk>.

From Bank of America. Please go ahead.

Hey, good morning, good morning.

Yes.

I had one follow up Chris when you think about when you talked about you and I will conclude the session. This stress testing on your loan book for the higher for longer.

I guess the.

Markets have generally been drawn expecting hi, Ed it's to pushing the economy into a recession I guess from your perspective bottoms up when you assume higher for longer.

Do you see a lot of being within your loan book 612, 18 months, how that causes you to have that view.

The wonder.

<unk> are higher for longer enough and it was with the economy.

Operator: If you would like to ask a question, please press one, then zero on your telephone keypad. You will hear an acknowledgment tone that your line has been placed in queue. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Moynihan, KeyCorp's Director of Investor Relations. Please go ahead.

Operator: If you would like to ask a question, please "press one, then zero" on your telephone keypad. You will hear an acknowledgment tone that your line has been placed in queue. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Moynihan, KeyCorp's Director of Investor Relations. Please go ahead.

Can you to surprise to the upside in terms of growth just how do you think about it, especially when you're assessing these zones.

Cost pressures and the other.

Area, where we saw some was just consumer services broadly those are those are the areas.

So in terms of just higher for longer.

Look at our book and you look at 2024 higher for longer works just fine for us.

Great. Thank you.

Sure.

The next question is from Ebrahim <unk> from Bank of America. Please go ahead.

That would from an NII perspective that would be the best outcome.

Brian Mauney: Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's Q1 2024 earnings conference call. I am 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 those statements speak only as of today, 18 April 2024, and will not be updated. With that, I will turn it over to Chris.

From pure NII I will tell you I would like to see a perfect scenario for key would be a couple of cuts late in the year, because I think that would be good for business fees.

Hey, good morning.

Yes.

Just had one follow up Chris when you think of when you talked about your outlook for the session.

Testing on Ya Li.

<unk> transactions et cetera, as I think about the economy my sort of word of caution here is if you look at the labor market. The labor market is very strong by any metric.

But for the higher for longer.

I guess the <unk>.

Markets have generally been drone expecting Iot, it's to push the economy into a recession I guess from your perspective bottoms up when you assume higher for longer.

And I, just think everyone assuming that there is going to be a soft landing without damaging the labor market I hope I hope the markets are right about that I'm not so sure. So thats kind of Thats sort of my thinking if thats helpful.

Do you see a lot of being within your loan book 612, 18 months out that causes you to have that view and I'm just trying to wonder.

Our higher for longer enough in a world where the economy could continue to surprise to the upside in terms of growth just how do you think about it, especially when you're assessing these loans.

Christopher Gorman: Thank you, Brian. I'm on slide two. This morning, we reported earnings of $183 million, or $0.20 per share, which incorporates $0.02 per share impact from an additional FDIC special assessment charge this quarter. I would characterize our underlying results as solid. Revenue was essentially flat sequentially, despite expected first quarter seasonality, as investment banking reported its best first quarter result in our company's history. Fees were up 6% against both the prior quarter and prior year. Retail relationship households were up 2.5% year over year, and commercial clients were up 6%. Customer deposits were up 2% year over year and essentially flat on a sequential basis. We continued to reduce our reliance on higher-cost brokered CDs and wholesale borrowings. Expenses remained well controlled at $1.1 billion. Non-performing assets and credit losses remained low.

Christopher Gorman: Thank you, Brian. I'm on slide two. This morning, we reported earnings of $183 million, or $0.20 per share, which incorporates $0.02 per share impact from an additional FDIC special assessment charge this quarter. I would characterize our underlying results as solid. Revenue was essentially flat sequentially, despite expected first quarter seasonality, as investment banking reported its best Q1 result in our company's history. Fees were up 6% against both the prior quarter and prior year. Retail relationship households were up 2.5% year-over-year, and commercial clients were up 6%. Customer deposits were up 2% year-over-year and essentially flat on a sequential basis. We continued to reduce our reliance on higher-cost brokered CDs and wholesale borrowings. Expenses remained well controlled at $1.1 billion. Non-performing assets and credit losses remained low.

That's helpful and I guess, just bigger picture I mean, they think it's been an.

Interesting last 12 months for key in terms of <unk> optimization expense focus et cetera do.

So in terms of just higher for longer.

Looking at our book and you look at 2024 higher for longer works just fine for us.

Do you mind us as we look forward strategically like the one or two things you are most focused on is it still in terms of optimizing the balance sheet.

From an NII perspective that would be the best outcome.

Vince is going to look like.

Sure.

What should we be thinking about as you think about just.

I will tell you I would like to see a perfect scenario for <unk> would be a couple of cuts late in the year, because I think that would be good for business.

Coming out of this in.

The next leg of growth for the bank.

Sure so coming out so there's no question that 2023 was a reset year for key for all the reasons that you just pointed out and I'm really proud of what we did shrinking <unk> by $14 billion, taking out about $400 million of expenses, having said that as I mentioned in my prepared.

Deposits transactions et cetera, as I think about the economy by sort of word of caution here is if you look at the labor market. The labor market is very strong by any metric.

And I, just think everyone assuming that there's going to be a soft landing without damaging the labor market I hope I hope the markets are right about that I'm not so sure. So thats kind of Thats sort of my thinking if that's helpful.

Remarks, we now Abraham are playing offense and what that involves is us leaning into areas, where we already have I think a good competitive position payments investment banking wealth and I mentioned business banking as well because I think as we go forward the loan to deposit ratios are going to be really really important.

That's helpful and I guess, just bigger picture I mean, they think it's been any.

Interestingly last 12 months for key in terms of our to be optimization expense focus et cetera remind us as we look forward strategically like the one or two things you're most focused on is it still in terms of optimizing the balance sheet.

Christopher Gorman: Additionally, we continued to build our credit reserves this quarter. Our capital ratios, including tangible common ratios, were flat to improved across the board, despite the impact of higher interest rates on the fair value of our available-for-sale securities. We ended the quarter with a Common Equity Tier 1 ratio of 10.3%, up 120 basis points from a year ago, representing our fastest rate of organic capital build over a twelve-month period since the industry began tracking this metric. I'm also encouraged by the momentum we are seeing in areas where we have a differentiated advantage and have been investing. While only one quarter, I am encouraged by the strong, broad-based results we saw in our capital markets business across M&A, equity, and debt capital markets, and our commercial mortgage group.

Additionally, we continued to build our credit reserves this quarter. Our capital ratios, including tangible common ratios, were flat to improved across the board, despite the impact of higher interest rates on the fair value of our available-for-sale securities. We ended the quarter with a Common Equity Tier 1 ratio of 10.3%, up 120 basis points from a year ago, representing our fastest rate of organic capital build over a twelve-month period since the industry began tracking this metric. I'm also encouraged by the momentum we are seeing in areas where we have a differentiated advantage and have been investing. While only one quarter, I am encouraged by the strong, broad-based results we saw in our capital markets business across M&A, equity, and debt capital markets, and our commercial mortgage group.

We as you know have taken our loan deposit ratio down to 77, I think kind of mid <unk> is where people are going to have to be as you lean into these businesses that are really kind of fee centric businesses. So that's where we're leaning and that's where we're investing.

Fences growth like well what should we be thinking about as you think about just.

Thank you.

Coming out of this and where the next leg of growth for the bank.

Thank you. The next question is from Mike Mayo from Wells Fargo Securities. Please go ahead.

Hi.

Hey, Mike Chris I know I know capital markets is your baby from times past.

I guess when I look at 17% year over year growth that was still lagging the big five U S. Players so.

Third remarks, we now Abraham are playing offense and what that involves is us leaning into areas, where we already have I think a good competitive.

Yes.

Good time to reminder of who is Keybanc capital markets, What's your mix.

Among advisory debt underwriting equity underwriting what's your typical size of the client one of your key metrics for Keybanc capital markets, and where do you stand with regard to the metrics sure.

<unk> payments investment banking, well and I've mentioned business banking as well because I think as we go forward.

Christopher Gorman: We also are seeing broad momentum across our targeted industry verticals, such as healthcare, power, industrials, and renewables. While I would expect to see some pullback in fees in Q2, our pipelines are up from a year ago and from year-end levels. Market conditions are clearly starting to normalize. We also continue to raise significant capital on behalf of our clients. In Q1, we raised over $22 billion, holding 12% on our balance sheet and distributing the balance in the capital markets. To this end, last month, we announced a strategic forward flow origination partnership with Blackstone. This partnership will allow us to accelerate growth and manage credit concentration risk within our differentiated commercial platform. It is another example of how we are delivering best-in-class execution for our clients.

We also are seeing broad momentum across our targeted industry verticals, such as healthcare, power, industrials, and renewables. While I would expect to see some pullback in fees in Q2, our pipelines are up from a year ago and from year-end levels. Market conditions are clearly starting to normalize. We also continue to raise significant capital on behalf of our clients. In Q1, we raised over $22 billion, holding 12% on our balance sheet and distributing the balance in the capital markets. To this end, last month, we announced a strategic forward flow origination partnership with Blackstone. This partnership will allow us to accelerate growth and manage credit concentration risk within our differentiated commercial platform. It is another example of how we are delivering best-in-class execution for our clients.

Loan to deposit ratios are going to be really really important we as you know have taken our loan deposit ratio down to 77, I think trying to mid Seventy's is where people are going to have to be as you lead into these businesses, they're really kind of fee centric businesses, that's where we're leaning in and that's where we're investing.

Great question, obviously, we on a percentage basis are more canter towards advisory. These are middle market companies a lot of them aren't going to the equity markets very often and if they are huge equity deals. Those are always led by bolds bracket firms.

Thank you.

So ours is heavily Kansas toward M&A. The good news there Mike as we've talked before M&A pulls through a lot of the other things that we do financing hedging et cetera. So we feel good about where we're positioned.

Thank you.

Thank you. The next question is from Mike Mayo from Wells Fargo Securities. Please go ahead.

Hi.

Speaker Change: Hey, Mike, Chris I know I know capital markets since Youre, maybe in times past.

Speaker Change: I guess when I look at 17% year over year growth that was still lagging the big side U S. Players so.

But the difference probably as you go as you went through all the numbers the difference would be that some of the largest banks obviously are deep players in investment grade issuance and seed players and large equity issuance.

Speaker Change: Yes.

Mike: Good time to reminder of who is Keybanc capital markets, What's your mix.

Mike It's Clarke the only other point I'd add there is a lot of the volume in the first quarter was $10 billion plus deals are very very large cap and while we do some work with them. We are a middle market focused bank. So.

Mike: Among advisory debt underwriting equity underwriting with your typical size of the client what are your key metrics for Keybanc capital markets, and where do you stand with regard to the metrics.

Mike: Sure.

Christopher Gorman: This deal also further validates our distinctive underwrite-to-distribute model in that one of the largest private credit providers has recognized our platform for its ability to originate, soundly underwrite, and service at volume with our high-quality clients. As markets evolve, we will continue to evaluate the potential for arrangements with other leading providers like this one, which allow us to offer a distinctive experience for our clients while concurrently managing our risk. Turning to wealth management, we recently launched Key Private Client, where we have the opportunity to penetrate a large, growing mass affluent segment within our consumer base and with our commercial business owners. In this mass affluent segment, we enrolled another six thousand households in this quarter and doubled production volumes compared to last year. This new business has added over two billion of household assets in just over a year.

This deal also further validates our distinctive underwrite-to-distribute model in that one of the largest private credit providers has recognized our platform for its ability to originate, soundly underwrite, and service at volume with our high-quality clients. As markets evolve, we will continue to evaluate the potential for arrangements with other leading providers like this one, which allow us to offer a distinctive experience for our clients while concurrently managing our risk. Turning to wealth management, we recently launched Key Private Client, where we have the opportunity to penetrate a large, growing mass affluent segment within our consumer base and with our commercial business owners. In this mass affluent segment, we enrolled another six thousand households in this quarter and doubled production volumes compared to last year. This new business has added over two billion of household assets in just over a year.

Speaker Change: That's a great question, obviously, we on a percentage basis are more Kansas toward advisory.

I think that's some of the delta on things like M&A.

And then when you talk about the multiplier effects from mergers because you said backlogs are up quarter over quarter backlogs are up year over year.

Speaker Change: Market companies, a lot of them aren't going to the equity markets very often and if there are huge equity deals those are always led by bolds bracket firms.

I guess do you expect.

Some good growth this year after the second quarter.

Speaker Change: So ours is heavily chanted toward M&A. The good news there Mike as we've talked before M&A pulls through a lot of the other things that we do financing hedging et cetera. So we feel good about where we're positioned.

How could you quantify that multiplier effect of that like one point to one five to ask does it Mary.

It would be the latter it varies Mike, but I did say that our M&A backlog is at record highs.

Brian Pony: But the difference is probably as you go if you went through all the numbers the difference would be that some of the largest banks obviously are deep players in investment grade issuance and the players and large equity issuance.

US that is the most important because if you think about it if you have the relationship the M&A relationship by definition, you are talking to and these middle market businesses the decision maker.

I feel good about how we're positioned but keep in mind these markets.

Clark Harold Ibrahim Khayat: Mike It's Clarke the only other point I'd add there is a lot of the volume in the first quarter was $10 billion plus deals or very very large cap.

Things are.

Not yet normalized they're getting back to normal, but theyre not yet normalized and as I mentioned earlier it isn't the absolute level of interest rates that I think as Dan has a dampening effect I think the I think the volatility in interest rates forces people to the sideline and to wait things out and so.

Clark Harold Ibrahim Khayat: We do some work with them you know we are a middle market focused bank. So I.

Christopher Gorman: Overall, our assets under management have now surpassed $57 billion. Before I turn it over to Clark, I want to touch briefly on credit quality. As I mentioned earlier, our non-performing loans, net credit losses, and delinquencies remain at low historical standards, with credit losses below our full year 2024 and through-the-cycle targets. In Q1, we saw an uptick in criticized loans, which was driven by our belief, which, by the way, we have held for some time now, that we will remain in a higher-for-longer environment as inflation remains sticky. With that in mind, this quarter, we performed a deep dive on over 90% of our clients that we believe would be most impacted under a higher-for-longer scenario, encompassing over 80% of our non-investment grade commercial exposures.

Overall, our assets under management have now surpassed $57 billion. Before I turn it over to Clark, I want to touch briefly on credit quality. As I mentioned earlier, our non-performing loans, net credit losses, and delinquencies remain at low historical standards, with credit losses below our full year 2024 and through-the-cycle targets. In Q1, we saw an uptick in criticized loans, which was driven by our belief, which, by the way, we have held for some time now, that we will remain in a higher-for-longer environment as inflation remains sticky. With that in mind, this quarter, we performed a deep dive on over 90% of our clients that we believe would be most impacted under a higher-for-longer scenario, encompassing over 80% of our non-investment grade commercial exposures.

Clark Harold Ibrahim Khayat: I think that some of the delta on things like M&A.

Brian Pony: And then when you talk about the multiplier effects from mergers because you said backlogs are up quarter over quarter backlogs are up year over year I guess you expect.

We need some settling in of rates it doesn't much matter frankly, where that is as I said, a four 610 year would be just fine to transact, but what we can't have is just extreme volatility.

Brian Pony: Some good growth this year after the second quarter.

Brian Pony: How could you quantify that multiplier factor that like one point to 1.5 to ask does it Mary.

And then last one on that.

Christopher Marrott Gorman: It would be the latter it varies Mike, but I did say that our M&A backlog is at record highs.

There is keybanc capital markets' revenues when you look out over say, a 10 year horizon, because I know the whole industry was down by almost half last year, and you're kind of bouncing off low levels.

Christopher Marrott Gorman: US that is the most important because if you think about it if you have the relationship the M&A relationship by definition Youre talking to in these middle market businesses. The decision maker. So I feel good about how we're positioned but keep in mind these markets things.

Typically for you guys.

Where are you.

Well I mean, I think if you look at our normalized investment banking.

Figure.

$600 million to $650 million in sort of normalized times and as you know because you've followed us for some time, that's been a double digit CAGR and Theres. No reason why we can't get back to that level of growth. If you think about 10 years and you look at the 10 years prior.

Christopher Marrott Gorman: Things are not yet normalized they're getting back to normal, but they are not yet normalized and as I mentioned earlier.

Christopher Gorman: Performing this deep dive confirmed our view that there will be low loss content in these loans. Approximately 96% of accruing criticized commercial loans are current, and 93% are current when also including non-accruing loans. Over 85% of our criticized real estate loans have recourse. I continue to feel very good about our ability to hit our net charge-off guidance of 30 to 40 basis points this year. In summary, while it's still early in the year, we are on pace to deliver against the commitments that we detailed at the beginning of this year. Key is back to playing offense, and I remain excited about our future and our ability to generate sound, profitable growth moving forward. I also want to take a moment to thank our teammates for their continued commitment to our clients and our communities.

Performing this deep dive confirmed our view that there will be low loss content in these loans. Approximately 96% of accruing criticized commercial loans are current, and 93% are current when also including non-accruing loans. Over 85% of our criticized real estate loans have recourse. I continue to feel very good about our ability to hit our net charge-off guidance of 30 to 40 basis points this year. In summary, while it's still early in the year, we are on pace to deliver against the commitments that we detailed at the beginning of this year. Key is back to playing offense, and I remain excited about our future and our ability to generate sound, profitable growth moving forward. I also want to take a moment to thank our teammates for their continued commitment to our clients and our communities.

Christopher Marrott Gorman: It isn't the absolute level of interest rates, but I think as Dan has a dampening effect I think the I think the volatility in interest rates forces people to the sideline and to wait things out and so we would need some settling in of rates. It doesn't much matter frankly, where that is as I said.

Alright, thank you.

Thank you Mike.

Thank you. Our next question is from Gerard Cassidy from RBC capital markets. Please go ahead.

Hi, Chris Sinclair.

Hi, good morning.

Christopher Marrott Gorman: For six to 10 year would be just fine to transact, but what we can't have is just extreme volatility.

Clark you mentioned about.

The loan portfolio, how you purposely exited single credit relationships.

Speaker Change: And then last one on that where is Keybanc capital markets' revenues. When you look out over say, a 10 year horizon, because I know the whole industry was down by almost half last year, and you're kind of bouncing off low levels, but specifically for you guys.

You talked about building the business bank deposit base better can you guys give us some more color on these types of credits that you've pushed out.

The syndicated loans since it was only a loan relationship.

Where are you.

Speaker Change: Well I mean, I think if you look at our normalized investment banking.

And then second getting back to that business Bank, Chris how does that differ from the commercial bank because I think you said, it's two different business lines.

Speaker Change: Figure $600 million to $650 million in sort of normalized kind of times and as you know because you've followed us for some time, that's been a double digit CAGR and Theres. No reason why we can't get back to that level of growth. If you think about 10 years and you look at the 10 years prior.

Yes, So let me take the first one first Gerard so and a lot of cases.

Christopher Gorman: I am very proud to share with you that for the eleventh consecutive exam cycle, since the passage of the regulation in 1977, Key received an outstanding rating from the OCC for meeting or exceeding the terms of the Community Reinvestment Act. This achievement reflects our collective commitment to our purpose and an enormous amount of hard work and dedication from every teammate at Key. With that, I'll turn it over to Clark to provide more details on the results of the quarter. Clark?

I am very proud to share with you that for the eleventh consecutive exam cycle, since the passage of the regulation in 1977, Key received an outstanding rating from the OCC for meeting or exceeding the terms of the Community Reinvestment Act. This achievement reflects our collective commitment to our purpose and an enormous amount of hard work and dedication from every teammate at Key. With that, I'll turn it over to Clark to provide more details on the results of the quarter. Clark?

Well, we have a relationship strategy and we had these relationship review sessions, where we see what kind of penetration, we get and often we let bankers many times it starts by sort of lagging into being a participant in a sector that we're really really good and we think we can do a lot of things and have a lot of capable.

Speaker Change: Alright, thank you.

Thank you Mike.

Mike: Thank you. Our next question is from Gerard Cassidy from RBC capital markets. Please go ahead.

Gerard Sean Cassidy: Hey, Chris.

<unk>.

It's just a matter of being really disciplined and if if we actually provide a loan and I've often said are properly granted loan can't return its cost of capital and so it actually is destroying value unless you can cross sell we're really proud of what we can do but if we can't penetrate that client we need to.

Christopher Marrott Gorman: Hi, good morning.

Speaker Change: Clark do you you mentioned about.

Speaker Change: The loan portfolio, how are you purposely exited single credit relationships and.

Speaker Change: Chris you talked about <unk>.

Clark Khayat: Thanks, Chris, and thank you everyone for joining us today. I'm now on slide four. For the first quarter, we reported earnings per share of $0.20, including $0.02 impact from the FDIC special assessment. This quarter's $29 million pre-tax assessment represented a 15% add-on to the charge we had taken in the fourth quarter relating to the bank failures last spring. As expected, our taxable equivalent net interest income declined 4.5% sequentially, within the range of down 3% to 5% that we provided in January. Non-interest income increased 6% compared to both the prior year and quarter, primarily driven by strong investment banking performance. Reported expenses were down, and excluding selected items, expenses were up slightly linked quarter and essentially flat year over year at approximately $1.1 billion.

Clark Khayat: Thanks, Chris, and thank you everyone for joining us today. I'm now on slide four. For the Q1, we reported earnings per share of $0.20, including $0.02 impact from the FDIC special assessment. This quarter's $29 million pre-tax assessment represented a 15% add-on to the charge we had taken in the Q4 relating to the bank failures last spring. As expected, our taxable equivalent net interest income declined 4.5% sequentially, within the range of down 3% to 5% that we provided in January. Non-interest income increased 6% compared to both the prior year and quarter, primarily driven by strong investment banking performance. Reported expenses were down, and excluding selected items, expenses were up slightly linked quarter and essentially flat year-over-year at approximately $1.1 billion.

Speaker Change: Building the business Bank deposit base better can you kind of just give us some more color on that.

Speaker Change: These types of credits that you've pushed out would they syndicated loans since it was only a loan relationship.

Exit that client to free up the capital to put it some place where we can make the kind of returns and so that was just the exercise obviously it had a huge amount of attention and our time frame of acceptance.

Christopher Marrott Gorman: And then the second.

Christopher Marrott Gorman: Getting back to that business bank, Chris how does that differ from the commercial bank because I think you said, it's two different business lines.

<unk> that last year, when we were going through the exercise as it relates to business banking. It is the same business as as middle market.

Christopher Marrott Gorman: Yeah. So let me take the first one first Gerard so there are a lot of cases.

Christopher Marrott Gorman: We have a relationship strategy and we have these relationship review sessions, where we see what kind of penetration, we get and often we let bankers. Many times it starts by sort of lagging into being a participant in a sector that we're really really good and we think we can do a lot of things and have a lot of.

Except that you need to be really focused on the payments piece, because as I said, they're mostly.

Deposit centric businesses and that's the reason that we've restructured in November of last year and put our payments business together with our middle market business and we think that's going to be critical to being able to go down market and really serve these these smaller commercial businesses.

Clark Khayat: Provision for credit losses of $101 million was roughly flat to the fourth quarter and included $81 million of net loan charge-offs and $20 million of credit reserve build. Our Common Equity Tier 1 ratio increased to 10.3%, while tangible book value declined 1% sequentially, reflecting the impact of higher rates on AOCI this quarter. Moving to the balance sheet on slide five. Average loans declined 2.6% sequentially to $111 billion, and loans ended the quarter at about $110 billion, down approximately $2.7 billion from year-end. The decline reflects the expected follow-on impacts of intentional actions we took in 2023 to reduce low return, lending-only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature.

Provision for credit losses of $101 million was roughly flat to the Q4 and included $81 million of net loan charge-offs and $20 million of credit reserve build. Our Common Equity Tier 1 ratio increased to 10.3%, while tangible book value declined 1% sequentially, reflecting the impact of higher rates on AOCI this quarter. Moving to the balance sheet on slide five. Average loans declined 2.6% sequentially to $111 billion, and loans ended the quarter at about $110 billion, down approximately $2.7 billion from year-end. The decline reflects the expected follow-on impacts of intentional actions we took in 2023 to reduce low return, lending-only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature.

Christopher Marrott Gorman: <unk>.

Christopher Marrott Gorman: And it's just a matter of being really disciplined and if if we actually provide alone and I've often said.

Christopher Marrott Gorman: Ah properly granted loan can't return its cost of capital and so it actually is destroying value unless you can cross sell we're really proud of what we can do but if we can't penetrate that client we need to exit that client to free up the capital to put it someplace, where we can make the kind of returns and so that was just the exercise.

We think we have a differentiated product offering.

And Chris when you talk about the deepening of the relationship with these customers that may only have alone.

Our deposit relationship aside from payments one of those other products that you can use to deepen that relationship to make it more profitable.

Christopher Marrott Gorman: Obviously, it had a huge amount of attention and our time frame of acceptance.

Sure.

<unk> with and certainly through last year's exercise. The first thing that we went to one customer and said we need your deposits. So it starts as simple as getting the deposits and I think at 86% or so of our businesses. We have multi dimensional relationships. The next thing that we focus on is payments we've been in.

Christopher Marrott Gorman: <unk> that last year, when we were going through the exercise as it relates to business banking. It is the same business as as middle market.

Christopher Marrott Gorman: Except that you need to be really focused on the payments piece, because as I said, they're mostly.

Clark Khayat: Lower balances are also a function of lower client demand, driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off-balance-sheet structures. We also remain disciplined and intentional about what we're putting on our balance sheet. We're very active with clients and prospects and still expect new loan origination to come back throughout 2024. On slide 6, average deposits declined about 1.5% sequentially, in line with recent historical seasonal patterns. Within that decline, we reduced broker deposits by roughly $1 billion. Client deposits were up 2% year over year. Both total and interest-bearing cost of deposits rose by 14 basis points during the quarter, primarily reflecting repricing of existing CDs and money market deposits as they come up for maturity, and some continued migration out of non-interest-bearing.

Lower balances are also a function of lower client demand, driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off-balance-sheet structures. We also remain disciplined and intentional about what we're putting on our balance sheet. We're very active with clients and prospects and still expect new loan origination to come back throughout 2024. On slide six, average deposits declined about 1.5% sequentially, in line with recent historical seasonal patterns. Within that decline, we reduced broker deposits by roughly $1 billion. Client deposits were up 2% year-over-year. Both total and interest-bearing cost of deposits rose by 14 basis points during the quarter, primarily reflecting repricing of existing CDs and money market deposits as they come up for maturity, and some continued migration out of non-interest-bearing.

Investing in payments for a long time for these middle market businesses, its not just moving money around but it's providing information embedded banking and so forth and then of course, we have the ability to help them hedge we have the ability to raise capital for them and then obviously the ultimate is being able to forgive them strategic advice.

Christopher Marrott Gorman: Posit centric businesses and that's the reason that we've restructured in November of last year and put our payments business together with our middle market business and we think that's going to be critical to being able to go down market and really serve these these smaller commercial businesses that.

We're fortunate that because were.

Christopher Marrott Gorman: We think we have a differentiated product offering.

Structure around industries, we can do all of those things, but we can't do those things that the company isn't receptive to our ideas.

Speaker Change: And Chris when you talk about the deepening of the relationship with these customers. They may only have alone or.

Very good and then as a follow up question I know you guys address what you did in the deep dive for looking at the portfolios in the criticized loan increase can you give us.

Christopher Marrott Gorman: Or a deposit relationship what aside from payments one of those other products that you can use to deepen that relationship to make it more profitable.

Clarke: Well sure.

Clarke: Arts with and certainly through last year's exercise. The first thing that we went to what the customer insight.

Number one two or three reasons alone moved into criticized so is that the loan to value degradation.

Clark Khayat: When adjusted for the non-interest bearing deposits in our hybrid commercial accounts, our percentage of non-interest bearing to total deposits dropped from 25% to 24% linked quarter. Our cumulative interest-bearing deposit beta was just below 52% since the Fed began raising interest rates, up about three percentage points from last quarter. On the bottom left of the page, we split out for you our deposit mix by product type and for interest bearing by business, including how much of our commercial book is indexed or managed to benchmark rates. We hope you'll find this information useful as you think through potential beta sensitivities. Moving to net interest income and margin on slide seven. Taxable equivalent net interest income was $886 million, down 4.5% from the prior quarter.

When adjusted for the non-interest bearing deposits in our hybrid commercial accounts, our percentage of non-interest bearing to total deposits dropped from 25% to 24% linked quarter. Our cumulative interest-bearing deposit beta was just below 52% since the Fed began raising interest rates, up about three percentage points from last quarter. On the bottom left of the page, we split out for you our deposit mix by product type and for interest bearing by business, including how much of our commercial book is indexed or managed to benchmark rates. We hope you'll find this information useful as you think through potential beta sensitivities. Moving to net interest income and margin on slide seven. Taxable equivalent net interest income was $886 million, down 4.5% from the prior quarter.

Doug irrigation or was it the debt service coverage, what was kind of in the main factors that pushed them into criticized.

Clarke: We need your deposits. So it starts a simple as getting the deposits and I think 86% or so of our businesses. We have multi dimensional relationships. The next thing that we focus on is payments we've been investing in payments for a long time and for the market businesses. Its not just moving money around but it's providing.

Its debt service coverage. So the first thing we focus on is debt service coverage and for purposes of this we completely deep link any secondary source of repayment and we assume that the only source of repayment is the primary source of that of course is spread up cash flow.

Clarke: Information embedded banking and so forth and then of course, we have the ability to help them hedge we have the ability to raise capital for them and then obviously the ultimate is being able to forgive them strategic advice. We're fortunate because we're we're structured around industries. We can do all of those things.

I appreciate it thank you Chris.

Sure.

Thank you our final question will come from the line of Peter Winter from D. A Davidson. Please go ahead.

Thanks, Good morning.

Yes.

Chris You mentioned in your opening remarks that you're ready to play offense again, but that sounded a little bit cautious on period end loan growth can you just talk about.

Clark Khayat: Approximately $40 million of benefit from fixed rate asset repricing, mostly from swaps and short-dated US Treasuries, was more than offset by lower loan volumes, higher deposit costs, and deposit mix migration. Day count impact was about $7 million. Net interest margin declined by five basis points to 2.02%, driven by higher deposit costs, lower than expected loans, and changes in funding mix. Both our net interest income and margin continue to reflect headwinds from prior balance sheet positioning. Our short-dated swaps and US Treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter. That said, we affirm our prior commitments that our NIM bottomed in Q3 2023, and that this first quarter of 2024 reflects the low point for net interest income. Turning to slide eight.

Approximately $40 million of benefit from fixed rate asset repricing, mostly from swaps and short-dated US Treasuries, was more than offset by lower loan volumes, higher deposit costs, and deposit mix migration. Day count impact was about $7 million. Net interest margin declined by five basis points to 2.02%, driven by higher deposit costs, lower than expected loans, and changes in funding mix. Both our net interest income and margin continue to reflect headwinds from prior balance sheet positioning. Our short-dated swaps and US Treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter. That said, we affirm our prior commitments that our NIM bottomed in Q3 2023, and that this Q4 of 2024 reflects the low point for net interest income. Turning to slide eight.

Clarke: But we can't do those things that the company doesn't receptive to our ideas.

Clarke: Great Great and then as a follow up question I know you guys address what you did in the deep dive looking at the portfolios in the criticized loan increase can you give us the number one two or three reasons alone moved into criticized so was it the loan to value.

The loan commitments loan pipelines, and how youre thinking about loan utilization in the second half of the year.

Yes so.

I don't think those things are and can grow and we clearly are playing offense. We're hiring people, we're focusing on the business that I'm mentioning having said that because because of our business model. We are not seeing huge loan demand and so if you think about utilization were basically flat at 32% and we've been <unk>.

Clarke: The aggregation or was it the debt service coverage, what was kind of in the main factors that pushed them into criticized.

Clarke: Its debt service coverage. So the first thing we focus on is debt service coverage and for purposes of this we completely deep link any secondary source of repayment and we assume that the only source of repayment is the primary source of that of course is spread up cash flow.

At 32% for the last few quarters, our loan book is building and there is no question that our backlog.

Speaker Change: I appreciate it thank you Chris.

Is not is higher than it was but it's not at historical standards.

Clark Khayat: Non-interest income was $647 million, up 6% quarter over quarter and year over year, compared to the prior year, the increase was primarily driven by investment banking fees, which grew 17% to $170 million, a record first quarter. Strong performance was broad-based across products and industries. Commercial mortgage servicing fees rose 22% year over year, reflecting growth in servicing, special servicing, and active special servicing balances. At 31 March, we serviced about $660 billion of assets on behalf of third-party clients. Finally, trust and investment services grew by 6% year over year, as assets under management grew 7% to $57 billion. We're seeing strong momentum in Key Private Client as well as tailwinds from higher market levels.

Non-interest income was $647 million, up 6% quarter-over-quarter and year-over-year, compared to the prior year, the increase was primarily driven by investment banking fees, which grew 17% to $170 million, a record Q1. Strong performance was broad-based across products and industries. Commercial mortgage servicing fees rose 22% year-over-year, reflecting growth in servicing, special servicing, and active special servicing balances. At 31 March, we serviced about $660 billion of assets on behalf of third-party clients. Finally, trust and investment services grew by 6% year- over-year, as assets under management grew 7% to $57 billion. We're seeing strong momentum in Key Private Client as well as tailwinds from higher market levels.

Speaker Change: Sure.

Speaker Change: Thank you our final question will come from the line of Peter Winter from D. A Davidson. Please go ahead.

And Peter I might just say sorry at spark I might just say thematically I think Christmas at this a couple times, but maybe just to summarize all that I think for us when we say, we're playing offense, we think that looks like.

Peter J. Winter: Thanks, Good morning.

Clarke: Yes.

Clarke: Yeah.

Speaker Change: Chris You mentioned in your opening remarks that you're ready to play offense again, but it sounded a little bit cautious on period end loan growth can you just talk about.

Disciplined loan growth in our targeted verticals, which we've been I think very consistent about over time I think it's funded by quality deposit growth from commercial and consumer clients.

Christopher Marrott Gorman: The loan commitments loan pipelines, and how youre thinking about loan utilization in the second half of the year.

Clarke: Yeah. So.

It's monetize through a series of we think leading fee platforms.

Clarke: I don't think those things are income growing we clearly are playing offense. We're out hiring people were focusing on the business that I've mentioned and having said that because because of our business model. We are not seeing huge loan demand and so if you think about utilization were basically flat at 32% and we've been flat.

That build that broader relationship so.

We think thats the recipe and when we're doing those things and they don't always come together and they don't always come necessarily in that order, but what we're doing and running our business and the relationship manner that we intend to and that's what it feels like.

Clark Khayat: Conversely, on a year-over-year basis, corporate services income declined by 9% given elevated LIBOR to SOFR-related transaction activity in Q1 a year ago. The 5% decline in cards and payments fees reflects slowing spend volumes and lower interchange rates in credit card and merchant. On Slide nine, total non-interest expense for the quarter was $1.1 billion and included $29 million related to the FDIC special assessment increase. Excluding selected items in all periods, expenses were flat compared to a year ago and up 1.5% from Q4. Personnel expenses were flat year-over-year, as a 7% decline in headcount offset impact from inflation, merit, and higher incentive compensation associated with our strong fee revenue results, and the impact of appreciation of our stock price associated with equity awards.

Conversely, on a year-over-year basis, corporate services income declined by 9% given elevated LIBOR to SOFR-related transaction activity in Q1 a year ago. The 5% decline in cards and payments fees reflects slowing spend volumes and lower interchange rates in credit card and merchant. On Slide nine, total non-interest expense for the quarter was $1.1 billion and included $29 million related to the FDIC special assessment increase. Excluding selected items in all periods, expenses were flat compared to a year ago and up 1.5% from Q4. Personnel expenses were flat year-over-year, as a 7% decline in headcount offset impact from inflation, merit, and higher incentive compensation associated with our strong fee revenue results, and the impact of appreciation of our stock price associated with equity awards.

Clarke: At 32% for the last few quarters, our loan book is building and there's no question that our backlog is.

Got it and then.

I ask.

The outlook is pretty strong momentum in the margin for this year and you've mentioned a more normalized margin is closer to three 3% would you expect to get near that level, maybe towards the end of next year.

Clarke: Is not.

Clarke: Higher than it was but it's not at historical standards.

Speaker Change: And Peter I might just say sorry in spark I might just say thematically I think Christmas at this a couple times, but maybe just to summarize a little bit I think for us when we say, we're playing offense, we think that looks like.

Yes.

I'm focused on confirming guidance for this year Peter but.

It's a totally fair question I do think it's a function a little bit of the shape of the curve.

Clarke: Disciplined loan growth in our targeted verticals, which we've been I think very consistent about over time I think it's funded by quality deposit growth from commercial and consumer clients.

On an absolute rates, but as Ive said before I think based on the business model we have.

In a normal kind of.

Upward sloping to two at least flatter yield curve I think that's achievable. So it is a function I can't predict where that yield curve is going to be in 2025, but I think as our.

It's monetize through a series of we think leading platforms.

Clark Khayat: Linked quarter, higher personnel costs also reflect seasonal benefits costs in addition to the factors just listed. Moving to Slide 10. Credit quality remains solid. Net charge-offs were $81 million, or 29 basis points of average loans, below our target of 30 to 40 basis points for the full year of 2024. Delinquencies increased just 2 basis points this quarter, and non-performing loans increased 15%, but remained low at 60 basis points of period end loans. As Chris mentioned, criticized loans increased and represented 6% of loans at quarter end. Roughly 2/3 of the increase came from our C&I portfolio, with the rest primarily in commercial real estate. Our internal ratings are driven by primary repayment sources.

Linked quarter, higher personnel costs also reflect seasonal benefits costs in addition to the factors just listed. Moving to Slide 10. Credit quality remains solid. Net charge-offs were $81 million, or 29 basis points of average loans, below our target of 30 to 40 basis points for the full year of 2024. Delinquencies increased just 2 basis points this quarter, and non-performing loans increased 15%, but remained low at 60 basis points of period end loans. As Chris mentioned, criticized loans increased and represented 6% of loans at quarter end. Roughly 2/3 of the increase came from our C&I portfolio, with the rest primarily in commercial real estate. Our internal ratings are driven by primary repayment sources.

Clarke: That build that broader relationship so.

Clarke: We think that's the recipe and when we're doing those things and they don't always come together and they don't always come necessarily in that order, but when were doing.

<unk> burn off we get more to that type of balance sheet, we want to have and you get a little bit more normalized rate environment, regardless, maybe have even absolute levels of rates, but just direction of the curve I think that's very achievable.

Clarke: Our business and the relationship manner that we intend to that's what it feels like.

Speaker Change: Got it and then.

Got it.

Speaker Change: Can I ask if the outlook is a pretty strong momentum in the margin for this year and you've mentioned a more normalized margin is closer to three 3% would you expect to get near that level, maybe towards the end of next year.

Thanks for taking the questions yes. Thank.

Thank you thank.

Thank you we do have a couple.

Your question that just queued up.

Steve Alexopoulos from Jpmorgan. Please go ahead.

Clarke: Yeah.

Hello, This is Janet Leon on.

Speaker Change: I'm focused on confirming guidance for this year Peter but.

Steve Alexopoulos just following up on John's question earlier on investment banking <unk> capital markets.

Clark Khayat: As loans were moved to criticized, we reaffirmed our collateral coverage, reappraised properties, further engaged with borrowers to understand operating pressures, if any, and analyzed secondary payment sources on these loans. Based on that thorough review, we feel good about the loss content on these loans, and as Chris shared, remain comfortable with our prior loss guidance for 2024 of 30 to 40 basis points. On Slide 11, given this was a fairly unique quarter in terms of the ins and outs, we provided you with a walk of how we derived a roughly $20 million build in our credit allowance this quarter. We added roughly $117 million to account for the quarter's credit migration, partially offset by a $98 million release to account for improved macro outlook.

As loans were moved to criticized, we reaffirmed our collateral coverage, reappraised properties, further engaged with borrowers to understand operating pressures, if any, and analyzed secondary payment sources on these loans. Based on that thorough review, we feel good about the loss content on these loans, and as Chris shared, remain comfortable with our prior loss guidance for 2024 of 30 to 40 basis points. On Slide 11, given this was a fairly unique quarter in terms of the ins and outs, we provided you with a walk of how we derived a roughly $20 million build in our credit allowance this quarter. We added roughly $117 million to account for the quarter's credit migration, partially offset by a $98 million release to account for improved macro outlook.

Clarke: It's a totally fair question I do think it's a function of a little bit of the shape of the curve.

Are you maintaining it.

Clarke: On.

Clarke: In absolute rates, but as Ive said before I think based on the business model we have.

Stan.

Progressing towards this normal level of $650 million range for this year, because if I look at <unk>.

Clarke: In a normal kind of.

Clarke: Upward sloping to two at least flatter yield curve I think that's achievable. So it is a function you know I can't predict where that yield curve is going to be in 2025, but I think you know as our positions burn off we get more to that type of balance sheet, we want to have and you get a little bit more normalized.

Absent a double digit decline in <unk> in the second quarter. It looks like you're on pace to exceed that normal level is that fair way to describe where and where is that declining and IBP is expected in the second quarter, mostly coming from debt capital markets commercial mortgage can you provide more insight.

Clarke: Environment, regardless, maybe have even absolute levels of rates, but just directionally the curve I think that's very achievable.

Yes. So this is Clark.

Clark Khayat: Even with this quarter's proactive deep dive, our net upgrades to downgrades ratio across the entire commercial book improved this quarter, as the velocity of downgrades has slowed. As a result, our allowance for credit losses continued to build and represented 1.66% period-end loans at the end of March. When you analyze our levels of reserves by loan type, you'll find that we compare similarly or better versus our peers, and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non-owner occupied CRE loans. Turning to Slide 12, we continue to build our capital position with CET1 of 24 basis points to 10.3% or 330 basis points above our required minimum, including our stress capital buffer.

Even with this quarter's proactive deep dive, our net upgrades to downgrades ratio across the entire commercial book improved this quarter, as the velocity of downgrades has slowed. As a result, our allowance for credit losses continued to build and represented 1.66% period-end loans at the end of March. When you analyze our levels of reserves by loan type, you'll find that we compare similarly or better versus our peers, and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non-owner occupied CRE loans. Turning to Slide 12, we continue to build our capital position with CET1 of 24 basis points to 10.3% or 330 basis points above our required minimum, including our stress capital buffer.

So.

We would be consistent with where we were before which is kind of.

Speaker Change: Got it.

Thanks for taking the questions.

That 600 to 650 range, we think that feels right. We do think there's upside to that but.

Speaker Change: Thank you.

Speaker Change: We do have a couple of other questions that just queued up.

As Chris mentioned, we will be down in the second quarter, I think thats a function.

Speaker Change: I'm, Steve Alexopoulos from Jpmorgan. Please go ahead.

Not necessarily any one area because the rate volatility I think is causing some hesitancy in a few different places that doesn't change our outlook for the year, but I don't think at this point, we are totally prepared to say.

Speaker Change: Hello. This is Janet Leon Unforeseeable like southwest just following up on John's question earlier on investment banking and capital markets.

Clarke: Are you maintaining your stance I E.

That will go to kind of a full normalized view.

Clarke: Progressing towards this normal level of 600 650 million range for I B. This year, because if I look at <unk>.

Okay.

And just one follow up on on your loan review I understand that office CRE is a very small portion of your overall portfolio.

Clarke: Absent a double digit decline in I b fees in the second quarter. It looks like you're on pace to exceed that normal level is that fair way to describe where and where is that declining and I be fees expected in the second quarter, mostly coming from debt capital markets commercial mortgage can you provide more insight.

Clark Khayat: Our marked CET1 ratio, which includes unrealized AFS and pension losses, increased thirteen basis points to 7.1%, and our tangible common equity to tangible assets ratio held steady, down just two basis points at 5.04%. This outcome, despite the roughly forty basis points increase in five-year rates during the quarter, reflects work we've done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration, and putting on roughly $7 billion of paid fixed swaps while terminating about $7.5 billion of fixed cash flow swaps last fall. We've reduced our DVO1 by 27% over the past twelve months. Our AOCI was negative $5.3 billion at quarter end, including $4.3 billion related to AFS.

Our marked CET1 ratio, which includes unrealized AFS and pension losses, increased thirteen basis points to 7.1%, and our tangible common equity to tangible assets ratio held steady, down just two basis points at 5.04%. This outcome, despite the roughly forty basis points increase in five-year rates during the quarter, reflects work we've done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration, and putting on roughly $7 billion of paid fixed swaps while terminating about $7.5 billion of fixed cash flow swaps last fall. We've reduced our DVO1 by 27% over the past twelve months. Our AOCI was negative $5.3 billion at quarter end, including $4.3 billion related to AFS.

And as you've done the re appraisals on the properties.

On I guess, including office, if you have like what percentage of decline you're generally seeing on your office.

Happening Q.

Updated cash flows from the landlords any inside you could share on that.

Speaker Change: Yeah. So this is quite good.

Speaker Change: So.

Clarke: We would be consistent with where we were before which is kind of that 600 to fix 50 range. We think you know that feels right. We do think there's upside to that but.

Yeah, I think we will have to come back a little bit on office just.

Just to make sure we have those numbers right, it's not a huge portfolio and while we're watching it.

I just don't have those details in front of me.

Clarke: As Chris mentioned will be down in the second quarter I think that's a function.

Got it thanks for taking my questions.

Sure.

Clarke: Not necessarily any one area because the rate volatility I think is causing some hesitancy in a in a few different places that doesn't change our outlook for the year, but I don't think at this point, we're totally prepared to say Ah that will go into kind of a full normalized.

We do have a question from Gerard Cassidy from RBC capital markets. Please go ahead.

Thank you I have a quick follow up for you guys.

Clark Khayat: As we've shared with you in the past, the right side of this slide shows Key's go-forward expected reduction in our AOCI mark based on two scenarios: the forward curve as of 31 March 2024, which assumes 6 rate cuts through 2025, and another scenario where rates hold at 31 March 2024 levels through the end of next year. In the forward curve scenario, the AOCI mark is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1.7 billion of capital build through that time frame. In the flat scenario, we still accrete $1.3 billion of capital, driven by maturities, cash flows, and time. Slide 13 provides our outlook for 2024 relative to 2023. In short, our guidance is unchanged from what we shared in January.

As we've shared with you in the past, the right side of this slide shows Key's go-forward expected reduction in our AOCI mark based on two scenarios: the forward curve as of 31 March 2024, which assumes 6 rate cuts through 2025, and another scenario where rates hold at 31 March 2024 levels through the end of next year. In the forward curve scenario, the AOCI mark is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1.7 billion of capital build through that time frame. In the flat scenario, we still accrete $1.3 billion of capital, driven by maturities, cash flows, and time. Slide 13 provides our outlook for 2024 relative to 2023. In short, our guidance is unchanged from what we shared in January.

Clark can issue when you talked about the Blackstone relationship.

I think you mentioned that they will participate in the specialty finance originations.

Clarke: Okay.

Clarke: And just one follow up on on your loan review I understand that office CRE is a very small portion out there overall portfolio and as you've done the re appraisals on the properties.

This relationship differ from the other relationships you guys have had Chris obviously, you've always pointed out the originate to distribute model is one of your key metrics here and I was just curious how this one with Blackstone is going to different from what you've already have in place for years.

Clarke: On I guess, including office, if you have like what percentage of decline you're generally seeing on your office and what's happening to the updated cash flows from the landlord is any insight you could share on that.

So this is just a lot more formalized and that we actually work together and we actually.

Services and work together focused on this certain asset class, but to your point, we've been distributing the preponderance of everything we originate forever, including to a lot of the credit funds. So it's just a formalization and most importantly, it's a forward flow agreement so, whereas we've always.

Speaker Change: Yeah, I think we will have to come back a little bit on office.

Speaker Change: To make sure we have those numbers right, it's not a huge portfolio and while we're watching it.

Clark Khayat: If there's one commitment we think will be a little more challenging to hit, it will be ending loan balances, given the impact of rate increases on client demand and our own selectivity of loans. But as we'll show you in a minute, we don't believe this will impact our ability to deliver on our net interest income commitments, both for the full year and the fourth quarter exit rate. On slide 14, we updated the net interest income opportunity from swaps and short-dated Treasuries maturing. As forward rates have moved higher this quarter, this cumulative opportunity has increased to $975 million from the roughly $900 million we estimated last quarter. Of course, some of this incremental benefit will be offset by higher funding costs and a higher for longer environment.

If there's one commitment we think will be a little more challenging to hit, it will be ending loan balances, given the impact of rate increases on client demand and our own selectivity of loans. But as we'll show you in a minute, we don't believe this will impact our ability to deliver on our net interest income commitments, both for the full year and the Q4 exit rate. On slide 14, we updated the net interest income opportunity from swaps and short-dated Treasuries maturing. As forward rates have moved higher this quarter, this cumulative opportunity has increased to $975 million from the roughly $900 million we estimated last quarter. Of course, some of this incremental benefit will be offset by higher funding costs and a higher for longer environment.

Speaker Change: I just don't have those details in front of me.

Speaker Change: Got it thanks for taking my questions.

Speaker Change: Sure.

Clarke: We do have a question from Gerard Cassidy from RBC capital markets. Please go ahead.

Painted on a deal by deal basis. This is an arrangement as we go forward.

Gerard Sean Cassidy: Thank you I have a quick follow up for you guys.

<unk> just on the concentration point because it is a concentration management tool.

Gerard Sean Cassidy: Clark can you show, where you talked about the Blackstone relationship and I think you mentioned that they will participate in the specialty finance originations.

Just to do it kind of at origination and not.

This book historically, we didn't do a lot of indications we would do securitizations on a client by client basis, but that takes time as you know so this allows us to do it kind of on the fly as we're going and manage that concentration.

Clark Harold Ibrahim Khayat: This relationship different from the other relationships you guys have had Chris I, obviously, you've always pointed it out the originate to distribute model is one of your key metrics here and I was just curious how this one with Blackstone is going to different from what you've already have in place for years.

Got it and then just a quick follow up on it have you guys just work with Blackstone in the past before this agreement or is the first initial foray with them.

Clark Khayat: As of the end of Q1, we've realized a little over 30% of this opportunity to date, which is shown on the left side of the slide in the gray bars. This leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months. Moving to slide 15, we wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year. In the top block, we've laid out the drivers of growth, assuming rates generally follow the forward curve and the Fed cuts twice later this year, once in September and again in December.

As of the end of Q1, we've realized a little over 30% of this opportunity to date, which is shown on the left side of the slide in the gray bars. This leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months. Moving to slide 15, we wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year. In the top block, we've laid out the drivers of growth, assuming rates generally follow the forward curve and the Fed cuts twice later this year, once in September and again in December.

Speaker Change: So this is just a lot more formalized in that we actually work together and we actually you know.

We've worked on a transactional basis with Blackstone in the past for certain.

Got it okay. Thank you.

Thank you Gerard.

Clarke: Services and work together focused on this certain asset class, but to your point, we've been distributing the preponderance of everything we originate forever, including to a lot of the credit funds. So it's just it's a formalization and most importantly, it's a forward flow agreement so, whereas we've always participated on.

Thank you and we have a question from John <unk> from Evercore. Please go ahead.

Alright, sorry for the follow up just one quick follow up here, Chris you I believe you just mentioned in discussing your criticized assets that you delink.

Clark Khayat: In this scenario, we see about $120 million benefit from the swaps in US Treasuries, in line with what we showed you on the previous slide. We also have another roughly $1.1 billion of projected fixed rate cash flows rolling every quarter, currently yielding in the low 2% range that will get reinvested at higher rates. This offsets the immediate impact that rate cuts would have on our variable rate loans and other short-term floating rate investments. We see some modest benefit in year from lower funding costs, particularly from our indexed commercial deposits and wholesale funding.

In this scenario, we see about $120 million benefit from the swaps in US Treasuries, in line with what we showed you on the previous slide. We also have another roughly $1.1 billion of projected fixed rate cash flows rolling every quarter, currently yielding in the low 2% range that will get reinvested at higher rates. This offsets the immediate impact that rate cuts would have on our variable rate loans and other short-term floating rate investments. We see some modest benefit in year from lower funding costs, particularly from our indexed commercial deposits and wholesale funding.

Secondary source of repayment when youre considering.

Clarke: Deal by deal basis. This is an arrangement as we go forward.

Clarke: Gerard just on the concentration point because it is a concentration management tool.

The credits ability to repay and your criticized status. So does that mean, you exclude and don't consider any recourse agreement that you have with other financial sponsors or the underlying borrower.

Clarke: Just to do it kind of at origination and not.

Clarke: This bookings historically, we didn't do a lot of indications we would do securitizations on a client by client basis, but that takes time as you know so this allows us to do it kind of on the fly as we're going and manage that concentration.

That's correct. So we're looking at straight up cash on cash what's the cash flow, what's the ability to service the debt based on the cash flow.

Speaker Change: I got it and then just a quick follow up on it have you guys work with Blackstone in the past before this agreement or is this your first initial foray with them.

Okay got you.

Clark Khayat: We'd also expect a net interest margin to improve meaningfully to the 2.4% to 2.5% range in the fourth quarter, with about 75% of the improvement driven by the Treasuries and swaps, and the other 25% through lower funding costs. In the bottom walk, we hold rates flat to where they are at 31 March. In this scenario, we get more earning asset repricing benefit because variable rate loans and other short-term instruments do not reprice lower. That is partially offset by deposit betas continuing to creep a little higher. As we've said, we expect to support clients and prospects to drive high-quality loan growth throughout the year. Should loan demand remain softer than expected, we would still expect to meet our Q4 net interest income guidance in either scenario I just described.

We'd also expect a net interest margin to improve meaningfully to the 2.4% to 2.5% range in the Q4, with about 75% of the improvement driven by the Treasuries and swaps, and the other 25% through lower funding costs. In the bottom walk, we hold rates flat to where they are at 31 March 2024. In this scenario, we get more earning asset repricing benefit because variable rate loans and other short-term instruments do not reprice lower. That is partially offset by deposit betas continuing to creep a little higher. As we've said, we expect to support clients and prospects to drive high-quality loan growth throughout the year. Should loan demand remain softer than expected, we would still expect to meet our Q4 net interest income guidance in either scenario I just described.

<unk>.

Right sorry.

Clarke: We've worked on a transactional basis with Blackstone in the past for certain.

Yeah, So it's a conservative perspective for sure.

I'll give you I'll give you an example, we have.

Speaker Change: Got it okay. Thank you thank.

Speaker Change: Thank you Gerard.

Because I just looked through all of these we have a company that has a market cap of say $24 billion.

Speaker Change: Thank you only have a question from John Payne Perry from Evercore. Please go ahead.

But they are having some near term operational challenges. They for example would be on the list of criticized assets just to give you an idea.

Speaker Change: Alright, sorry for the follow up just one quick.

Speaker Change: Follow up here, Chris you I believe you just mentioned in discussing your criticized assets that you did link.

Yeah, and just to be clear Jonathan said, it's the primary repayment for the risk rating, which is what gets the classified we then take into account the secondary pieces, when we think about ultimate loss content.

Speaker Change: Secondary source of repayment when youre considering the.

<unk>.

Speaker Change: The credits ability to repay and your criticized status.

Clarke: Does that mean, you exclude and don't consider any recourse agreement that you have with kinds of financial sponsors or the underlying borrower.

Clark Khayat: With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator?

With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator.

Right, Okay got it thanks Clark Alright appreciate it.

Operator: Thank you. Ladies and gentlemen, if you wish to ask a question, please press one, then zero on your touchtone phone. You will hear an acknowledgment tone that you've been placed in a queue, and you may remove yourself from queue at any time by repeating the one-zero command. If you're on a speakerphone, please pick up your handset before pressing the number. Once again, if you have a question, please press one, then zero. Our first question is from the line of Ken Usdin from Jefferies. Please go ahead.

And we have a question from Mike Mayo from Wells Fargo Securities. Please go ahead.

Speaker Change: That's correct. So we're looking at straight up cash on cash what's what's the cash flow, what's the ability to service the debt based on the cash flow.

Just a big picture question, you stressed weak loan growth.

And I'm just wondering is that a sign the economy is not as strong as people think it is I mean, you're in a lot of different <unk>.

Clarke: Okay.

Clarke: Got recourse.

Sorry.

Speaker Change: Yeah. So it's it's a conservative perspective for sure.

States in the U S or is it simply your commercial clients, saying, Hey, we want our borrowers going to wait for rates to drop.

Speaker Change: I'll give you I'll give you an example, we have.

Ken Usdin: Thanks, good morning. Clark, I'm wondering if you can kind of start where you just finished and just looking at those two scenarios on slide 15. I hear you that it still seems like there's a lot of ways to get to that billion plus. Just wondering how you can help us understand the variance of those outcomes. Maybe a way to think about how much those two cuts mean on their own, or some of the other kind of moving parts that would change that, or is it- or is it really just like a pretty narrow answer, whatever the cut scenario is in terms of where that Q4 exit lands?

I think it's both Mike I think I have not seen a lot of people, making significant investments in property plant and equipment and I'm not seeing people make significant investments in inventory in technology and in people. So I think I think it's a combination.

Clarke: I just went through all of these we have a company that has a market cap of say $24 billion.

Clarke: But they are having some near term operational challenges. They for example would be on the list of criticized assets just to give you an idea.

Speaker Change: Yeah, and just to be clear Jonathan said, it's it's it's the primary repayment for the risk rating, which is what gets the classified.

Both I think rates clearly have an impact, but I think uncertainty as to the path and Directionally Academy is also a factor.

Clarke: Then take into account the secondary pieces, when we think about ultimate loss content.

Clark Khayat: Yeah. Thanks, Ken, and great question. I would point you to 15 and just say, if you look at the two ends, the swap and UST roll-off, that's, you know, a pretty predictable number. We think we've been good about disclosing the details there. That's, I think, pretty straightforward math. It'll be a little bit better in a no cut than in a cut scenario, as you know, but it's, you know, it's within a bound range when you think about two cuts versus zero. And then on the other side, the impact from loan growth, which again, we think is coming but will be a little bit back-end loaded, has a relatively minimum in-year impact.

Okay. So this is more concern among the decision makers about whats their ultimate cost of capital due to the <unk>.

Speaker Change: Right, Okay got it thanks Clark Alright appreciate it.

Speaker Change: And we have a question from Mike Mayo from Wells Fargo Securities. Please go ahead.

Volatility in rates and it is some underlying hey, we're going into a recession right now.

Michael Lawrence Mayo: Just a big picture question.

No I think it's I think I think it's both I'm not saying that they think we're going to go into a recession, but I think there's just a lot of uncertainty about the path of the economy.

Michael Lawrence Mayo: Stress with loan growth.

Michael Lawrence Mayo: And I'm just wondering is that a sign the economy's not as strong as people think it is I mean, you're in a lot of different.

Well the fed engineer, a soft landing tell us very similar to the conversation we've been having this morning.

Clarke: States in the U S or is it simply your commercial clients, saying, Hey, we want our borrowers going to wait for rates to drop.

Yeah.

Okay alright, thank you.

Sure Mike.

Clarke: I think it's both Mike I think I I have not seen a lot of people, making significant investments in property plant and equipment and I'm, not saying people make significant investments in inventory in technology and in people. So I think I think it's a combination.

Clark Khayat: So the range of outcomes on loan growth, while, you know, we'd rather have more in year, you know, I don't think is a huge driver of this number. So it really is those two pieces in the middle and the trade between, you know, how much more you get from asset repricing, net of loan yields, if there are cuts, versus what the impact of funding is. And those sort of work to offset each other a little bit, but in a way that we think is relatively muted for the course of the year.

So the range of outcomes on loan growth, while, you know, we'd rather have more in year, you know, I don't think is a huge driver of this number. So it really is those two pieces in the middle and the trade between, you know, how much more you get from asset repricing, net of loan yields, if there are cuts, versus what the impact of funding is. And those sort of work to offset each other a little bit, but in a way that we think is relatively muted for the course of the year.

And at this time there are no further questions in queue. Please continue with your closing remarks.

Well. Thank you operator again, thank you for participating in our call. Today. If you have any follow up questions. You can direct them to our Investor Relations team to 106 68942 to one this concludes our remarks. Thank you.

Speaker Change: Oh, I think rates clearly have an impact, but I think uncertainty as to the path and Directionally economy is also a factor.

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

Speaker Change: Okay. So this is more concern among the decision makers about whats their ultimate cost of capital due to the <unk>.

Clark Khayat: And then, you know, just the other point I'd make is the 886, while on the low end for the quarter, was within the guide, and obviously, when we gave you the guide for Q1, we had in mind hitting the, not only the full year guide, but importantly, the fourth quarter exit rate, and we continue to confirm our ability to do that. Is that helpful?

And then, you know, just the other point I'd make is the 886, while on the low end for the quarter, was within the guide, and obviously, when we gave you the guide for Q1, we had in mind hitting the, not only the full year guide, but importantly, the fourth quarter exit rate, and we continue to confirm our ability to do that. Is that helpful?

Speaker Change: Volatility in rates than it is some underlying hey, we're going into a recession right now.

Speaker Change: No I think it's I think I think it's both I'm not saying that they think there we're gonna go into recession, but I think there's just a lot of uncertainty about the path of the economy.

Ken Usdin: Yeah, it is. Thank you. And, as a follow-up on that loan growth point, I'm just wondering, in the prepared remarks, Chris talked about the new agreement with Blackstone, and I'm just wondering that dynamic and how that plays into the combination of loan growth, investment banking fees, and kind of like, what, what that means for how you originate versus how you distribute.

Clarke: Well the fed engineer, a soft landing kind of very similar to the conversation we've been having this morning.

Speaker Change: Okay alright, thank you.

Speaker Change: Sure Mike.

Speaker Change: And at this time there are no further questions in queue. Please continue with your closing remarks.

Clark Khayat: Well, good morning, Ken. So it's a good question. Let me, let me hit the loan growth kind of head on. You know, we have always demonstrated an ability to grow loans. Having said that, sort of three things all have to be present for us to grow loans. One, there has to be demand. Right now, there is not a lot of loan demand out there, so that's, that's point one. You see it in kind of flat utilization, among other things, and not a lot of investment. The second thing is, it has to be in our clients' best interest for us to, in fact, provide those loans.

Christopher Gorman: Well, good morning, Ken. So it's a good question. Let me, let me hit the loan growth kind of head on. You know, we have always demonstrated an ability to grow loans. Having said that, sort of three things all have to be present for us to grow loans. One, there has to be demand. Right now, there is not a lot of loan demand out there, so that's, that's point one. You see it in kind of flat utilization, among other things, and not a lot of investment. The second thing is, it has to be in our clients' best interest for us to, in fact, provide those loans.

Speaker Change: Well. Thank you operator again, thank you for participating in our call. Today. If you have any follow up questions. You can direct them to our Investor Relations team to 106 68942 to one this concludes our remarks. Thank you.

Speaker Change: Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Clark Khayat: You've probably noticed that we raised $22 billion, but only put 12% on our balance sheet, and that's because we can better serve our clients, whether it's through the forward flow arrangement with Blackstone that you referenced or a variety of other markets. The third thing is that the loans that are available to put on our balance sheet have to fit our risk profile, and they have to fit our return requirements. Yeah, right now, there's not a lot of loans like that, from our perspective. Having said that, what's interesting about bank loans is because there's excess capacity, the best time to make bank loans is when there's a downturn.

You've probably noticed that we raised $22 billion, but only put 12% on our balance sheet, and that's because we can better serve our clients, whether it's through the forward flow arrangement with Blackstone that you referenced or a variety of other markets. The third thing is that the loans that are available to put on our balance sheet have to fit our risk profile, and they have to fit our return requirements. Yeah, right now, there's not a lot of loans like that, from our perspective. Having said that, what's interesting about bank loans is because there's excess capacity, the best time to make bank loans is when there's a downturn.

Clark Khayat: And, you know, our house view is we are going to see a downturn, and that'll be a great time for us to really use our balance sheet. Your question, though, the implications of your question really are broader than just the loan growth. And let me just spend a little bit of time talking about how we're positioning Key. We think that no matter how things play out-

And, you know, our house view is we are going to see a downturn, and that'll be a great time for us to really use our balance sheet. Your question, though, the implications of your question really are broader than just the loan growth. And let me just spend a little bit of time talking about how we're positioning Key. We think that no matter how things play out all banks like Key are going to have to carry more capital.

Speaker Change: We're sorry your conferences ending now please hang up.

Christopher Gorman: ... all banks like Key are going to have to carry more capital. As a consequence of that, what we're focusing on is really serving our clients through capital light type businesses, specifically payments, which we've invested in for a long time, investment banking, which we referenced, our wealth business, which we think we have an opportunity to really grow. And lastly, something that we frankly haven't capitalized on the degree that we could or should have to date, and that's business banking. We're a really good commercial bank. We've never really capitalized on the opportunity, in my opinion, to gather the deposits. That's business banking is a very deposit-centric business. So I just wanted to give you some insight of how we're thinking about the business model going forward and how we continue to reposition Key.

As a consequence of that, what we're focusing on is really serving our clients through capital light type businesses, specifically payments, which we've invested in for a long time, investment banking, which we referenced, our wealth business, which we think we have an opportunity to really grow. And lastly, something that we frankly haven't capitalized on the degree that we could or should have to date, and that's business banking. We're a really good commercial bank. We've never really capitalized on the opportunity, in my opinion, to gather the deposits. That's business banking is a very deposit-centric business. So I just wanted to give you some insight of how we're thinking about the business model going forward and how we continue to reposition Key.

Scott Siefers: Thank you, Chris.

Ken Usdin: Thank you, Chris.

Christopher Gorman: Sure.

Operator: Thank you. And our next question is from John Pancari from Evercore. Please go ahead.

John Pancari: Morning.

Christopher Gorman: Good morning.

Scott Siefers: Hey, John.

Clark Khayat: Hey, John.

John Pancari: Just on that loan growth topic, I know you have also indicated you do expect new loan origination to pick up, as you look through 2024. I mean, in what areas do you think that you're going to be able to see the better opportunities begin to emerge? I know demand is modest, as you just said, and line utilization weaker. So what areas do you see that anecdotal evidence of a pickup that could drive accelerating originations and balance sheet growth as you look through 2024?

Christopher Gorman: Sure. So the first area that, that I would say would be people doing strategic things. So sort of the whole transaction business, which is just starting to get legs under it. We have a significant backlog, for example, in M&A. That would be an opportunity, John. Other businesses that are really capital intensive, where we have leadership positions in, are things like renewables. I was out calling with our renewables team last week. Incredible amount of opportunity. By the way, this is partially inflationary because there's a ton of stimulus around green energy, that's a huge opportunity. Affordable housing, still a huge unmet need that, that is very, very capital intensive. And then, I think you'll start to see people really start to invest in property, plant, and equipment.

Christopher Gorman: If we continue to get an acceleration in inflation, you're going to see people start to go a little long on inventory. Those are the areas where I think there'll be opportunities for loan growth. We're not really seeing those right now, but I think they'll develop over the course of the year, John.

If we continue to get an acceleration in inflation, you're going to see people start to go a little long on inventory. Those are the areas where I think there'll be opportunities for loan growth. We're not really seeing those right now, but I think they'll develop over the course of the year, John.

John Pancari: Got it. Thanks for that, Chris. Just related to that, is any of the weakness related to bond market disintermediation right now?

Christopher Gorman: For sure. When you have record issuance of investment-grade debt, and you have spreads that continue to grind in, there's no question that that plays a role.

John Pancari: Okay, thanks. And then lastly, on the IB and capital markets revenues, I know you indicated that you do expect some pullback in fees in the second quarter. In what areas? Is that in the IB area, just given the levels that you saw this quarter? And maybe if you can help quantify the magnitude of that pullback that you could see in the second quarter.

John Pancari: Okay, thanks. And then lastly, on the IB and capital markets revenues, I know you indicated that you do expect some pullback in fees in the Q2. In what areas? Is that in the IB area, just given the levels that you saw this quarter? And maybe if you can help quantify the magnitude of that pullback that you could see in the Q2.

Christopher Gorman: Yeah. So let me kind of start at the top. From a backlog perspective, we are at record backlogs in our M&A business. Our backlogs are above where they were a quarter ago, and they're above where they were at year-end. Having said that, when the ten-year is gyrating around as it is, if the ten-year was just at 4.6, I think there'd be a lot of transactions. But I think anytime there's this kind of volatility, it causes pause on certain transactions. And so that was really the premise of my comment as we look at what will come out of the backlog in the second quarter.

Christopher Gorman: I'm sure because the first quarter was actually hospitable to getting transactions done, I'm sure some that would have been in the second quarter actually went into the first quarter.

I'm sure because the first quarter was actually hospitable to getting transactions done, I'm sure some that would have been in the Q2 actually went into the Q1.

John Pancari: Okay, great. Thank you.

Christopher Gorman: Sure.

Operator: Thank you. Our next question is from Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers: Morning, everyone. Thanks for taking the question. Chris, was something you could address in a bit more detail, the decision to build the, the reserve a bit more? It sounds like from your prepared remarks, you're just sort of trying to be out in front of anything you might see in a higher for longer environment rather than anything you're actually seeing today. Is that the, the right way to, to think about it, or what are, what are sort of the nuances in there?

R. Scott Siefers: Morning, everyone. Thanks for taking the question. Chris, was something you could address in a bit more detail, the decision to build the, the reserve a bit more? It sounds like from your prepared remarks, you're just sort of trying to be out in front of anything you might see in a higher for longer environment rather than anything you're actually seeing today. Is that the, the right way to, to think about it, or what are, what are sort of the nuances in there?

Christopher Gorman: Yeah, actually, it was completely proactive. I am of a mindset that we're in this higher for longer, and as a consequence, we have been stressing all of our portfolio. And anytime we do that, we start with anything that's leveraged because that's most vulnerable. Then we also focus a lot on real estate. And so as we go through and we make assumptions that perhaps these rates will stay where they are for some time, that's what's driving it. And also we make some assumptions about, you know, my view is we probably will have a recession, and that's part of my macro view is part of that, part of the calculus as well.

Scott Siefers: ... Okay, perfect. Thank you. And then maybe we can talk to expenses for a quick second. So, just curious around how you're thinking about expenses sort of holistically for the year, insofar as, you know, we definitely are getting a more normalizing investment banking environment, which is great, but, you know, that there could be costs accompanied with that. Within the expense outlook, you know, what kind of provisions have you made for that IB recovery? And would you still be kind of comfortable with the guide, even if that recovery comes back even more powerfully than is currently contemplated?

R. Scott Siefers: .Okay, perfect. Thank you. And then maybe we can talk to expenses for a quick second. So, just curious around how you're thinking about expenses sort of holistically for the year, insofar as, you know, we definitely are getting a more normalizing investment banking environment, which is great, but, you know, that there could be costs accompanied with that. Within the expense outlook, you know, what kind of provisions have you made for that IB recovery? And would you still be kind of comfortable with the guide, even if that recovery comes back even more powerfully than is currently contemplated?

Clark Khayat: Yeah. Hey, Scott, it's Clark. Thanks for the question. So look, we feel good on the guide, kind of, relatively stable, ±2%. That incorporates, as we talked about, progression towards normalization. If we get something fuller, you know, I think we can absorb that. Obviously, we weren't expecting coming into the year, the additional FDIC charge, so that, you know, that's an extra component. We will continue to look at ways to absorb that, intelligently, but we think we can cover the impact of a strong investment banking year, which again, we expect to see, even if the Q2 is a little bit lighter. So we did account, we think, for that pretty well.

Scott Siefers: Perfect. Okay, good. Thank you very much.

R. Scott Siefers: Perfect. Okay, good. Thank you very much.

Clark Khayat: Yep.

Operator: The next question is from Manan Gosalia from Morgan Stanley. Please go ahead.

Manon Gosalia: Hi, good morning.

Manan Gosalia: Hi, good morning.

Clark Khayat: Good morning.

Manon Gosalia: I wanted to follow up on the Blackstone partnership and just in general with, you know, partnerships with private credit. In terms of underwriting the loans, do you underwrite the loans and is it your sole decision? Does a private credit partner come in, and you know, how does it impact spreads and term and structure, as you do more of these relationships?

Manan Gosalia: I wanted to follow up on the Blackstone partnership and just in general with, you know, partnerships with private credit. In terms of underwriting the loans, do you underwrite the loans and is it your sole decision? Does a private credit partner come in, and you know, how does it impact spreads and term and structure, as you do more of these relationships?

Clark Khayat: Yeah. Hey, Manan, it's Clark. Thanks for the question. You know, first of all, I think it's just important to understand the rationale behind the partnership, and that is largely to support more clients, not to, you know, manage capital or move loans off the balance sheet. It's really, for us, largely in our specialty finance area that's been growing very aggressively. It's been an outstanding business. But we do think thoughtfully about managing credit concentrations, and this is the opportunity to do that and not limit the amount of clients we can serve. So I think that strategic rationale is really important. As it relates to underwriting, we basically run the business, do the underwriting. Blackstone has an option to participate in these credits if they fit their box.

Clark Khayat: But obviously, if we entered and announced a relationship, we've been very deep with them on what the box looks like and what it reflects, and we think our business reflects market conditions, as does their appetite. So we would expect this to go well. It's a one-year deal, and we will, you know, test the relationship over the course of the year. We hope it goes very positively, because if it does, we're supporting a lot more clients and prospects in growing our business. And again, given our, we think, differentiated distribution model, we don't necessarily always need to grow the balance sheet to grow the business. But this is a case where we would expect to actually do both. We'd expect to continue to grow this portfolio, but moderate some of that growth with a partner.

But obviously, if we entered and announced a relationship, we've been very deep with them on what the box looks like and what it reflects, and we think our business reflects market conditions, as does their appetite. So we would expect this to go well. It's a one-year deal, and we will, you know, test the relationship over the course of the year. We hope it goes very positively, because if it does, we're supporting a lot more clients and prospects in growing our business. And again, given our, we think, differentiated distribution model, we don't necessarily always need to grow the balance sheet to grow the business. But this is a case where we would expect to actually do both. We'd expect to continue to grow this portfolio, but moderate some of that growth with a partner.

Clark Khayat: We'll get, you know, a modest asset management fee to do that, one that we think makes sense, to both sides. And again, we'll test it through the year, and if there's more opportunities to do this with Blackstone or others, we'll investigate those where they allow us to serve more clients and serve them better.

We'll get, you know, a modest asset management fee to do that, one that we think makes sense, to both sides. And again, we'll test it through the year, and if there's more opportunities to do this with Blackstone or others, we'll investigate those where they allow us to serve more clients and serve them better.

Manon Gosalia: So in addition to the fee side, does it also help you with deposits because you can have more relationships with larger corporates?

Manan Gosalia: So in addition to the fee side, does it also help you with deposits because you can have more relationships with larger corporates?

Clark Khayat: Yeah. I mean, last I checked, Blackstone wasn't in the business of taking deposits or providing payment services, and we are, so we like those kind of deals.

Manon Gosalia: Fair enough. Okay, and then as a follow-up on the loan review, can you throw some more light on what you learned in specific industries? You know, which of the industries that are seeing more pressure? And then, you know, in your role as a special servicer as well on the commercial real estate side, can you shed some more light on what you're seeing there?

Manan Gosalia: Fair enough. Okay, and then as a follow-up on the loan review, can you throw some more light on what you learned in specific industries? You know, which of the industries that are seeing more pressure? And then, you know, in your role as a special servicer as well on the commercial real estate side, can you shed some more light on what you're seeing there?

Clark Khayat: Sure. So let me start, if I could, on what we're seeing in our servicing business. Our servicing business, as you can imagine, we look at what goes in and out of active special servicing. And as you can well imagine, office continues to be the largest area by far. We have seen some multifamily start to go into our active special servicing, and those are typically deals that were done at very low cap rates, that were highly leveraged, and as a consequence, are very sensitive to the significant rise in interest rates. As it relates to our strategic review, as I mentioned, we always start with anything that's leveraged, but a few industries that I would bring out to your attention, one, obviously, is real estate.

Christopher Gorman: Sure. So let me start, if I could, on what we're seeing in our servicing business. Our servicing business, as you can imagine, we look at what goes in and out of active special servicing. And as you can well imagine, office continues to be the largest area by far. We have seen some multifamily start to go into our active special servicing, and those are typically deals that were done at very low cap rates, that were highly leveraged, and as a consequence, are very sensitive to the significant rise in interest rates. As it relates to our strategic review, as I mentioned, we always start with anything that's leveraged, but a few industries that I would bring out to your attention, one, obviously, is real estate.

Clark Khayat: We spend a lot of time looking at real estate, very sensitive to interest rates. The other one is healthcare. Healthcare is an area where we have a very significant strategic hold, and there's no question that there's going to be a lot of consolidation in healthcare because a lot of healthcare companies are under a myriad of cost pressures. The other area where we saw some was just consumer services broadly. Those are the areas.

We spend a lot of time looking at real estate, very sensitive to interest rates. The other one is healthcare. Healthcare is an area where we have a very significant strategic hold, and there's no question that there's going to be a lot of consolidation in healthcare because a lot of healthcare companies are under a myriad of cost pressures. The other area where we saw some was just consumer services broadly. Those are the areas.

Manon Gosalia: Great. Thank you.

Manan Gosalia: Great. Thank you.

Clark Khayat: Sure.

Christopher Gorman: Sure.

Operator: ... the next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Operator: The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Good morning.

Christopher Gorman: Morning, Abraham.

Christopher Gorman: Morning, Ebrahim

Ebrahim Poonawala: I just had one follow-up, Chris. When you talked about your outlook for a recession, the stress testing on your loan book for the higher for longer, I guess the markets have generally been wrong, expecting higher rates to push the economy into a recession. I guess from your perspective, bottoms up, when you assume higher for longer, do you see a lot of pain within your loan book six, twelve, eighteen months out that causes you to have that view? And I'm just trying to wonder, are higher for longer enough in a world where the economy could continue to surprise to the upside in terms of growth? Just how do you think about it, especially when you're stress testing these loans?

Christopher Gorman: So in terms of just higher for longer, as you look at our book and you look at 2024, higher for longer works just fine for us. From an NII perspective, that would be the best outcome, just from pure NII. I will tell you, I'd like to see a perfect scenario for Key would be a couple cuts late in the year, because I think that would be good for business, fees, deposits, transactions, et cetera. As I think about the economy, my sort of word of caution here is, if you look at the labor market, the labor market is very strong by any metric. And I just think everyone assuming that there's going to be a soft landing without damaging the labor market, I hope, I hope the markets are right about that. I'm not so sure.

Christopher Gorman: So in terms of just higher for longer, as you look at our book and you look at 2024, higher for longer works just fine for us. From an NII perspective, that would be the best outcome, just from pure NII. I will tell you, I'd like to see a perfect scenario for Key would be a couple cuts late in the year, because I think that would be good for business, fees, deposits, transactions, etcetera. As I think about the economy, my sort of word of caution here is, if you look at the labor market, the labor market is very strong by any metric. And I just think everyone assuming that there's going to be a soft landing without damaging the labor market, I hope, I hope the markets are right about that. I'm not so sure.

Christopher Gorman: That's kind of... that's sort of my thinking, if that's helpful.

That's kind of... that's sort of my thinking, if that's helpful.

Ebrahim Poonawala: That's helpful. And I guess just bigger picture, I mean, I think it's been an interesting last twelve months for Key in terms of RWA optimization, expense focus, et cetera. Remind us as we look forward strategically, like the one or two things you're most focused on, is it still in terms of optimizing the balance sheet, expenses, growth? Like, what should we be thinking about as we think about just coming out of this and where the next leg of growth comes for the bank?

Ebrahim Poonawala: That's helpful. And I guess just bigger picture, I mean, I think it's been an interesting last 12 months for Key in terms of RWA optimization, expense focus, etcetera. Remind us as we look forward strategically, like the one or two things you're most focused on, is it still in terms of optimizing the balance sheet, expenses, growth? Like, what should we be thinking about as we think about just coming out of this and where the next leg of growth comes for the bank?

Christopher Gorman: Sure. So, there's no question that 2023 was a reset year for Key, for all the reasons that you just pointed out. And I'm really proud of what we did, shrinking RWAs by $14 billion, taking out about $400 billion of expenses. Having said that, as I mentioned in my prepared remarks, we now, Ebrahim, are playing offense. And what that involves is us leaning into areas where we already have, I think, a good competitive position, payments, investment banking, wealth. And I mentioned business banking as well, because I think as we go forward, the loan-to-deposit ratios are going to be really, really important. We, as you know, have taken our loan-to-deposit ratio down to 77%.

Christopher Gorman: I think kind of mid-seventies is where people are going to have to be as you lean into these businesses that are really kind of fee-centric businesses. So that's where we're leaning in. That's where we're investing.

I think kind of mid-seventies is where people are going to have to be as you lean into these businesses that are really kind of fee-centric businesses. So that's where we're leaning in. That's where we're investing.

Ebrahim Poonawala: Got it. Thank you.

Christopher Gorman: Thank you.

Operator: Thank you. The next question is from Mike Mayo from Wells Fargo Securities. Please go ahead.

Mike Mayo: Hi,

Christopher Gorman: Hey, Mike.

Mike Mayo: Look, Chris, I know, I know, capital markets is your, your baby from times past. I guess when I look at 17% year-over-year growth, that was still lagging the big five US players. So, you know, good time for a reminder of, you know, who is KeyBank Capital Markets? What's your mix among advisory, debt underwriting, equity underwriting? What's your typical size of the client? What are your key metrics for KeyBank Capital Markets, and where do you stand with regard to those metrics?

Christopher Gorman: Sure. That's, that's a great question. Obviously, we, on a percentage basis, are more canted toward advisory. These are middle-market companies. A lot of them aren't going to the equity markets very often, and if they're huge equity deals, those are always led by bulge bracket firms. So ours is heavily canted toward M&A. The good news there, Mike, is that we've talked before, M&A pulls through a lot of the other things that we do, financing, hedging, et cetera. So, we feel good about where we're positioned. But the difference probably as you go, if you went through all the numbers, the difference would be that some of the largest banks obviously are deep players in investment grade issuance and deep players in large equity issuance.

Christopher Gorman: Sure. That's, that's a great question. Obviously, we, on a percentage basis, are more canted toward advisory. These are middle-market companies. A lot of them aren't going to the equity markets very often, and if they're huge equity deals, those are always led by bulge bracket firms. So ours is heavily canted toward M&A. The good news there, Mike, is that we've talked before, M&A pulls through a lot of the other things that we do, financing, hedging, etcetera. So, we feel good about where we're positioned. But the difference probably as you go, if you went through all the numbers, the difference would be that some of the largest banks obviously are deep players in investment grade issuance and deep players in large equity issuance.

Clark Khayat: Mike, it's Clark. The only other point I'd add there is that a lot of the volume in Q1 was $10 billion-plus deals or, you know, very, very large-cap. And while we do some work with them, you know, we are a middle-market-focused bank. So, I think that's some of the delta on things like M&A.

Mike Mayo: Then when you talk about the multiplier effects from mergers, because you said backlogs are up quarter over quarter, backlogs are up year over year, I guess you expect some good growth this year after the second quarter. How could you quantify that multiplier effect? Is that like 1.2x, 1.5x, 2x? Does it vary?

Mike Mayo: Then when you talk about the multiplier effects from mergers, because you said backlogs are up quarter-over-quarter, backlogs are up year-over-year, I guess you expect some good growth this year after the Q2. How could you quantify that multiplier effect? Is that like 1.2x, 1.5x, 2x? Does it vary?

Christopher Gorman: It would be the latter. It varies, Mike. But I did say that our M&A backlog is at record highs, and for us, that is the most important. Because if you think about it, if you have the relationship, the M&A relationship, by definition, you're talking to, in these middle-market businesses, the decision maker. So I feel good about how we're positioned. But keep in mind, these markets, things are not yet normalized. They're getting back to normal, but they're not yet normalized. And as I mentioned earlier, it isn't the absolute level of interest rates that I think has a dampening effect. I think the volatility in interest rates forces people to the sideline and to wait things out. And so, we'd need some settling in of rates.

Christopher Gorman: It doesn't much matter, frankly, where that is. As I said, a four, six, 10-year would be just fine to transact, but what we can't have is just extreme volatility.

It doesn't much matter, frankly, where that is. As I said, a four, six, 10-year would be just fine to transact, but what we can't have is just extreme volatility.

Mike Mayo: Then last one on that, where is KeyBank Capital Markets revenue when you look out over, say, a ten-year horizon? Because I know the whole industry was down by almost half last year, and you're kind of bouncing off low levels. But specifically for you guys, where are you?

Christopher Gorman: Well, I mean, I think if you look at our normalized investment banking, if you figure $600 to 650 million in sort of normalized kind of times, and as you know, because you've followed us for some time, that's been a double-digit CAGR, and there's no reason why we can't get back to that level of growth if you think about 10 years and you look at the 10 years prior.

Mike Mayo: All right, thank you.

Christopher Gorman: Hey, thank you, Mike.

Operator: Thank you. Our next question is from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Gerard Cassidy: Hi, Chris. Hi, Clark.

Christopher Gorman: Hey, Gerard.

Mike Mayo: Good morning.

Clark Khayat: Good morning.

Gerard Cassidy: Clark, you mentioned about, you know, the loan portfolio, how you purposely exited single credit relationships. Chris, you talked about, you know, building the business bank deposit base better. Can you guys give us some more color on these types of credits that you've pushed out? Were they syndicated loans since it was only a loan relationship? And then the second, getting back to that business bank, Chris, how does that differ from the commercial bank? Because I think you said it's two different business lines.

Christopher Gorman: Yeah. So let me take the first one first, Gerard. So in a lot of cases, well, we have a relationship strategy, and we have these relationship review sessions where we see what kind of penetration we get. And often we let bankers ... Many times it starts by sort of legging into being a participant in a sector that we're really, really good, and we think we can do a lot of things and have a lot of capabilities. And it's just a matter of being really disciplined. And if we actually, you know, provide a loan, and I've often said, a properly graded loan can't return its cost to capital, and so it actually is destroying value unless you can cross sell.

Christopher Gorman: Yeah. So let me take the first one first, Gerard. So in a lot of cases, well, we have a relationship strategy, and we have these relationship review sessions where we see what kind of penetration we get. And often we let bankers, Many times it starts by sort of legging into being a participant in a sector that we're really, really good, and we think we can do a lot of things and have a lot of capabilities. And it's just a matter of being really disciplined. And if we actually, you know, provide a loan, and I've often said, a properly graded loan can't return its cost to capital, and so it actually is destroying value unless you can cross sell.

Christopher Gorman: We're really proud of what we can do, but if we can't penetrate that client, we need to exit that client to free up the capital to put it someplace where we can make the kind of returns. And so that was just the exercise. Obviously, it had a huge amount of attention, and our time frame of acceptance contracted a bit last year when we were going through the exercise. As it relates to business banking, it is the same business as middle market, except that you need to be really focused on the payments piece, because as I said, they're mostly deposit-centric businesses. And that's the reason that we restructured in November of last year and put our payments business together with our middle market business.

We're really proud of what we can do, but if we can't penetrate that client, we need to exit that client to free up the capital to put it someplace where we can make the kind of returns. And so that was just the exercise. Obviously, it had a huge amount of attention, and our time frame of acceptance contracted a bit last year when we were going through the exercise. As it relates to business banking, it is the same business as middle market, except that you need to be really focused on the payments piece, because as I said, they're mostly deposit-centric businesses. And that's the reason that we restructured in November of last year and put our payments business together with our middle market business.

Christopher Gorman: We think that's going to be critical to being able to go down market and really serve these smaller commercial businesses that we think we have a differentiated product offering.

We think that's going to be critical to being able to go down market and really serve these smaller commercial businesses that we think we have a differentiated product offering.

Gerard Cassidy: And, Chris, when you talk about the deepening of the relationship with these customers that may only have a loan or a deposit relationship, what, aside from payments, what are those other products that you can use to deepen that relationship to make it more profitable?

Christopher Gorman: Well, sure. Well, it starts with, and certainly through last year's exercise, the first thing that we went to customers and said, "We need your deposits." So it starts as simple as getting the deposits, and I think 86% or so of our businesses, we have multidimensional relationships. The next thing that we focus on is payments. We've been investing in payments for a long time, and for these middle-market businesses, it's not just moving money around, but it's providing information, embedded banking, and so forth. And then, of course, we have the ability to help them hedge. We have the ability to raise capital for them, and then obviously, the ultimate is being able to provide them strategic advice.

Christopher Gorman: We're fortunate that because we're structured around industries, we can do all of those things, but we can't do those things if the company isn't receptive to our ideas.

We're fortunate that because we're structured around industries, we can do all of those things, but we can't do those things if the company isn't receptive to our ideas.

Gerard Cassidy: Very good. And then as a follow-up question, I know you guys addressed what you did in the deep dive for looking at the portfolios. In the criticized loan increase, can you give us the, the number one, two, or three reasons a loan moved into criticized? Was it a loan-to-value degradation, or was it the debt service coverage? What was kind of the main factors that pushed them into criticized?

Christopher Gorman: It's debt service coverage.

Gerard Cassidy: Okay.

Christopher Gorman: So the first thing we focus on is debt service coverage, and for purposes of this, we completely delink any secondary source of repayment, and we assume that the only source of repayment is the primary source, and that, of course, is straight-up cash flow.

Christopher Gorman: So the first thing we focus on is debt service coverage, and for purposes of this, we completely de-link any secondary source of repayment, and we assume that the only source of repayment is the primary source, and that, of course, is straight-up cash flow.

Gerard Cassidy: Appreciate it. Thank you, Chris.

Christopher Gorman: Sure.

Operator: Thank you. Our final question will come from the line of Peter Winter from D.A. Davidson. Please go ahead.

Mike Mayo: Thanks. Good morning.

Peter Winter: Thanks. Good morning.

Christopher Gorman: Good morning.

Mike Mayo: Chris, you mentioned in your opening remarks that you're ready to play offense again, but-

Mike Mayo: Chris, you mentioned in your opening remarks that you're ready to play offense again, but it sounded a little bit cautious on period-end loan growth. Can you just talk about, you know, the loan commitments, loan pipelines, and how you're thinking about loan utilization in the H2 of the year?

Peter Winter: ... sounded a little bit cautious on period-end loan growth. Can you just talk about, you know, the loan commitments, loan pipelines, and how you're thinking about loan utilization in the second half of the year?

Janet Lee: Yeah. So, I don't think those things are incongruent. We clearly are playing offense. We're out hiring people. We're focusing on the business that I'm mentioning. Having said that, because of our business model, we are not seeing huge loan demand. And so if you think about utilization, we're basically flat at 32%, and we've been flat at 32% for the last few quarters. Our loan book is building, and there's no question that our backlog is higher than it was, but it's not at historical standards.

Christopher Gorman: Yeah. So, I don't think those things are incongruent. We clearly are playing offense. We're out hiring people. We're focusing on the business that I'm mentioning. Having said that, because of our business model, we are not seeing huge loan demand. And so if you think about utilization, we're basically flat at 32%, and we've been flat at 32% for the last few quarters. Our loan book is building, and there's no question that our backlog is higher than it was, but it's not at historical standards.

Clark Khayat: Peter, I might just say. Sorry, it's Clark. I might just say, thematically, and I think Chris has hit this a couple of times, but maybe just to summarize a little bit. I think for us, when we say we're playing offense, we think that looks like disciplined loan growth in our targeted verticals, which we've been, I think, very consistent about over time. I think it's funded by quality deposit growth from commercial and consumer clients, and it's monetized through a series of, we think, leading fee platforms that build that broader relationship.

Clark Khayat: So, you know, we think that's the recipe, and when we're doing those things, and they don't always come together, and they don't always come necessarily in that order, but when we're doing and running our business in the relationship manner that we intend to, that's what it feels like.

So, you know, we think that's the recipe, and when we're doing those things, and they don't always come together, and they don't always come necessarily in that order, but when we're doing and running our business in the relationship manner that we intend to, that's what it feels like.

Peter Winter: Got it. And then can I ask if the outlook is a pretty strong momentum in the margin for this year, and you've mentioned a more normalized margin is closer to 3.3%. Would you expect to get near that level, maybe towards the end of next year?

Clark Khayat: Yeah, I'm focused on confirming guidance for this year, Peter, but it's a totally fair question. I do think it's a function a little bit of the shape of the curve, and absolute rates, but as I've said before, I think based on the business model we have, in a normal kind of upward sloping to at least flatter yield curve, I think that's achievable. So it is a function. You know, I can't predict where that yield curve is gonna be in 2025, but I think, you know, as our positions burn off, we get more to the type of balance sheet we wanna have, and you get a little bit normalized rate environment, regardless maybe of even absolute levels of rates, but just direction of the curve. I think that's very achievable.

Peter Winter: Got it. Thanks for taking the questions.

Clark Khayat: Yep, thank you.

Operator: Thank you. We do have a couple other questions that just queued up. Steve Alexopoulos from JPMorgan, please go ahead.

Janet Lee: Hello, this is Janet Lee on for Steve Alexopoulos. Just following up on John's question earlier on investment banking and capital markets. Are you maintaining your stance that you're progressing towards this normal level of $600 to 650 million range for IBs this year? Because if I look at, you know, absent a double-digit decline in IB fees in Q2, it looks like you're on pace to exceed that normal level. Is that fair way to describe, or, and where is that decline in IB fees expected in Q2, mostly coming from the debt capital markets, commercial mortgage? Can you provide more insight?

Clark Khayat: Yeah, so this is Clark, Janet. So we would be consistent with where we were before, which is kind of that $600 to $650 range. We think, you know, that feels right. We do think there's upside to that, but as Chris mentioned, we'll be down in Q2. I think that's a function, you know, not necessarily any one area, because the rate volatility, I think, is causing some hesitancy in a few different places. That doesn't change our outlook for the year, but I don't think at this point we're totally prepared to say that we'll go to kind of a full normalized view.

Janet Lee: Okay. And just one follow-up on your loan review. I understand that office CRE is a very small portion of your overall portfolio, and as you've done the reappraisals on the properties, on, I guess, including office, if you have, like, what percentage of decline you're generally seeing on your office and what's happening to the, you know, updated cash flows from the landlords? Any insight you could share on that?

Clark Khayat: Yeah. I think we'll have to come back a little bit on office, just to make sure we have those numbers right. It's not a huge portfolio, and while we're watching it, I just don't have those details in front of me.

Janet Lee: Got it. Thanks for taking my questions.

Clark Khayat: Sure.

Operator: We do have a question from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Peter Winter: Thank you. I have a quick follow-up for you guys. Clark, can you share. You talked about the Blackstone relationship, and I think you mentioned that they'll participate in the specialty finance originations. How does this relationship differ from the other relationships you guys have had? Chris, obviously, you've always pointed out the originate-to-distribute model is one of your key metrics here, and I was just curious how this one with Blackstone is gonna differ from what you've already had in place for years.

Gerard Cassidy: Thank you. I have a quick follow-up for you guys. Clark, can you share. You talked about the Blackstone relationship, and I think you mentioned that they'll participate in the specialty finance originations. How does this relationship differ from the other relationships you guys have had? Chris, obviously, you've always pointed out the originate-to-distribute model is one of your key metrics here, and I was just curious how this one with Blackstone is gonna differ from what you've already had in place for years.

Clark Khayat: So this is just a lot more formalized in that we actually work together, and we actually, you know, service it and work together, focused on this certain asset class. But to your point, we've been distributing the preponderance of everything we originate forever, including to a lot of the credit funds. So it's just a, it's a formalization, and most importantly, it's a forward flow agreement. So whereas we've always participated on a deal-by-deal basis, this is an arrangement as we go forward.

Christopher Gorman: ...So it's just a, it's a formalization, and most importantly, it's a forward flow agreement. So whereas we've always participated on a deal-by-deal basis, this is an arrangement as we go forward.

Clark Khayat: And Gerard, just on the concentration point, because it is a concentration management tool, this allows us to do it kind of at origination and not in a, you know, this book historically, we didn't do a lot of syndications. We would do securitizations on a client-by-client basis, but that takes time, as you know. So this allows us to do it kind of on the fly as we're going and manage that concentration.

Gerard Cassidy: I got it. And then just a quick follow-up on it. Have you guys worked with Blackstone in the past before this agreement, or is this your first initial foray with them?

Christopher Gorman: No, we've worked on a transactional-

Christopher Gorman: No, we've worked on a transactional

Gerard Cassidy: Okay.

Christopher Gorman: basis with Blackstone, in the past, for certain.

Gerard Cassidy: Got it. Okay, thank you.

Christopher Gorman: Thank you, Gerard.

Operator: Thank you. We have a question from John Pancari from Evercore. Please go ahead.

John Pancari: Hi, sorry for the follow-up. Just one quick follow-up here. Chris, I believe you just mentioned in discussing your criticized assets, that you delinked secondary source of repayment when you're considering, you know, the credit's ability to repay and your criticized status. So does that mean you exclude and don't consider any recourse agreement that you have with either financial sponsors or the underlying borrower?

John Pancari: Hi, sorry for the follow-up. Just one quick follow-up here. Chris, I believe you just mentioned in discussing your criticized assets, that you de-linked secondary source of repayment when you're considering, you know, the credit's ability to repay and your criticized status. So does that mean you exclude and don't consider any recourse agreement that you have with either financial sponsors or the underlying borrower?

Christopher Gorman: That's correct. So we're looking at straight-up cash on cash. What's, what's the cash flow? What's the ability to service the debt based on the cash flow?

John Pancari: Okay, and you exclude that recourse-

Christopher Gorman: That's right.

John Pancari: Sorry. Go ahead.

Christopher Gorman: Yeah, so it's a conservative perspective for sure. I'll give you an example. We have a company that has a market cap of, say, $24 billion, but they're having some near-term operational challenges. They, for example, would be on the list of criticized assets, just to give you an idea.

Clark Khayat: Yeah, and just to be clear, John, as Chris said, it's the primary repayment for the risk rating, which is what gets declassified. We then take into account the secondary pieces when we think about ultimate loss content.

John Pancari: Right. Okay, got it. Thanks, Clark. All right, appreciate it.

Operator: We have a question from Mike Mayo from Wells Fargo Securities. Please go ahead.

Mike Mayo: Just a big picture question. You, you stress weak loan growth, and I'm just wondering, is that a sign the economy's not as strong as people think it is? I mean, you're in a lot of different states in the US. Or is it simply your commercial clients saying, "Hey, we wanna borrow, we're just gonna wait for rates to drop?

Christopher Gorman: I think it's both, Mike. I think I have not seen a lot of people making significant investments in property, plant, and equipment, and I'm not seeing people make significant investments in inventory, in technology, and in people. So I think, I think it's a combination of both. I think rates clearly have an impact, but I think uncertainty as to the path and direction of the economy is also a factor.

Mike Mayo: Okay, so this is more concern among the decision makers about what's their ultimate cost of capital due to the volatility in rates than it is some underlying, "Hey, we're going into a recession right now?

Christopher Gorman: No, I think it's both. I'm not saying that they think we're gonna go into recession, but I think there's just a lot of uncertainty about the path of the economy. Will the Fed engineer a soft landing? Kind of very similar to the conversation we've been having this morning.

Mike Mayo: Okay. All right. Thank you.

Christopher Gorman: Sure, Mike.

Operator: At this time, there are no further questions in queue. Please continue with your closing remarks.

Christopher Gorman: Well, thank you, operator. Again, thank you for participating in our call today. If you have any follow-up questions, you can direct them to our investor relations team, 216-689-4221. This concludes our remarks. Thank you.

Operator: Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.

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