Q2 2025 KeyCorp Earnings Call

Good morning and welcome to Chi corpse. The second quarter 2025 earnings conference call. At this time. All participants are now listening. Only mode later, we will conduct a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian. Monty key, Corp, director of investor relations. Please go ahead.

Thank you, operator, and good morning everyone. I'd like to thank you for joining keycorp second quarter 2025 earnings conference call. I'm here with Chris Gorman, our chairman and chief executive officer and Clark kyatt 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 in 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, July 22nd, 2025, and will not be updated with that. I will turn it over to you, Chris. Thank you, Brian and good morning everyone. Today, we reported strong second quarter results in what can be described as a dynamic and complex macro environment.

Earnings per share worth 35 cents. Even while we added 36 million dollars to our loan loss, reserves and elected to pre-fund our charitable Foundation. This quarter revenues were up 21% from a year ago. While expenses were up about 6%, excluding the charitable contribution, our pre-provision net revenue, increased by 44 million sequentially, marking the 5th straight quarter that our ppnr has increased

In the aggregate are ppnr. Has grown over 60% since the first quarter of 2024, we continued to demonstrate strong commercial loan growth.

As of June 30th, we had already achieved our full year plan to grow commercial loans by about 3 billion dollars in 2025 and our backlogs in both institutional and Middle Market continue to build. As we look to the second half of the year.

With respect to fees, which grew 10% from a year ago, our priority fee based businesses all continue to perform very well. Investment Banking had its second best first half of our of the year in history as debt and Equity issuance, normalized after pausing in April, particularly as we approach the end of the quarter, we raised over 30 billion dollars of capital for our clients, in the quarter retaining 22%, on our balance sheet,

Commercial payments fee, equivalent Revenue, grew High single digits year-over-year.

Since under management reached a record, 64 billion dollars, additionally sales production in our massive fluid. Segment was a record in the first half of the Year. Finally commercial mortgage servicing continued, its strong performance as named special servicing balances reached record levels and active special servicing, balances remained near record levels.

While Topline momentum remains robust. Concurrently all of our credit metrics. Continue to migrate in the right direction. Net charge offs, criticize, loans, and delinquencies all decline from the first quarter, while npas were essentially stable,

Our overall credit migration improved for the sixth consecutive quarter with commercial upgrades exceeding, downgrades this quarter.

Our strong first half results combined, with our healthy pipelines, and active client engagement Drive, our optimism that we will meet or exceed all of the full year and exit Rate. Financial targets that we detailed for you at the beginning of the year.

As Clark will discuss in more depth. Shortly, we are increasing our net interest income and Loan growth guidance.

Based on the rebound and client activity, we continue to feel good about our ability to deliver 5% or better fee growth. This year Investment, Banking pipelines, remain at historically. Elevated levels essentially flat on a linked quarter basis.

Clark Kyatt: And currently we remain committed to holding expense growth in the load of mid single digit range. Even while investing meaningfully in our Frontline bankers and increasing our Tech spend by nearly a hundred million dollars this year on the hiring front.

Clark Kyatt: We are on track to increase our Frontline bankers and client advisors by roughly 10% this year.

Clark Kyatt: We have successfully recruited, highly skilled investment bankers, Middle Market relationship, managers wealth managers and payments advisors to our platform and our active recruiting pipelines, remain strong.

Clark Kyatt: I'm also encouraged by our strong retention rates, which are reflective of our highly engaged Salesforce.

Clark Kyatt: As a reminder, we accelerated investments in people and Technology late last year. And we are already seeing Returns on those Investments. For example, in the case of our Middle Market banking, the teams that we onboarded in Chicago and Southern California, this last November have already driven new client growth loan, volumes payments and Investment Banking business. Our platform is very attractive to Bankers with specific expertise that aligns to our industry. Verticals. Our new teammates can join the key team and be more impactful to both their clients and their prospects to wrap up.

Clark Kyatt: We had a solid first half of the year. We remained Vigilant in a dynamic environment and are, well, positioned for a wide range of scenarios.

Clark Kyatt: We are operating from a position of strength.

Clark Kyatt: We have a leading Capital position among our peers and ample liquidity that gives us flexibility to take advantage of the inevitable Market dislocations.

Clark Kyatt: Our clearly defined structural net interest income Tailwind is materializing.

As expected.

Clark Kyatt: We are enjoying significant success in the marketplace while concurrently making investments in people and technology that will drive our future growth.

Clark Kyatt: With that. I'd like to turn it over to Clark Clark.

Clark Kyatt: Thanks, Chris starting on slide 4. We reported second quarter earnings per share of 35 cents. Revenue was up, 21% year-over-year, while expenses increase 7% or 6% adjusting for a charitable Foundation contribution. That we historically done later in the year.

Clark Kyatt: Tax equivalent, net interest income was up 4%, sequentially, and 28% year-over-year.

Clark Kyatt: Mortgage servicing commercial payments, and wealth.

Clark Kyatt: We achieved approximately 1,400 and 300 basis points of total and fee based operating leverage respectively. Year-over-year

Clark Kyatt: For vision for credit, losses of 138 million included, 102 million dollars of net charge offs and a 36 million Reserve. Bill

roughly half of the bill is driven by loan growth and mix shift and the remainder from the net impact deterioration in the Moody's. Macroeconomic scenario.

We're call last quarter. We made a qualitative adjustment to account for the heightened uncertainty. At the time, we reverse some of that bill this quarter is the uncertainty is now reflected in the Moody scenario.

Clark Kyatt: Tangible book value per share increased 3%, sequentially and 27% year-over-year.

Clark Kyatt: To the balance sheet on slide 5. Average loans were up 1.4 billion dollars sequentially and increased 1.6 billion dollars on a period end basis.

Clark Kyatt: On a spot basis. Cni loans, grew 1.7 billion dollars in CRA loan loans. Grew half a billion dollars partially offset by the intentional runoff of low yielding Consumer loans, namely Residential Mortgages

Within cni, the growth continues to be broad-based across Industries and regions, with both large institutions and Middle Market clients.

Clark Kyatt: Most of the growth was from new clients to key.

Clark Kyatt: Cni line, utilization ticked up approximately 50 basis points to 32%.

Clark Kyatt: The CRA growth was primarily driven by Project, based deals, and affordable housing, traditional multifamily and data centers.

Clark Kyatt: On slide 6 average deposits declined by less than 1% from last quarter as we prioritize data management in the first half of the year and primarily reflected a reduction in higher Cost commercial client balances and Retail seeds.

Clark Kyatt: Compared to the prior year total deposits and client deposits. Both increased by 2% reflecting growth in consumer. Balances 95% of commercial. Balances are with clients that have an operating account with key.

Clark Kyatt: Non-interest bearing deposits for 19% total deposits for 23% when adjusted for the non interest bearing deposits in our hybrid accounts, stable to the first quarter.

Clark Kyatt: Interest bearing deposit costs decreased by 9 basis points during the quarter and total deposit cost for managed below 2%.

Clark Kyatt: Cumulative deposit data to the Fed rate, Cuts, continue to perform, better than expectations reaching 55% in the second quarter.

Clark Kyatt: Overall interest bearing funding costs declined by 6 basis points and our cumulative interest bearing funding beta was 69% through the second quarter.

Clark Kyatt: Slide 7 provides drivers of net, interest income, and Nim this quarter.

Clark Kyatt: Tax equivalent, net interest income was up 4% sequentially and net. Interest margin increased by 8 basis points to 2.66%. The increase was largely driven by proactive deposit data management. Fixed rate asset repricing, Swap maturities and Commercial loan growth.

Nii also benefited from an additional day in the quarter.

Clark Kyatt: while client settlement is improved compared to where it was on our last earnings call on Mid April, the environment remains dynamic

Clark Kyatt: Given the macro uncertainty we continue to hold roughly 4 to 5 billion dollars more cash and other short-term liquidity than we anticipate needing over the medium term.

Clark Kyatt: This excess cash position, had a 4 to 5 basis points impact on Nim, but it diminished impact to knee.

Clark Kyatt: Turning to slide 8. Non-interest income was 690 million up 10% year-over-year with all of our priority fee based businesses, growing mid single digits or better.

Clark Kyatt: Investment Banking and debt, placement fees were 178 million, an increase of 41% year-over-year.

For the first half of 2025 Investment Banking fees were 353 million. The second best first half in our company's history.

Clark Kyatt: This quarter's growth was driven by syndication commercial real estate and Equity issuance activity.

Clark Kyatt: Several clients. Accelerated, their transactions into the end of the quarter to take advantage of lower yields and Tighter spreads?

Clark Kyatt: While this does pull forward some activity from the third quarter, we have since backfilled a good majority of that Pipeline and so if current conditions hold we're optimistic that third quarter Investment Banking fees could look similar to 2q levels.

Clark Kyatt: Elsewhere commercial mortgage servicing. Fees continue to perform well growing your approximately 50% year-over-year.

As of June 30th, we were the named primary or special service center in approximately 710 billion dollars of CRA loans, of which about 260 billion is special services.

Clark Kyatt: Active special servicing. Balances remain elevated at approximately 11 billion dollars up. 59% compared to the prior year.

Our service charges and Corporate Services fees increased, roughly 11 and 12% of respectively.

despite Market volatility earlier in April and a 1 month, lag in how we book, our fees trust and Investment Services, income group 5% and assets under management reached a record, high of 64 billion

on slide 9 second quarter. Non-interest expenses of 1.15 billion dollars increased 2% from the prior quarter and 7% year-over-year on a recorded basis.

Year-over-year. Expense growth was driven by higher Personnel expense related to the strong speed generation continued investments in people in technology as well as higher other business services and professional fees.

Clark Kyatt: during the quarter, we made a 10 million dollar contribution to our charitable Foundation

Consistent with prior guidance. We expect expenses to increase through the remainder of the Year, reflecting continued, hiring and Technology, Investments anticipated growth in non-interest income and client activity day count and other seasonality factors.

As shown on slide, 10 credit quality is broadly stable to improve it on a linked quarter basis. Net charge offs were 102 million down 7% or an annualized. 39, basis points of average loans.

Clark Kyatt: non-performing asset Trends were stable dollars increased by 1%, but npas to loans and Oreo decline by 1 basis, point to 66 basis points,

Clark Kyatt: Criticized loans declined by about million dollars for 3%.

Turning to slide 11. Our cet1 ratio was 11.7% quarter end as loan growth and a change in loan, mix offset, net earnings generation, Our marked cet1 ratio, which includes unrealized AFS and pension losses, Rose slightly to 10%. We believe both ratios continue to be at or near the top of the peer group.

Clark Kyatt: Moving to slide 12, we are positively revising our 2025 guidance, given the strong first half of the year and encouraging pipelines. We see heading into the back half.

Clark Kyatt: This guidance continues to incorporate a range of potential, scenarios anywhere from 0 to 4 Cuts as we move through the balance of the year.

Clark Kyatt: We now expect full year net interesting income growth of 20 to 22% compared to Prior guidance of approximately 20%.

Clark Kyatt: As a reminder roughly 8% of our knee growth, this year is due to the Scotia Bank investment and related Securities, portfolio of repositioning that we executed late in 2024. Implying organic knee growth in the low teams this year.

we also now expect our fourth quarter exit rate, nii to grow 11% or better compared to the fourth quarter of 2024 and fourth quarter, Nim to be approximately 2.75%

Clark Kyatt: We've also improved our loan guidance, for the year as a reminder, for previous guidance. For average loans was down 2 to 5%. With loans flat on a period end basis, including commercial loans up 2 to 4%

Clark Kyatt: We now expect average loans for the foyer to be down, 1 to 3%.

Clark Kyatt: On a period end basis. Loans are now expected to be up approximately 2% with commercial loans. Growing about 5%.

Clark Kyatt: Other p&l guidance remains broadly unchanged, we can continue to expect adjusted fees will grow 5% or a little better with the upside primarily dependent on IV pipelines pulling through the second half.

Clark Kyatt: Expenses Up 3 to 5% and note that we are currently planning to be at the midpoint of this range given client activity levels and pipelines today.

Clark Kyatt: Net charge offs as a percent of loans in the 40 to 45 basis point range.

With respect to Capital, we continue to Target marked, cet1 ratio of 9.5 to 10% over time. But as the macro Outlook remains Dynamic, It's Our intention to manage the high end of this range in the near term.

Speaker Change: That I will now turn the call back to the operator, to provide instructions for the Q&A session operate.

Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star, followed by 1 on your telephone keypad. If for any reason at all, you would like to remove that question. Please. Press star. Followed by 2 again. To ask a question. Please press star 1. The first question comes from Ryan Nash, with Goldman Sachs, you may proceed.

Ryan Nash: Good morning, guys.

Ryan Nash: Hey, good morning, man.

Ryan Nash: Press 8 clock. Um, so you know, you guys had better than expected in Investment Banking fees, and you'll have stronger long growth in the quarter. Um, sounds like pipelines are still pretty healthy coming into the back, half clock, you made some comments about 3 Q Investment Banking, which sounded, you know, which sounded pretty upbeat. So, you know, maybe just to start off, Chris, can you maybe just talk about what you're hearing from clients in terms of their sentiment and their eagerness to borrow and transaction and and maybe Clark can you just talk about how all this translated into your financial Outlook in terms of the higher knee and Loan growth? Thank you and have a follow-up.

Ryan Nash: Clients all the time and it's interesting, they go through all the macro concerns, geopolitical, tariffs trade, and then you ask them about their business and they say they feel pretty good about their business.

Ryan Nash: So let me start with the consumer Ryan. Uh, our consumer is just fine, just as a reminder, uh, our at at funding, our consumers have a FICO score of about 767. And so as you look at how the credits are performing, if you look at how spending volumes are performing, um our clients are in good shape, I think 1 of the things that the models really failed to pick up is the wealth effect and the fact that household wealth in the United States over the last 15 years has increased by about a hundred trillion dollars. And um, that is uh that's not inconsequential. And I think, you know, when people start looking at hours worked and they start looking at the labor participation rate, I think sometimes that's missed. For example, we're a Main Street Bank and we have perfect information and a million of our 2.5 million customers have between a half a million and 2 million dollars to invest. So that's the consumer. The consumer is in good shape.

Ryan Nash: Okay, let's talk about commercial for a second. I think balance sheets are healthy. Um, they're liquidity is in good shape. Um, I think the companies are a lot more agile, Ryan than they were, even going into the pandemic. If you look at their supply chains, if you look at their ability to just make changes on the Fly. Um, it's interesting. We perform a very detailed survey on 850 customers that borrowed 10 million dollars or more,

Ryan Nash: 50% of them think that the current environment is an opportunity for growth,

Ryan Nash: As it relates to tariffs because that's always a topic for everyone.

Ryan Nash: 30% of our customers are impacted by tariffs. But here's the interesting thing of the 56 billion that we have outstanding in cni, only 3% are significantly impacted in a direct way by tariffs. So, um, that's just a little bit of a run down there. The 1 thing, I would add, I guess that I don't think people are talking about enough, it's not that pertinent to publicly traded companies, but for private companies, this 100% bonus depreciation. I think that's very significant, and none of that is in any of the plans that we're sharing with you today. And any of our updated guidance, I think in the back half of the year for the first time, in a long time, you're going to see a significant ramp up in capex and I'll just close by just giving a couple watch points. Uh, as I always do, I think, um, yeah.

Speaker Change: While we at Key are criticized, loans are down, 13% year-over-year, the areas that we're watching very very closely are any place. There's leverage 1 of my view is we could very well be in a higher for longer scenario. And if that's the case, we got to really watch these leverage companies. Uh, only 2 to 3% of our loans are leveraged the other place. We're watching, is any place that's dependent on Medicare funding. Um, so that's hospitals and other places we're watching those. And then we have a little bit of an outside in perspective, from our third-party commercial Loan Servicing business as you know, we're named

Special serer on 267 billion loans. And when they go into active, we're basically the workout agent and it won't surprise you. But you know, what's inactive special, uh, servicing right now is office multi family principally in the Sunbelt. Um, and then what's new is there's been a little bit of a a surge in lodging which I thought.

Speaker Change: Was interesting, but that's kind of a, uh, that's kind of a round robin on kind of how we see the customers Clark. What would you add to that?

So, uh,

You know, let's maybe start with NI since. I think that's been in Focus most of the year and you know another good quarter for us up, 4%,

Speaker Change: Uh, first quarter to second quarter.

Speaker Change: And, you know, that's led to the kind of revised guidance here. So just as a reminder, and for avoidance of doubt we went from, you know, approximately 20% knee up here, over here to 20 to 22%.

Speaker Change: And fourth quarter, exit rate from 10% plus to 11% plus and we picked up the Nim there as well. I think important to note that we have the equivalent level of confidence in the revised guide, as we did in the previous, which means we believe we can deliver this across a range of conditions.

Speaker Change: Continue. But not likely at the same rate in the second half as, uh, as competition begins to pick up a little bit on the deposit side. I think it's also important to note that the potential upside that Chris referenced in things like bonus depreciation and capex, spend is not part of that guide. So, uh, if that materializes in any significant way, that could be a potential upside there.

Speaker Change: Um, I would say achieving the middle.

Of the improved guidance range of the 20 to 22, doesn't apply a pretty healthy 2 to 3 percentage growth rate, um, off second quarter levels. So, um, you know, we don't think it's a layup to be sure. Um, on bees we had a very good second quarter across all the priority fee categories and again, aided by a late rally, the last few weeks of June in investment banking.

Speaker Change: I think back in early June, I noted, the April pause was making the 5% plus guide on fees a little tighter.

Speaker Change: Since then obviously activities picked up considerably. I think that's reflective of clients willingness and ability to act quickly and a significant amount of investor Capital that's on the sidelines waiting uh, to get into the market.

We see that level of capital markets activity continuing the second half, we feel like we can deliver on the plus component of that fee guide.

uh, as for expenses, we continue to invest, as we've shared, we'll see an uptick in the second half based on continued hiring and investments in technology, I'd remind you we accelerated the same types of investments in the fourth quarter last year and we've seen those benefits, uh, already in 2025

Speaker Change: You know, very confident on this expense guide and to the extent, the market turn. And we saw some softness. We have ways to uh, address speed growth through the back half of the year, but we don't plan to do that at the expense of sound Investments for future profitable growth.

Speaker Change: Uh and then lastly credit metrics stable to improving across the board. We're quite comfortable with our Reserve, at the moment, and the direction of travel there.

Speaker Change: As it always does. Well, obviously, depend on how the economy on hold unfolds in the second half.

Got I appreciate the in-depth response, so maybe just as my quick, follow-up, sort of where you left off Clark, um, you know, results in the first half, coming in better than expected, and this should set you up well for 2026 Revenue growth. And, you know, when you think about expenses, you talked about the midpoint of the range for this year. You can maybe just talk about how you're thinking about the pacing of Investments over the short to medium term, you know, it feels like you're playing more offense now in terms of higher ring and Technology investing and maybe just as we look ahead, what is the right way to think about the pacing of positive operations?

Speaker Change: Operating leverage over the medium-term. Thank you.

Hey Ryan, so a couple things obviously.

Speaker Change: Positive operating leverage for us is a Fed account plea. This year we focused on really generating positive operating, leverage from a fee perspective and we'll continue to focus on that. We will also continue to invest, probably at the current rates. We're growing our, we mentioned in our prepared remarks that we're growing Bankers, Middle Market, relationship managers wealth managers payment advisors, we're going to continue to invest there. We frankly have been investing in technology the whole time. Um,

you know, every year we've replaced core systems, we've actually migrated half of our apps now to the cloud, our systems are in the cloud. Um, we'll continue, you know, we'll continue along that investment but I'm a big believer that you've got to continually through, get, you know, through continuous Improvement. We we have to be able to take out costs and serve our clients better. And, you know, we were an early adopter. When you think about, you know, robotic process automation, we've been an early adopter on machine learning. You'll get we that goes as far back as our performance and PPP you'll remember. And you know, we're very focused on using technology to take not only take out expense, but have it be a better experience for both our teammates and our employees.

Speaker Change: Thanks again.

Speaker Change: Thank you. Thank you. The next question. Comes from Scott, sifers with Piper Sandler, you may proceed.

Morning guys. Thanks for taking the question.

Um, Clark was hoping, yep. Hey uh, Clark was hoping you could expand a little on some of the deposit comments. Uh you made in response to um uh the last question just basically sort of deposit pricing strategy, given the 9 basis points improvement improvement sequentially and expectations. Um, that will continue, maybe more, I guess more broadly, sort of the the pricing versus uh growth balance. I know you, you're in an excess liquidity position, but we'll just be curious to hear your thoughts there.

Speaker Change: Sure. Um, so just to maybe put a finer point on your last comment there, you know, we came in at kind of loan to deposit ratios at the low end of the peer group 70%. So I think that affords us a little bit of flexibility there. Um I think our deposit costs slightly higher. So some room there and a lot of uh CDs and mmda promotional rates rolling over kind of months and months that will continue in the second half. And then the last piece that hasn't played out exactly the way. We thought it's beginning of the year, but continues to be beneficial and liquidity side is just the trade of residential, real estate pay downs and then the the, the movement of those dollars into cni loans, so

It didn't happen as much as we had thought going in, which is, you know, the benefit of of faster loan growth, but that is still a benefit, you know, on the liquidity side. So we saw some positive, uh, pricing in the quarter. We did on 2 fronts, um, kind of make it an active decision to let some deposits roll off. Uh, in 2 places in particular, kind of high-end commercial where we did see some relatively competitive pricing happening and we didn't

Speaker Change: Feel the need to to match those offers those remain clients and we could go back to those dollars if we needed them and then on the retail CD side, we let about a billion 4 roll off. Um, that were you know not not turning over at the same rates I will say while our front book production on CDs and promotional mmdas is a little bit lower, given some of our Market rates are retention client. Retention rates in those pockets are better than expected. So again, we're seeing, you know, I think I'd argue maybe consumers aren't changing 25 basis points. Uh, if these levels

Um and then maybe 1 other point on deposits, which are, you know, in the quarter we did see CRA clients use cash to do Acquisitions. Um, instead of pay down, those pay Downs, would have been deposits. So they're using cash to uh to buy new properties that would also exist in our servicing book. So in both cases, we saw a little bit lower deposits on those sides. Uh, we'll see how that uh, transpires in the second half but

Speaker Change: Um, normally our low point in deposits would be mid to late April after tax season, that really rolled a bit into may, but we've seen a nice rebound, particularly on the commercial side, going into the end of the quarter, we have good commercial deposit pipelines, um, and we'd expect to see that grow going into the second half but we are very much watching um, some of the deposit actions of competitors. Giving some of the comments we've heard across the industry in the quarter.

Speaker Change: Gotcha, perfect. Thank you and then um, could switch to capital for just a second. So I think you're now at the high end of the mark, common Equity, Tier 1 Target, just maybe a thought on, um, uh, where we are sort of with resuming, uh, repurchase and sort of order magnitude in terms of appetite as we look into the second half of the year,

so Scott, it's kind of our

Scott: Thought on capital is 1. Yes we are at the high end of our targeted marked cet1. Right at 10%. Having said that. We've said that in this environment, we think it's good to carry a little additional capital and and preserve optionality. There's a few things going on 1. Our underlying organic business is very strong right now and we want to make sure we have Capital to support our clients first and foremost in the marketplace.

Secondly, um, I think there's going to be an opportunity out there for kind of, for us to continue to invest in people, and if they may come in groups, invest in technology, which I just talked about, that's high on our list. The next thing that I think you'll see us kind of continuing that we always look at, is kind of Niche or tuck in Acquisitions. I think we're pretty good at buying. These entrepreneurial groups and plugging them into our platform. Obviously the dividend is important and then that gives you kind of a the bottom of the stack that gives you 2 things that we could do with the excess capital.

Scott: The 1 is, we could do tweaking of our balance sheet which we're constantly looking at or we could resume our share repurchases. I think we'll do that. But it'll be kind of a crawl. Walk run approach, I would say that in the third quarter you can assume that we would have modest share of purchases and then probably uh, stepping up later, uh, in the fourth quarter. That's how we're thinking about it now based on the opportunities, uh, that we have in front of us.

Got it.

Scott: All right, perfect. Thank you guys.

Thanks guys.

Scott: Thank you.

Scott: Hey, good morning.

Speaker Change: I guess maybe this clock following up with you on uh, the knee and the margin Outlook.

Speaker Change: Um I I think in the past you've talked about the margin potentially hitting 3% uh as you think about the normalized level for the margin. So if if you don't mind as we think about the 275 exit run rate in the fourth quarter, 1, do you think uh, we can get to 3%.

Speaker Change: Um by next year and in that world I know you talked about the loan to deposit ratio like is the balance sheet larger or smaller before you get to the 3% name.

Speaker Change: Yeah so look I think 1 Note you know we were at 2666 in the quarter and as we noted we are uh carrying a little bit extra cash that probably cost us 4 or 5 basis points on them. So I think there's you know continued strong performance there. We still feel confident that you know by end of 26. We can be at 3% at the current course and speed. Um, you know, in terms of balance sheet size, I'd say there's, you know, probably a couple ways to think about it. Um, 1 in our business model and this is not a, an ni specific answer. But we don't feel that we necessarily need to grow the balance sheet to grow the business. Given some of our Capital markets distribution capabilities.

That said, we will continue to see residential real estate, runoff, you know, something like uh, about 600 million a quarters, what we've seen this year, maybe another 2 billion or so next year, that affords us some liquidity to invest in cni growth, on an ongoing basis. And at this point, given our liquidity position, we could take down, cash Andor, um, reduce the Securities book a little bit if we wanted to. So I think there's ways to actually uh grow nii and reflect that in a better Nim over time without necessarily A significantly. Larger balance sheet.

Speaker Change: um, but again, we'll uh, we'll operate based on to some degree where the environment is and we've carried additional cash in the quarter, just given the April pause, and some of the uncertainty we've seen out there

Speaker Change: Got it and I guess maybe just going back. Uh, so I think it's my takeaway based on your responses was momentum both on lending. And capital markets seems to be sending as we look into the back half of the year and I think Chris you mentioned about hiring of Bankers uh just to remind us the I mean I'm not I'm not sure if you spelled out uh the number of Bankers you plan to hire and are these within your existing verticals kind of what's the focus when you think about incremental banking

Speaker Change: Yeah. So what we, what we said is, we were going to increase our Frontline people by 10% and specifically, we talked about investment bankers. Um, so we're really building, those are clearly being built out within our verticals. We talked about Middle Market, relationship, managers, and those folks, as you know, are typically in a, in a, a given geography. But they obviously point to many of our industry verticals because that's where we have the greatest leverage in the marketplace. We've talked about wealth managers and our wealth managers are a little bit different than some because we're often for when it comes to mass affluent mining, the huge opportunity that we have within our existing business. Uh, we've only penetrated to the tune of about 10% uh, in our Mass affluent, uh area. So our, our our hiring there is a little bit different. Also, our payment advisors, uh, Abraham are typically really software folks, because it's all about implementation of

Our complex and important. Um, embedded banking for example, so those are the kind of people we're hiring and as we mentioned in our opening remarks, there's uh, there's a lot of people available right now.

Speaker Change: Got it. Thank you.

Thank you.

Speaker Change: Thank you.

Speaker Change: The next question comes from Chris, McGrady with Keith Bryant and woods, you may proceed.

All right, good morning.

Speaker Change: Um, Chris, Chris on the, uh, on the deregulatory question I think you addressed you kind of uses of capital, but if we think about, uh, where he is spending spending money, you talked about the increasing tax spend. If we do get broader, deregulatory reform, is there a um,

Speaker Change: a reallocation of where you're allocating dollars, maybe towards more productive Revenue, producers versus um,

Speaker Change: You know more uh back office regulatory costs, thanks.

Speaker Change: Also, 3, in-game hasn't been finalized and there's liquidity rules out there. We have basically adopted all of the proposals as they've come out. So we really feel like the, the, you know, the investment that we've needed to make in terms of sort of, the plumbing has been made. And so, we feel like we have the opportunity to really lean in on hiring more Frontline people because we think we have a unique business model and also on technology. Um so I think you'd see us um really no matter where I mean the right the clearly the regulatory environment is going to do nothing but get more favorable and we feel like from a starting point of where we are uh we're in good stead there.

Speaker Change: Great. Thank you.

Speaker Change: Thank you. The next question comes from Ben Rybeck.

Speaker Change: With autonomous, you may proceed.

Ken: Uh hey guys, it's Ken used in uh, good morning. Um,

Christy mentioned, and you're prepared remarks that

Speaker Change: Um kept about 20% of the 300 for clients. It's a little higher of a keep rate than you had in the past. I'm just wondering how much more are you willing to push that in terms of both seeing the improved potential originations out there and um and your comfort with like what your whole levels of that origination capacity.

Speaker Change: Yeah, well that's a great observation typically, over over time we've typically held about 18%. And, as you point out, we were above 20, we were 22% this last quarter, and it really can is all driven on what's in the client's best interest. And when the markets dislocated a bit for 3 weeks, in April, it gave us the opportunity to structure things and put them on our balance sheet, in a manner that we'd be very satisfied to have them on our balance sheet. So, um, you know, if if I, I, I've said this before, actually, if everything's flashing green, it's really hard. Given our platform. If we get a little bit of dislocation in the market, that's actually good for us and, uh, it was certainly good for us, last quarter.

Okay. And, and just a little bit of a dig on the, uh, dig in, on the, um, line, you, you had talked to Mid quarter about 9. You being up and, uh, it looks like it was only up about a 0.5%. Um, in in the quarter itself, could you just talk about the Dynamics that you're seeing there in terms of unfunded growth and also just clients willingness to, uh, draw down their lines,

Speaker Change: Yeah, that's uh, that that's a that's a great question and it's 1 that frankly has confounded us. Um, I would have thought that people would have been aggressively forward, buying all the tariffs, it's interesting in the middle of the quarter, we were actually up more like a percent and we ended up the quarter of up about half a percent.

It continues to be something that we're watching. Obviously, that's the easiest way for us to grow loans. Um, if you know, I think as we get into an environment where, um, there's probably more certainty. Um, we may see people uh forward buying the tariffs, but we have not seen a lot of that in our book and we're pretty close to our to our customers. I've been surprised.

Speaker Change: 1 other slide point on that. Utilization rate, Ken, is the denominator grew a little bit in the quarter as well. So that would not offset the entire half a percent, but would certainly

Speaker Change: bring it down a little bit.

Speaker Change: Yep, understood

Speaker Change: thank you.

We have a question from Menan. Gosalia with Morgan Stanley. You may proceed.

Speaker Change: Hey, good morning.

Speaker Change: Um, can you talk about, um, just pricing competition and both, uh, loan and deposit side? Um, you know, I think some of your peers have noted some pressure on spreads, and you also called out, uh, Titus spreads in the capital markets, since you think about, uh, your forward loan growth. Can you talk about how you expect spreads

Uh, to Trend and, um, maybe also on the deposit side. I think you called out that you, you expect more competition there. So if you can talk a little bit more about that,

Speaker Change: The capital and that's why our business model is so important, man. In that, we can do so many other things for these clients. So our pricing is actually stayed flat, um, but I think pricing on quality loans will continue to be a challenge just based on, uh, what I see as excess capacity out there. Having said that, as you can see, we are able to monetize these relationships and a variety of ways um, well over 95% of our borrowing commercial customers. Uh, in fact have a more wholesome relationship than just borrowing. So I think that's really important. Um, I think that's that's the key and that frankly is, is how Banks like, like key can compete with a variety of competitors on the deposit front. I think Clark covered that. Um, we've we've seen very rational um, pricing to date. Although obviously we like you have heard some of the recent discussions of uh of increased focus on on.

Speaker Change: On pricing Clark, what would you add to that?

Speaker Change: Yeah look we're we noted you know, a little bit more competitive pricing on the commercial deposit side. Uh we'll watch watch that closely. Particularly as we expect some growth in that book in the second half. I think, broadly, um, in our markets at least consumer pricing has been pretty rational as Chris noted, there are some spots where we've seen

Speaker Change: You know, either a push on premiums or a push on some teaser rates. Uh, we have seen conversely in a couple Western markets. Some large players actually, take their front book rates down. So it's a little bit of a mixed bag. And I think, when you get to this level in the deposit game, it is a very local market to market business, and we're watching it, um, in exactly that way.

Got it, very helpful. Um, maybe on the credit side um with the strong cni growth in the mix shift and Loans. Um how should we think about the reserve ratio from here? Um, it has a bottomed here or is there more room to bring it down if uh criticized loans and npls keep moving lower?

Speaker Change: Yeah, I mean um, you know, look 3, 3 things, as you know, Drive The Reserve, right, the the loan growth, um, the General Credit quality of our own book and then the macroeconomic environment. So I think our, as we said our our credit metrics overall stable to improving, if we continue in that direction, you would see that reflected appropriately in the reserve

Speaker Change: Half of our build. This quarter was really long growth so you know, that's a high class problem, generally speaking. Um, and then the macroeconomic conditions, obviously are a little bit outside, our control will reflect that appropriately. I think. If some of the upside that Chris referenced earlier came to pass and that, uh, you know, led to a stronger more constructive economy. There's

Clearly room to reduce the reserve. But um, you know, we still see a fair amount of uncertainty and that's why we didn't pull off the entirety of the qualitative. Reserve we put on in the first quarter.

Great. Thank you.

Speaker Change: Thank you.

Erica: The Following comes from Erica ngajarin with UBS, you may proceed.

Speaker Change: Hi. Um, good morning. Um, just wanted to unpack, um, the loan growth guide. Um, and ending loans up, 2%, your already there. For the first half of the year, um, is that Dynamic that you're expecting for the second half related to Clark, what you said about maybe some resi growth funding loan growth? I mean, um, you know, um, Chris sounded quite, um, bullish. He said, underlying organic growth is very strong. I'm sure he's referring to the cni. So I wanted to unpack that and clarify what you had said about. You know, you said something about getting to the midpoint of the knee guide would require, you know, 2 to 3% organic growth in. I just wanted to um, Circle that square.

Speaker Change: Okay. Um so on maybe start with the ladder which is you know if you go from our second quarter results and get to the midpoint of the guide at 21%, you sort of have somewhere in the 2 to 3 range.

Speaker Change: Uh, of growth in the quarters to get there, which we think is, you know, again not necessarily simple but we think very achievable. So um if if that doesn't make sense, then let me know and we can we can go deeper into that on the line growth. I think it's what you noted there which is sorry, go ahead.

Speaker Change: All good. Go ahead.

Speaker Change: Okay.

Okay, thank you. Sorry. Uh so loan growth um

Speaker Change: look, we

Speaker Change: In the first half and we expected we continue to expect to see growth just again, not necessarily on balance sheet at the same level it'll be offset by what we would expect right now which is a little bit of CRA pay down and some resi real estate pay down. So right now we're sort of kind of net neutral on a balanced basis but moving more and more to that cni profile which you know we prefer. Um the other way I would think about it is if the capital markets get really strong

Speaker Change: You could actually see more of that Loan Production, go straight into the market, and even some come off balance sheet, and get raphide into the market, that's pretty typical. And that would be our model, which is often reflected in, kind of the lower retention rate of the capital. We raise in a quarter conversely, if things slow, as Chris noted, we might use the balance sheet a little bit more, but it's probably on aggregate lower volume. So it gets us kind of similarly, to a balance sheet growth rate.

Um on the cni side which again we think gets you know offset by the runoff in those other portfolios. All of that to say if some of the upside based on the capex and bonus depreciation, Provisions does occur. That's not really in the guide and you could see some potential for a little bit of outperformance on cnx.

And we're assuming a current rates that the runoff of our mortgage book, our mortgage book is 600 to 700 million a quarter just to give it in perspective.

Ryan Nash: Got it. Um, thank you for that. And my my second question is just wanted to sort of unpack, maybe the balance sheet, mix for the rest of the year. And into 26 Clark, you mentioned, I think 4 to 5 basis point. Um, net interest, margin impact from excess cash. I think you said you're running you have 4 to 5 billion more um, than you you need. I guess I'm wondering as we we we think about the balance of the year. Um, how you're thinking about, um, running down that excess liquidity, or, or not and how we should think about, um, deposit growth from here? I think fully understand your comments on on pricing, but as we think about, um, you know, the second half of the year, you know, should you, we expect key Corp to continue to prioritize price optimization versus deposit growth or are there sort of seasonal and business benefits to the second half?

Ryan Nash: Yeah, so great question. And you hit on a bunch, a bunch of the components. So we generally would see seasonal growth in the second half. Um, we would expect that as I noted in the commercial book, for sure, although we'll watch the kind of price balance trade-off. I don't think given the loan growth. We saw.

Ryan Nash: That we would be as sort of slanted to pricing versus balances as we were in the first half. I think we'd be in a, in a little bit more of a, um,

Ryan Nash: Lack of ironic term, a balanced approach here between you know, rate and dollars. Um, and I think you know, you'll see uh, stable to slightly growing consumer deposits as well. So I think we we'd expect the deposit book overall to grow. Um, we think we have a little bit, all other things being equal, a little bit of pricing, uh, opportunity here just as CDs and mmda promos roll off. Um, but we're, we're watching that closely. There's been a lot of deposit Dynamics, um, in the industry as we heard through the last week of earnings calls. So we'll watch it closely but, um,

Ryan Nash: I don't think we will be, you know, as rate oriented in the second half.

Ryan Nash: And then on your cash, question, look, given given April and some of the other uncertainty, we certainly felt comfortable carrying a little bit more cash didn't really impact. Knee at all it did drop the Nim a little artificially. Um, as long as we feel like the environment is constructive, we'd probably bring that level down. Um, and we'll, you know, we'll continue to watch that as it transpires over the next month or so,

Ryan Nash: Okay, thanks for taking my questions.

Speaker Change: Thank you. We have a question from John panari with evercore. You may proceed.

Ryan Nash: Morning.

Speaker Change: Gain the greatest momentum, within the cni book, uh, throughout the back half and and does your guidance for commercial growth. Um, does it reflect that expectation at the capital markets games team and you could see some financing go into the into the markets?

Speaker Change: So let me start with the last part of the question first. It, it does not. I mean, we sort of assume kind of a continuation of the way the markets are currently operating um, because that's just an easier way to plan. In terms of where um, we consider where we see the volume, it's pretty broad-based, but we're fortunate in that we are significant players in certain areas that lend themselves to sort of continuous new projects 1 would be Renewables. And obviously, Renewables have been in the media, a lot lately. We Finance literally the the best players in the renewable energy space. Um the way the the bill was written is as long as you're completed in 4 years, you're in good shape. And so our backlogs there are intact and in talking to our leaders, there we feel good about that. The next area where we get a lot of growth is affordable. Affordable is 1 of the few areas.

That I've always said, you know, people on all on both sides of the aisle, really agree on. And there's a bunch of things that are very good on a net basis for affordable. So those pipelines are strong. And then the other place where we're getting a fair amount of growth is around both our, our health care business. Obviously Healthcare is going through a big transformation. There's opportunity there, we also have a public sector business, that's having uh, a good year and then just broadly, our Middle Market Bankers. Uh, are gaining share. Um, broadly. So that that's where the growth is coming from both that which we funded and that, that which we see in the pipeline,

Speaker Change: Got it, got it great. Thanks Chris. And then separately on the Capitol Front we've seen a pickup in sector m&a amid the the regional activity and um you know just curious in your updated thoughts around uh Bank m&a, where is it on your priority list and would you consider um, smaller transactions at all on that front and something interesting came up and then maybe just an updated uh, Outlook around non-bank.

Speaker Change: Sure. So I'll I'll start with thanks. Uh, and and specifically I'll talk about kind of our appetite. It's it's not high on our list. I kind of walked through our Capital priorities, not high on our list of priorities. Um, I I just think, um, right now, I think there's an environment, where in the larger Banks, you have a lot of people,

Interested in buying and no 1 interested in selling. And with smaller Banks, I think you probably have a lot of people that are interested in selling and not a lot of people interested in buying. Um, having said that, I do think we're going to start to see a pickup in Bank m&a. We've already seen, obviously a little bit of that. Um, so that's the first point. The second Point, uh, is actually really important for our business and that is just greater velocity in m&a, in general, we obviously have a very large m&a business, um, that business, um, you know, Middle Market m&a has been down significantly, uh, and I think you're going to see that start to pick up after Labor Day. So in spite of how well, our investment bank is performing. We're not, we haven't gotten much of a lift on m&a and I think people are getting pretty good clarity now on what can get done in importantly, how quickly things can be approved and I think that holds true for Banking and non-banking

and maybe it was just the last add-on is the non-bank acquisition front for us, which Chris, I think noted once or twice and just that it's a little bit of our bread and butter. Um, and we consistently look at that whether its capital markets payments, uh, or anything else that that's our priority fee businesses generally, and we'll continue to do that. Yeah, we have a long history there. I'm I'm really proud of our ability to buy entrepreneurial businesses. This goes back to all the Partnerships we did with fintechs and all the boutiques not many large companies. Um, I don't

And do a really good job of bringing on entrepreneurial businesses. And I think we do, we we look at a lot of them, John, we obviously don't act on many. But, um,

I think that's an opportunity for us.

And John it's Mo Manny Chief Chris Chief. Chris officer just on your prior comments on loan growth. Um, we do look at that closely. We've been able to grow without stretching our risk appetite. So for example, we look at weighted average risk rating at origination versus the back book. We look at policy exceptions, so there's nothing that will give us concern that, uh, we're having a stretch to achieve this loan growth.

Speaker Change: good point, Bob,

Speaker Change: Okay, great. Thank you for the caller.

Speaker Change: Thank you.

Speaker Change: We have a question from Matthew Conor, what Deutsche Bank, you may proceed.

Matthew Conor: Uh, good morning. Um can you frame how far along you are in terms of adding the 10% bankos across the businesses? Are you halfway? Have you front ended it a bit?

Matthew Conor: I I don't have those numbers in each of the categories Matt. Um, but we're we front-ended a bit because as, you know, there's somewhat of a recruiting season. And so we've been very busy from the time people received their bonuses to present. And obviously, as we get late in the year, it will tail off.

Matthew Conor: Mhm.

Okay, that's helpful. And then just separately. Any updated thoughts on, uh, consumer lending strategy. And then you talked about continued rundown and the mortgage book, um, and obviously other areas, uh, have been running off as well, but just any updates, strategic thoughts on consumer lending. Thank you.

Speaker Change: Sure, Matt I think what you'll see us is is lean into uh he likes. Um you know we we have the capability to do it, we're in the business right now, um, and obviously our client base is older has equity in their home for a variety of reasons that, you know, well probably won't be moving, and we'll be looking at tapping into the equity and so,

Speaker Change: I think that's probably a 2 or 3 billion dollar uh, opportunity for us as we ramped that up.

Speaker Change: Okay, thank you.

Thank you, Matt.

Thank you. I'll now pass it back to Chris Gorman for closing remarks.

Well, we appreciate everyone's interest and key and the discussion this morning. If anyone has any further questions, please reach out to our investor relations team. Uh directly thank you. We're adjourned goodbye.

Speaker Change: So today's conference call, thank you for your participation. You may not disconnect your line.