Q2 2026 KeyCorp Earnings Call

July 21, 2026

Speaker #1: Our lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question during that time, simply press *1 on your telephone keypad.

Speaker #1: As a reminder, this conference is being recorded, and I would now like to turn the conference over to Troy Gates, Key Corp's Director of Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: Thank you, Operator, and good morning, everyone. I'd like to thank you for joining Key Corp's second quarter 2026 earnings conference call. I'm here with Chris Corvin, our Chairman and Chief Executive Officer.

Speaker #2: Clark Kaya, our Chief Financial Officer, and Mo Rahmani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides which can be found in the Investor Relations section of the Key.com website.

Speaker #2: 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.

Speaker #2: Actual results may differ materially from forward-looking statements, and those statements speak only as of today. July 21, 2026, and will not be updated. With that, I will turn it over to Chris.

Speaker #3: Thank you, Troy, and good morning, everyone. Our second quarter results reflect strong business momentum and continued progress against our strategic and financial commitments. We reported second quarter earnings of $44 per share, up 26% year over year.

Speaker #3: Revenue grew 7% year over year, and pre-provision net revenue grew 9%. Net interest margin expanded sequentially, to 2.89%, and we are on track to meet or exceed 3% by year-end.

Speaker #3: Supported by several tailwinds that we expect will contribute to accelerated margin expansion in the second half of the year. Commercial loan growth remains strong, period end CNI loans increased 2.1 billion dollars, or 3%, sequentially, reflecting continued success in attracting new clients across our markets while concurrently deepening existing relationships.

Speaker #3: Our deposit franchise continues to perform well in a competitive environment, with total deposit costs declining 2 basis points during the quarter. Asset quality remains strong, while non-performing loans increased modestly during the quarter, reflecting idiosyncratic items.

Speaker #3: Broader portfolio performance remains stable. Tightly managed and consistent with our expectations. Our net charge-off ratio was 42 basis points during the quarter, and our year-to-date charge-offs remain at the low end of our 40 to 45 basis-point full-year outlook.

Speaker #3: Given our stronger-than-expected business performance, I have even greater confidence in our ability to generate a return on tangible common equity exceeding 15% by the end of 2027 on our path to achieving our 16 to 19% long-term target.

Speaker #3: Importantly, we continue to deploy capital in a disciplined manner, supporting client growth, investing in the franchise, and returning capital to shareholders through ongoing share repurchases.

Speaker #3: During the quarter, we repurchased more than 340 million dollars of common stock, putting us on pace to achieve our full-year share repurchase target of at least 1.3 billion dollars.

Speaker #3: As we continue to repurchase our shares, our strong capital position enables us to concurrently drive organic growth and invest in our business. As an example, during the quarter we announced an agreement to acquire Clearwater UK, this transaction represents a strategic extension of our leading middle-market advisory franchise and expands our ability to serve M&A clients and prospects internationally.

Speaker #3: We expect this transaction to close in the second half of 2026. While the macroeconomic environment remains uncertain, our momentum continues to be strong, we are seeing healthy client engagement, solid activity levels across our businesses, and remain well-positioned to perform through a range of potential economic scenarios.

Speaker #3: We continue to grow clients. In the second quarter, relationship households increased 3%, and commercial clients increased 2% from the prior year. Commercial loan pipelines remain strong, up 6% from the prior year.

Speaker #1: Can have for 2026. While the macroeconomic environment remains uncertain, our momentum continues to be strong. We are seeing healthy client engagement, solid activity levels across our businesses, and remain well-positioned to perform through a range of potential economic scenarios.

Speaker #3: Our priority fee-based businesses—investment banking, commercial payments, and wealth—continue to perform exceptionally well. In the first half of the year, these businesses collectively grew 8% when compared to the first half of 2025.

Speaker #3: Investment banking pipelines are up 9% sequentially, and remain at historically elevated levels, supported by record M&A and DCM pipelines. While middle-market M&A activity has yet to normalize, we continue to see significant client engagement and remain confident in our expectation for mid-single-digit investment banking fee growth this year.

Speaker #1: We continue to grow our client base. In the second quarter, relationship households increased 3%, and commercial clients increased 2%. Activity has yet to normalize; we continue to see significant client engagement and remain confident in our expectation for mid-single-digit investment banking fee growth this year.

Speaker #3: In commercial payments, total gross payment fees increased 12% compared to the prior year, as investments we continue to make in bankers and scaling embedded banking build momentum.

Speaker #3: In wealth, assets under management reached another record, 74 billion dollars. Since the launch of our mass affluence strategy in 2023, we've added 59,000 households, over 4 billion dollars of AUM, and nearly 8 billion dollars of total client assets to keep.

Speaker #3: Wealth remains a significant opportunity for us, as we are less than 10% penetrated with respect to our base of currently existing mass affluent households.

Speaker #1: In commercial payments, total gross payment fees increased 12% compared to the prior year, as investments we continue to make in bankers and scaling embedded banking build momentum.

Speaker #3: Overall, we are encouraged by our second quarter performance and the sustained momentum across the business. As a result of our continued favorable loan momentum, we have increased our full-year guidance with respect to net interest income, revenue, and loan growth.

Speaker #1: In wealth, assets under management reached another record: $74 billion. Since the launch of our mass affluence strategy in 2023, we've added $59,000 households, over $4 billion of AUM, and nearly $8 billion of total client assets to key.

Speaker #3: Our guidance implies substantial positive operating leverage, as we expect to grow revenues twice as fast as expenses in 2026. As always, our guidance reflects a range of potential interest rate scenarios, and assumes markets remain constructive.

Speaker #1: Wealth remains a significant opportunity for us, as we are less than 10% penetrated with respect to our base of currently existing mass affluent households.

Speaker #1: Overall, we are encouraged by our second-quarter performance and the sustained momentum across the business. As a result of our continued favorable loan momentum, we have increased our full-year guidance with respect to net interest income, revenue, and loan growth.

Speaker #3: We enter the second half of the year from a position of strength. The underlying trends across key remain favorable. We will continue to drive disciplined execution across our franchise.

Speaker #3: With that, I'll turn it over to Clark. Clark?

Speaker #1: Our guidance implies substantial positive operating leverage, as we expect to grow revenues twice as fast as expenses in 2026. As always, our guidance reflects a range of potential interest rate scenarios and assumes markets remain constructive.

Speaker #2: Thanks, Chris. Starting on slide 4. We reported second quarter earnings per share of 44 cents, revenue was up 7% year-over-year while expenses increased by 5%.

Speaker #2: Tax-equivalent net interest income increased 9% year-over-year and 2% sequentially, primarily driven by commercial loan growth and portfolio repricing. Non-interest income increased 2% year-over-year. Loan loss provision of 92 million dollars included 115 million dollars for 42 basis points of net charge-offs, and a reserve release of 23 million dollars.

Speaker #1: We enter the second half of the year from a position of strength. The underlying trends across key areas remain favorable. We will continue to drive disciplined execution across our franchise.

Speaker #1: With that, I'll turn it over to Clark. Clark?

Speaker #2: The net release was driven by improvement in Moody's economic scenarios and a continued remix to higher credit quality relationships. Partially offset by a qualitative bill to account for increased economic uncertainty.

Speaker #2: Thanks, Chris. Starting on slide 4. We reported second-quarter earnings per share of $44, revenue was up 7% year-over-year while expenses increased by 5%. Tax-equivalent net interest income increased 9% year-over-year and 2% sequentially, primarily driven by commercial loan growth and portfolio repricing.

Speaker #2: We drew tangible book value per share, 6% year-over-year. Moving to the balance sheet on slide 5. Average loans were up 2.3 billion dollars sequentially.

Speaker #2: Non-interest income increased 2% year-over-year. Loan loss provision of $92 million included $115 million for 42 basis points of net charge-offs, and a reserve release of $23 million.

Speaker #2: Period end loans increased by 1.2 billion dollars, driven by CNI growth of 2.1 billion dollars, or 3%, currently offset by the ongoing planned runoff of low-yielding consumer loans.

Speaker #2: The net release was driven by improvement in Moody's economic scenarios and a continued remix to higher credit quality relationships, partially offset by a qualitative build to account for increased economic uncertainty.

Speaker #2: Growth was largely from new relationships and broad base across industries and regions. The largest industry contributors were utilities, power, and renewables, real estate, and technology.

Speaker #2: We drew tangible book value per share, 6% year-over-year. Moving to the balance sheet on slide 5. Average loans were up 2.3 billion dollars sequentially.

Speaker #2: CNI line utilization decreased 50 basis points sequentially to 31%, driven by higher commitments. Turning to slide 6, average deposit balances were relatively flat sequentially and year-over-year, consistent with historical seasonal trends.

Speaker #2: Period-end loans increased by $1.2 billion, driven by CNI growth of $2.1 billion, or 3%, partly offset by the ongoing planned runoff of low-yielding consumer loans.

Speaker #2: Average non-interest-bearing deposits increased 2.3% sequentially, representing 19% of total deposits, or 24% when adjusted for our hybrid accounts. As expected, the average deposits for the quarter were consistent with Q1, and we saw end-of-period deposits up versus prior quarter after troughing in May.

Speaker #2: Growth was largely from new relationships and broad-based across industries and regions. The largest industry contributors were utilities power and renewables, real estate, and technology.

Speaker #2: At the end of June, deposit balances—which closed the quarter at 153 billion dollars—were temporarily elevated by about 4 billion dollars due to the timing of transaction activity among our relationship clients.

Speaker #2: Total deposit costs declined 2 basis points sequentially to 1.63%. Our cumulative interest-bearing deposit beta held steady at 56%. To support our continued strong commercial loan growth, we supplemented funding with short-term borrowings.

Speaker #2: Given our expectations that client deposits will grow in the second half, we used wholesale funds in the second quarter rather than repricing existing deposit relationships.

Speaker #2: At the end of June, deposit balances—which closed the quarter at $153 billion—were temporarily elevated by about $4 billion due to the timing of transaction activity among our relationship clients.

Speaker #2: As a result, total funding costs increased by 1 basis point. We continue to pay close attention to deposit dynamics and will take proactive and strategic actions to manage funding effectively to achieve our goals.

Speaker #2: We expect to increase average client deposits by more than 2% through year-end. Slide 7 provides drivers of NII and NIM this quarter. Taxable equivalent NII was up 2%, and net interest margin increased 2 basis points from the prior quarter to 2.89%.

Speaker #2: Given our expectations that client deposits will grow in the second half, we used wholesale funds in the second quarter rather than repricing existing deposit relationships.

Speaker #2: The increase was driven by commercial loan growth, fixed-rate asset repricing, and an additional day in the quarter. We continue to manage our balance sheet to a fairly neutral interest rate, risk position, as we move through the remainder of 2026.

Speaker #2: On slide 8, non-interest income increased 2% year-over-year. Investment banking and debt placement fees were 169 million dollars for the quarter, and the first half of 2026 investment banking fees were 366 million dollars, an increase of 4% compared to the same year-ago period.

Speaker #2: As Chris mentioned, our pipelines are at a historically elevated level. Compared to the prior quarter, overall pipelines are up 9%, and M&A pipelines are up 7% to a new record.

Speaker #2: We expect third-quarter investment banking fees to be up 20%-plus quarter over quarter and remain confident in delivering mid-single-digit investment banking fee growth for the year.

Speaker #2: On slide 8, non-interest income increased 2% year-over-year. Investment banking and debt placement fees were $169 million for the quarter, and first half 2026 investment banking fees were $366 million, an increase of 4% compared to the same year-ago period.

Speaker #2: Trust and investment services income grew 9% year-over-year, reflecting higher market values, and assets under management reached a new record high of 74 billion dollars.

Speaker #2: Service charges on deposit accounts and corporate services fees each increased by 5% year-over-year. The increase in service charges was driven by growth in commercial payments, while corporate services income was driven by higher loan commitment fees.

Speaker #2: As Chris mentioned, our pipelines are at a historically elevated level. Compared to the prior quarter, overall pipelines are up 9%, and M&A pipelines are up 7% to a new record.

Speaker #2: We expect third-quarter investment banking fees to be up 20%-plus quarter-over-quarter and remain confident in delivering mid-single-digit investment banking fee growth for the year. Trust and investment services income grew 9% year-over-year, reflecting higher market values, and assets under management reached a new record high of $74 billion.

Speaker #2: Commercial mortgage servicing fees were 49 million dollars, down 21 million dollars year-over-year, largely driven by lower deposit placement fees and special servicing fees. At quarter end, we remained primary, where special service earned approximately 735 billion dollars of commercial real estate loans, of which about 270 billion is special servicing.

Speaker #2: Active special servicing third-party assets were flat sequentially at 10 billion dollars, about half of which is office. We continue to expect commercial mortgage servicing fees to run about 50 to 60 million dollars per quarter, the remainder of the year.

Speaker #2: On slide 9, second-quarter non-interest expenses were 1.2 billion dollars, an increase of 3% sequentially and 5% compared to the year-ago quarter. The increase was driven by higher personnel expenses related to the investments in frontline bankers, impact of Keith's higher stock price on incentive compensation, as well as higher benefits costs.

Speaker #2: Commercial mortgage servicing fees were $49 million, down $21 million year-over-year, largely driven by lower deposit placement fees and special servicing fees. At quarter-end, we remained primary or special servicer on approximately $735 billion of commercial real estate loans, of which about $270 billion is special servicing.

Speaker #2: Sequentially, expenses increased due to higher incentive compensation, professional fees, and marketing expenses, as well as an additional day in the quarter. Expenses are expected to modestly tick up through the second half of the year, reflecting our ongoing investments in people and technology and incentive compensation associated with expected seasonally higher fees.

Speaker #2: Active special servicing third-party assets were flat sequentially at $10 billion, about half of which is office. We continue to expect commercial mortgage servicing fees to run about $50 to $60 million per quarter for the remainder of the year.

Speaker #2: On slide 9, second-quarter non-interest expenses were $1.2 billion, an increase of 3% sequentially and 5% compared to the year-ago quarter. The increase was driven by higher personnel expenses related to the investments in frontline bankers, impact of Key's higher stock price on incentive compensation, as well as higher benefits costs.

Speaker #2: We continue to expect to be within our full-year expense growth guide of 3 to 4%. Turning to credit. Net charge-offs were 115 million dollars, for an annualized 42 basis points of average loans.

Speaker #2: Criticized loans were relatively stable at an annualized 4.9%. Non-performing assets increased by 126 million dollars sequentially to an annualized 74 basis points of loan.

Speaker #2: Sequentially, expenses increased due to higher incentive compensation, professional fees, and marketing expenses, as well as an additional day in the quarter. Expenses are expected to modestly tick up through the second half of the year, reflecting our ongoing investments in people and technology, and incentive compensation associated with expected seasonally higher fees.

Speaker #2: The increase was largely driven by 3 credits in the real estate, consumer goods, and agriculture industries. Based on our current assessment, we do not expect these credits to result in meaningful incremental losses, and they do not alter our outlook for net charge-offs.

Speaker #2: We continue to expect to be within our full-year expense growth guide of 3 to 4%. Turning to credit. Net charge-offs were $115 million for an annualized 42 basis points of average loans.

Speaker #2: Moving forward, we expect several sizable non-performing loans to resolve through the rest of the year. Overall, our portfolio remains healthy, fundamental performance of our borrowers remains resilient at its tracking in line with expectations.

Speaker #2: Criticized loans were relatively stable at an annualized 4.9%. Non-performing assets increased by $126 million sequentially to an annualized 74 basis points of loans. The increase was largely driven by three credits in the real estate, consumer goods, and agriculture industries.

Speaker #2: Moving to slide 11, our CET-1 ratio was 11.2%, and our marked CET-1 ratio was 9.8% at quarter end. As Chris mentioned, we continue to expect to repurchase at least 1.3 billion dollars of our shares for the year.

Speaker #2: Based on our current assessment, we do not expect these credits to result in meaningful incremental losses, and they do not alter our outlook for net charge-offs.

Speaker #2: Moving to slide 12, we are increasing our 2026 guidance to reflect our loan growth outperformance. We now expect revenue to grow 78% compared to approximately 7% of us previously communicated.

Speaker #2: We also now expect full-year net interest income to increase 9 to 11% compared to the prior guide of 9 to 10%. This guidance holds under a fairly broad range of interest rate scenarios, including a Fed hike scenario.

Speaker #2: Moving to slide 11, our CET1 ratio was 11.2%, and our marked CET1 ratio was 9.8% at quarter-end. As Chris mentioned, we continue to expect to repurchase at least $1.3 billion of our shares for the year.

Speaker #2: We now expect to exit the year with a net interest margin in the range of 3 to 3.05%, with average earning assets increasing between 1 to 2 billion dollars from the second quarter.

Speaker #2: This outlook assumes continued loan growth and a stable competitive deposit environment, while incremental balance sheet growth may be modestly margin-dilutive. We are willing to trade NIM to a degree to add quality relationship clients with a strong return profile.

Speaker #2: We also now expect full-year net interest income to increase 9% to 11%, compared to the prior guide of 9% to 10%. This guidance holds under a fairly broad range of interest rate scenarios, including a Fed hike scenario.

Speaker #2: Additionally, we continue to expect the benefits of over 9 billion dollars of low-yielding fixed asset repricing through year end, and disciplined deposit management to more than offset that impact.

Speaker #2: We now expect to exit the year with a net interest margin in the range of 3.00% to 3.05%, with average earning assets increasing between $1 billion to $2 billion from the second quarter.

Speaker #2: We now expect average loans to increase 4 to 5% compared to our previous guidance of 2 to 4%, and average commercial loans are now expected to increase 8 to 10% this year.

Speaker #2: The higher outlook reflects strong loan growth through the first half of the year, continued success in adding and expanding client relationships, and healthy commercial loan pipelines that continue to support growth in the second half of 2026.

Speaker #2: This outlook assumes continued loan growth and a stable competitive deposit environment. While incremental balance sheet growth may be modestly margin-dilutive, we are willing to trade NIM to a degree to add quality relationship clients with a strong return profile.

Speaker #2: All other guidance remains unchanged. In summary, subject to the usual macro caveats and a constructive environment that remains broadly consistent with today, we expect to maintain our strong momentum through the second half of the year and deliver a solid return on and return of capital to shareholders.

Speaker #2: Additionally, we continue to expect the benefits of over $9 billion of low-yielding fixed asset repricing through year-end and disciplined deposit management to more than offset that impact.

Speaker #2: We now expect average loans to increase 4 to 5%, compared to our previous guidance of 2 to 4%, and average commercial loans are now expected to increase 8 to 10% this year.

Speaker #2: With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Operator?

Speaker #1: Thanks. Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star followed by 1 on your telephone keypad.

Speaker #1: If for any reason you would like to remove your question, please press star followed by 2. Again, to ask a question, please press star 1.

Speaker #2: All other guidance remains unchanged. In summary, subject to the usual macro caveats, and assuming a constructive environment that remains broadly consistent with today, we expect to maintain our strong momentum through the second half of the year and deliver a solid return on, and return of, capital to shareholders.

Speaker #1: As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. The first question will go to the line of Ryan Nash with Goldman Sachs.

Speaker #2: With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Operator?

Speaker #1: Ryan, your line is open.

Speaker #2: Hey, good morning, guys.

Speaker #3: Good morning, guys.

Speaker #4: Good morning.

Speaker #1: Okay. Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star, followed by 1 on your telephone keypad.

Speaker #2: Clark, maybe to start on the net interest margin, hey, Ryan, it's

Speaker #1: If for any reason you would like to remove your question, please press star followed by 2. Again, to ask a question, please press star followed by 1.

Speaker #4: Chris. We can't hear you.

Speaker #2: Can you hear me now, Chris?

Speaker #4: Yes. Yes, we can. We started to talk about you started to talk about NIM and then you faded out.

Speaker #2: Sorry about that. So I was saying, what drove the main pieces that drove the NIM miss? I know you talked about the decision to use some wholesale funding and some lower loan yields.

Speaker #1: Ryan, your line is open.

Speaker #2: Hey, good morning, guys.

Speaker #3: Good morning.

Speaker #2: And then maybe just talk about what's embedded in reaching the 305, including deposit costs, fixed rate asset repricing, and any other impacts you think we could see that happen this quarter that may not repeat.

Speaker #2: Clark, maybe to start on the net interest margin, hey, Ryan,

Speaker #2: Thank you, and I have a follow-up.

Speaker #3: It's Chris. We can't hear you.

Speaker #4: Yeah. Well, Ryan, first of all, thanks for the question. Let me just make a brief comment. NIM is clearly an important metric for us, but as you can imagine, what we're most intensely focused on is our long-term return targets.

Speaker #2: Can you hear me now, Chris? Yeah, we can hear you. Sorry about that.

Speaker #3: You started to talk about you started to talk about NIM, and then you faded out.

Speaker #2: Sorry about that. So, I was saying, what were the main drivers of the NIM miss? I know you talked about the decision to use some wholesale funding and some lower loan yields.

Speaker #4: By the way, both of which are still intact. So Clark, you can maybe step us through the detail.

Speaker #3: Sure. And thanks for the question, Ryan. So maybe first, just to remind everyone, NIM was up in the quarter, just not up maybe as much as we would have expected.

Speaker #2: And then maybe just talk about what's embedded in reaching the 305, including deposit costs, fixed-rate asset repricing, and any other impacts you think we could see that happen this quarter that may not repeat.

Speaker #3: But maybe just a couple of factors in Q2. So stronger loan growth than we expected through the quarter. We obviously covered that. I think the loans we put on came in at a higher credit quality, and therefore a little bit tighter spread.

Speaker #2: Thank you, and I have a follow-up.

Speaker #3: Yeah. Well, Ryan, first of all, thanks for the question. Let me just make a brief comment. NIM is clearly an important metric for us, but as you can imagine, what we're most intensely focused on are our long-term return targets.

Speaker #3: So bigger balance sheet, a little bit tighter spread. And then overnight sofa was down about 4 basis points in the quarter. So put all those together, again, a little bit bigger balance sheet, a little thinner margin.

Speaker #3: By the way, both of which are still intact. So, Clark, you can maybe step us through the detail.

Speaker #2: Sure. And thanks for the question, Ryan. So maybe first, just to remind everyone, NIM was up in the quarter, just not up maybe as much as we would have expected.

Speaker #3: We had a known seasonal low in deposits. So as we told you, troughing in late May, that happened sort of as expected, but with the timing of that loan growth, created a little bit larger funding need in the period.

Speaker #2: But maybe just a couple of factors in Q2. So stronger loan growth than we expected through the quarter. We obviously covered that. I think the loans we put on came in at a higher credit quality and therefore a little bit tighter spread.

Speaker #3: And we chose to fill that with wholesale funds rather than reprice the client deposit base because the expectation is we're going to see some good deposit growth here in the second half.

Speaker #2: So, bigger balance sheet, a little bit tighter spread. And then overnight, silver was down about 4 basis points in the quarter. So, put all those together—again, a little bit bigger balance sheet, a little thinner margin.

Speaker #3: So as you transition then, what gets us confident that we'll go from where we are to 3%? And you hit most of the elements there, Ryan, but about 9 billion of fixed asset repricing coming in the back half with the pickup of about 1.25%.

Speaker #2: We had a known seasonal low in deposits. So, as we told you, troughing in late May—that happened sort of as expected. But the timing of that loan growth created a little bit larger funding need in the period.

Speaker #3: As I mentioned, solid client deposit growth. So about 2% or 3 billion in the second half, largely from core operating deposits. So should be very solid growth with good relative pricing.

Speaker #2: And we chose to fill that with wholesale funds rather than reprice the client deposit base because the expectation is we're going to see some good deposit growth here in the second half.

Speaker #3: And because that's coming, as I noted, that's why we chose to bridge with short-term wholesale funds. And then while we do expect loan growth, we would expect it to moderate off the first half pace.

Speaker #2: So, as you transition then, what gives us confidence that we'll go from where we are to 3%? And you hit most of the elements there, Ryan, but about $9 billion of fixed asset repricing is coming in the back half, with a pickup of about 1.25%.

Speaker #3: And some of that is just not that client activity will be down, but it'll be a mix between the balance sheet and the market.

Speaker #2: As I mentioned, solid client deposit growth—about 2%, or $3 billion, in the second half—largely from core operating deposits. So it should be very solid growth with good relative pricing.

Speaker #3: So put all those together, and I think what we see is a path to 3% plus with what we think is relatively low execution risk based on what's in front of us today.

Speaker #3: The last piece I'd say is just on deposit cost. If rates are stable, we would expect deposit costs through the period to be pretty stable.

Speaker #2: And because that's coming, as I noted, that's why we chose to bridge with short-term wholesale funds. And then while we do expect loan growth, we would expect it to moderate off the first half pace.

Speaker #3: If we see a hike, as is sort of becoming more probable, I guess, from the market standpoint, we would see deposit costs start to drift up a little bit.

Speaker #3: But we'll get the offset in loan yields and, frankly, don't think that'll be really impactful in the back half of '26.

Speaker #2: And some of that is just not that client activity will be down, but it'll be a mix between the balance sheet and the market.

Speaker #2: So, put all those together, and I think what we see is a path to 3% plus, with what we think is relatively low execution risk based on what's in front of us today.

Speaker #2: Great. Got it. And then maybe as my follow-up, Chris, it seems that results on investment banking fell a little bit shy of expectations. We're obviously seeing strong results across the industry.

Speaker #2: The last piece, I'd say, just on deposit cost is if rates are stable, we would expect deposit costs through the period to be pretty stable.

Speaker #2: I know 1Q was a record, but maybe just talk about what drove the miss. And then when you look at pipelines, you mentioned you expect to be up 20% in 3Q.

Speaker #2: If we see a hike, as is sort of becoming more probable, I guess, from the market standpoint, we would see deposit costs start to drift up a little bit.

Speaker #2: Maybe just talk about expectations that are embedded for the back half of the year. Thank you.

Speaker #2: But we'll get the offset in loan yields, and frankly, I don't think that'll be really impactful in the back half of '26. Got it. And then maybe as my follow-up, Chris, it seems that results on investment banking fell a little bit shy of expectations.

Speaker #4: Sure. Well, thanks for the question. And we did come up short of what we had anticipated in the quarter. We obviously came off a great first quarter, and we're coming off strong comps in 2025.

Speaker #4: Having said that, we remain confident that we'll have the ability to grow mid-single digit. In the first half, we completed about 366 million. And so we're up about 4%.

Speaker #2: We're obviously seeing strong results across the industry. I know 1Q was a record. But maybe just talk about what drove the miss, and then when you look at pipelines, you mentioned you expect to be up 20% in 3Q.

Speaker #4: So as we mentioned, the pipelines are very, very strong. We're up 9% length quarter, up 31% year over year. And as you know, Ryan, there tends to be some seasonality in this business in that, particularly in these middle-market deals, a lot of people want to get them closed by year-end.

Speaker #2: Maybe just talk about expectations that are embedded for the back half of the year. Thank you.

Speaker #3: Sure. Well, thanks for the question. We did come up short of what we had anticipated in the quarter. We obviously came off a great first quarter, and we're coming off strong comps in 2025.

Speaker #4: That's just a natural thing. So over time, we always see a step up in the back half of the year. When you mentioned that people were having great quarters and indeed they are, what's interesting is to date, there's been a real bifurcation between large deals and the middle-market deals.

Speaker #3: Having said that, we remain confident that we'll have the ability to grow mid-single digits in the first half. We completed about $366 million, so we're up about 4%.

Speaker #3: So as we mentioned, the pipelines are very, very strong. We're up 9% linked quarter up 31% year over year. And as you know, Ryan, there tends to be some seasonality in this business in that, particularly in these middle-market deals, a lot of people want to get them closed by year-end.

Speaker #4: Transaction volume is actually down 24% year to date. However, the value, believe it or not, is up 83%. So as you can see, a real skew sort of to larger deals I feel good about how we're positioned.

Speaker #4: It's not as though any of these deals fell apart. They got pushed out, which often happens in due diligence, etc. And when I speak about pipelines, these are engaged deals that people are spending valuable time and money on.

Speaker #3: That's just a natural thing. So over time, we always see a step up in the back half of the year. When you mentioned that people were having great quarters and indeed they are, what's interesting is to date, there's been a real bifurcation between large deals and the middle-market deals.

Speaker #4: So people are invested in these deals. I think we'll see them come out in the back half of the year. In the last comment I would make, and this sounds kind of counterintuitive, Clark just commented on the interest rate environment.

Speaker #3: Transaction volume is actually down 24% year to date. However, the value, believe it or not, is up 83%. So as you can see, a real skew sort of to larger deals.

Speaker #4: I think in a higher-for-longer environment, when people think that rates are either going to be higher for longer or potentially even go up, today the 10-year is obviously around 4.6.

Speaker #3: I feel good about how we're positioned. It's not as though any of these deals fell apart; they got pushed out, which often happens in due diligence, etc.

Speaker #3: And when I speak about pipelines, these are engaged deals that people are spending valuable time and money on. So people are invested in these deals.

Speaker #4: I think that's actually a better climate to get deals done than a climate where people are anticipating a bunch of rate cuts and tend to kind of sit on the sidelines.

Speaker #3: I think we'll see them come out in the back half of the year. In the last comment I would make— and this sounds kind of counterintuitive.

Speaker #4: So that might be more than you're looking for, but that's all I'm thinking about the business.

Speaker #2: Thanks for the call, Chris.

Speaker #4: Sure.

Speaker #3: Clark just commented on the interest rate environment. I think in a higher-for-longer environment—when people think that rates are either going to be higher for longer or potentially even go up—today the 10-year is obviously around 4.6%.

Speaker #1: Thank you, Ryan. Our next question will go to the line of Ibrahim Kunawala with Bank of America. Ibrahim, your line is open.

Speaker #5: Hey, good morning.

Speaker #4: Hey, good morning.

Speaker #5: I guess maybe on this whole name versus NII debate, Chris, and Clark, you said something willing to trade name to add clients with a strong return profile.

Speaker #3: I think that's actually a better climate to get deals done than a climate where people are anticipating a bunch of rate cuts and tend to kind of sit on the sidelines.

Speaker #5: Maybe unpack that for us in that if loan growth is stronger, my read is there's pressure on incrementally pressure on the name, but as a management team, how do you think about that in the framework of the 16 to 18 percent ROC that you want to hit over the medium term?

Speaker #3: So that might be more than you're looking for, but that's all I'm thinking about the business.

Speaker #2: Thanks for the call, Chris.

Speaker #3: Sure.

Speaker #1: Thank you, Ryan. Our next question will go to the line of Ibrahim Kunawala with Bank of America. Ibrahim, your line is open.

Speaker #5: Just contextualize how long does it take to make up for that name that you give up to drive growth on the fee side or how we should think about the timeline there.

Speaker #4: Hey, good morning. I guess maybe on this whole name versus NII debate, Chris—and Clark, you said something about being willing to trade name to add clients with a strong return profile.

Speaker #5: Thanks.

Speaker #4: Yeah. So it's a great question. And I don't think our target of 15 plus by 12/31/27 is in conflict with growing the business, generating more NII, generating more EPS.

Speaker #4: Maybe unpack that for us in that if loan growth is stronger, my read is there's pressure on incrementally pressure on the name. But as a management team, how do you think about that in the framework of the '16 to '18% Roth C that you want to hit over the medium term?

Speaker #4: We are very targeted on who we want to do business with. And we're fortunate enough to bring a lot of these new-to-client customers onto the balance sheet.

Speaker #4: Just to contextualize, how long does it take to make up for that name that you give up to drive growth on the fee side, or how should we think about the timeline there?

Speaker #4: We have about, put in perspective, about 58% of our CNI loans are investment-grade. So obviously, and I've said this many times, you're usually start by providing some capital, but in order to get the kind of returns that we have to get, we've got to do a lot more things for them.

Speaker #4: Thanks.

Speaker #3: Yeah. So it's a great question. And I don't think our target of '15 plus by '12, '31, '27 is in conflict with growing the business, generating more NII, generating more EPS.

Speaker #4: And usually, that takes a bit of time. But I don't think I don't think it's a trade that's in conflict. I actually think growing the business with our targeted customers is actually helpful on our long-term path to achieve our the kind of returns on tangible common equity that we're looking for.

Speaker #3: We are very targeted on who we want to do business with, and we're fortunate enough to bring a lot of these new-to-client customers onto the balance sheet.

Speaker #3: We have, to put it in perspective, about 58% of our C&I loans are investment-grade. So obviously, and I've said this many times, you usually start by providing some capital.

Speaker #5: Got it. And I guess maybe just to follow up, you mentioned the 2% deposit growth in the back half. Looks like you have a pretty decent line of sight in terms of what's coming through.

Speaker #3: But in order to get the kind of returns that we have to get, we've got to do a lot more things for them. And usually, that takes a bit of time.

Speaker #5: How should we then think about, one, if there's any more color on that deposit growth, drivers of that, and then just, Chris, to your point about the 15% ROTC by fourth quarter '27, do we still feel good about the margin being the 325 plus that you've talked about in the past?

Speaker #3: But I don't think I don't think it's a trade that's in conflict. I actually think growing the business with our targeted customers is actually helpful on our long-term path to achieve our the kind of returns on tangible common equity that we're looking for.

Speaker #5: Thank you.

Speaker #3: Yeah. So Ibrahim and Clark, thanks for the question. So we do have we think very good visibility on that deposit growth. It will be largely commercial in nature and connected to relationship clients with whom we have very tight interactions.

Speaker #4: Got it. And I guess maybe just to follow up, you mentioned the 2% deposit growth in the back half. Looks like you have a pretty decent line of sight in terms of what's coming through.

Speaker #4: How should we then think about, one, if there's any more color on that deposit growth, the drivers of that, and then just, Chris, to your point about the 15% ROTCE by fourth quarter '27—do we still feel good about the margin being the 3.25% plus that you've talked about in the past?

Speaker #3: So as we see that, there is a seasonal build in the commercial book. I think that's pretty broadly known. And again, we have very good line of sight, again, on what we think is a rich pool of operating deposits coming through.

Speaker #4: Thank you.

Speaker #3: And again, appropriately priced, we think. Some of that won't all be non-interest-bearing, for example. Some of that will be interest-bearing. Some of that will be in our hybrid accounts, etc., but we sort of like the profile of that for sure.

Speaker #3: As it relates to the 15% return in fourth quarter '27 and the related NIM target, what I'd say is just to reiterate Chris's point at the end of the day, returns really are the most important thing we're looking at over time.

Speaker #3: So, as we see, there is a seasonal build in the commercial book. I think that's pretty broadly known. And again, we have very good line of sight on what we think is a rich pool of operating deposits coming through.

Speaker #3: And making them sustainable, that is not to say NIM is not an important factor and something that we keep track of. And at this point, there's nothing that would tell us we have concerns about hitting either of those targets in Q4 '27.

Speaker #3: And again, appropriately priced, we think some of that won't all be non-interest-bearing, for example. Some of that will be interest-bearing. Some of that will be in our hybrid accounts, etc.

Speaker #3: But we sort of like the profile of that for sure. As it relates to the 15% return in fourth quarter '27 and the related NIM target, what I'd say is just to reiterate Chris's point: at the end of the day, returns really are the most important thing we're looking at over time.

Speaker #5: Thank you. Thank you.

Speaker #3: Yep.

Speaker #1: Thank you, Ibrahim. Our next question will go to the line of Chris McGrady with KVW. Chris, your line is open.

Speaker #4: Oh, great. Good morning, everybody.

Speaker #2: Good morning.

Speaker #3: And making them sustainable—that is not to say NIM is not an important factor and something that we keep track of. At this point, there's nothing that would tell us we have concerns about hitting either of those targets in Q4 '27.

Speaker #4: Clark or Chris, the operating leverage comment or very wide this year. I'm interested in, I guess, sustainability and, again, what's factored into the medium term in terms of operating leverage.

Speaker #4: Can you continue to generate operating leverage into next year?

Speaker #4: Very good. Thank you.

Speaker #3: Yeah. Hey, Chris. It's Clark. Look, again, assuming a constructive macro environment, we feel very good about that. I think we have demonstrated over time we can manage expenses very effectively.

Speaker #3: Yep.

Speaker #1: Thank you, Ibrahim. Our next question will go to the line of Chris McGrady with KVW. Chris, your line is open.

Speaker #3: Oh, great. Good morning, everybody.

Speaker #2: Good morning.

Speaker #3: And as Chris has noted a few times here, we like the pipelines the current status of the business and the momentum going forward. So if you put those two together, we do feel comfortable that we can drive operating leverage going forward.

Speaker #3: Clark or Chris, the operating leverage comment or very wide this year. I'm interested in, I guess, sustainability and, again, what's factored into the medium term in terms of operating leverage.

Speaker #3: We have talked before about kind of long-term expense growth, and we think we're a little bit we were a little bit higher last year.

Speaker #3: Can you continue to generate operating leverage into next year?

Speaker #5: Yeah. Hey, Chris, it's Clark. Look, again, assuming a constructive macro environment, we feel very good about that. I think we have demonstrated over time we can manage expenses very effectively.

Speaker #3: We're still going to be kind of above that long-term target, but gliding to that over time. And that's a combination of continuous improvement efforts and finding opportunities to reinvest in the business, understanding that you got to cover inflation and people and some of the other costs.

Speaker #5: And as Chris has noted a few times here, we like the pipeline, the current status of the business, and the momentum going forward. So if you put those two together, we do feel comfortable that we can drive operating leverage going forward.

Speaker #3: So there's nothing again in our crystal ball as good or bad as it may be that tells us we're concerned about not being able to deliver that sustainably.

Speaker #5: We have talked before about kind of long-term expense growth, and we think we're a little bit we were a little bit higher last year.

Speaker #4: By the way, that's while we're investing significantly in the business, whether it's hiring or the billion dollars, we're going to spend this year on tech and ops.

Speaker #5: We're still going to be kind of above that long-term target, but gliding to that over time. And that's a combination of continuous improvement efforts and finding opportunities to reinvest in the business, understanding that you got to cover inflation and people and some of the other costs.

Speaker #4: Got it. Okay. Wonderful. And then Chris, on the buyback, you reiterated the billion three at least this year. Obviously, we have the deposit proposals that will be a tailwind, but I'm interested in just your views of the toggle between what appears to be strengthening growth and returning capital.

Speaker #5: So there's nothing again in our crystal ball as good or bad as it may be that tells us we're concerned about not being able to deliver that sustainably.

Speaker #4: I know you had a comment in release about return on and return of capital. Thanks. Sure. So our capital priorities remain unchanged, Chris. The first is to support our clients and our prospects.

Speaker #3: By the way, that's while we're investing significantly in the business—whether it's hiring, or the $1 billion we're going to spend this year on tech and ops.

Speaker #4: And that's where we're going to focus. Secondly, what I just mentioned, we're going to continue to invest heavily in the business because we think there's a great opportunity.

Speaker #2: Got it. Okay. Wonderful. And then Chris on the buyback, you reiterated the billion three at least this year. Obviously, we have the Basel proposals that will be a tailwind.

Speaker #4: Third would be our dividend and then lastly, would be share repurchases. Obviously, we have an abundance of capital right now. We think if Basel III plays out the way it's currently described, we'll be the beneficiary under some timeline of another 100 basis points.

Speaker #2: But I'm interested in just your views of the toggle between what appears to be strengthening growth and returning capital. I know you had a comment in the release about return on and return of capital.

Speaker #2: Thanks.

Speaker #4: But we haven't given any guidance yet with respect to 2027.

Speaker #3: Sure. So our capital priorities remain unchanged, Chris. The first is to support our clients and our prospects, and that's where we're going to focus.

Speaker #3: The only thing I'd add there is, as you noted, Chris, on track for the 1.3, we're a little bit ahead of schedule. I would just sort of assume kind of 300 million a quarter in the back half, which gets us just north of that number.

Speaker #3: Secondly, as I just mentioned, we're going to continue to invest heavily in the business because we think there's a great opportunity. Third would be our dividend, and then lastly would be share repurchases.

Speaker #3: But I think maybe the takeaway there is less about the number and more about just a methodical, thoughtful kind of quarter-by-quarter approach, which may not get us exactly to the place we want to be quickly, but I think gives us maximum flexibility to support clients as that evolves and obviously to absorb any macro deterioration that might happen.

Speaker #3: Obviously, we have an abundance of capital right now. We think if Basel III plays out the way it's currently described, we'll be the beneficiary, under some timeline, of another 100 basis points.

Speaker #3: But we haven't given any guidance yet with respect to 2027.

Speaker #5: The only thing I’d add there is, as you noted, Chris, on track for the $1.3 billion, we’re a little bit ahead of schedule. I would just sort of assume kind of $300 million a quarter in the back half.

Speaker #4: And the other thing I would add to the discussion is we basically have reaffirmed the target of 9.5 to 10 on a marked basis.

Speaker #4: We think that's the right amount of capital. Having said that, we wouldn't be adverse to going below that from time to time. If we needed to, because we're generating a lot of capital.

Speaker #5: Which gets us just north of that number. But I think maybe the takeaway there is less about the number and more about just a methodical, thoughtful kind of quarter-by-quarter approach, which may not get us exactly to the place we want to be quickly, but I think gives us maximum flexibility to support clients as that evolves and obviously to absorb any macro deterioration that might happen.

Speaker #5: Perfect. Thank you.

Speaker #4: Thank you.

Speaker #1: Thank you, Chris. Our next question will go to the line of Erica Najerean with UBS. Erica, your line is open.

Speaker #3: And the other thing I would add to the discussion is we basically have reaffirmed the target of 9.5 to 10 on a marked basis.

Speaker #2: Hi. Good morning. My first question is from hi. My first question is for you, Clark. Clearly, the stock is opening lower. And I'm wondering if it's just a lower exit rate as we think about that path to 325.

Speaker #3: We think that's the right amount of capital. Having said that, we wouldn't be adverse to going below that from time to time. If we needed to, because we're generating a lot of capital.

Speaker #2: And obviously, fully hear everybody loud and clear that client growth is way more important than just NIM. How much of the path from, let's call it, 302 and 4Q of '26 to 325 is, quote, "baked" relative to the balance sheet dynamics that you see?

Speaker #2: Perfect. Thank you.

Speaker #3: Thank you.

Speaker #1: Thank you, Chris. Our next question will go to the line of Erica Najerean with UBS. Erica, your line is open.

Speaker #6: Hi. Good morning. My first question is from hi. My first question is for you, Clark. Clearly, the stock is opening lower. And I'm wondering if it's just a lower exit rate.

Speaker #2: So I guess what the market is trying to figure out in terms of the initial reaction is, how safe is consensus EPS for '27 relative to the NIM outlook?

Speaker #6: As we think about that path, this 325, and obviously, fully hear everybody loud and clear that client growth is way more important than just NIM.

Speaker #3: Yeah. Great question, Erica. So one, and I'm not being flip at between 305 and 3 to 305 isn't significant enough to get people or shouldn't be significant enough to get people concerned about the full year '27.

Speaker #6: How much of the path from, let's call it, 3.02% and Q4 of '26 to 3.25% is, quote, "baked" relative to the balance sheet dynamics that you see?

Speaker #3: And obviously, we haven't provided full guidance for '27, which we'll do as we get through the year. But I think to your question, and just start sort of broadly on the structural piece, between now and 12/31 of '27, we're looking at about 30 billion dollars of fixed asset fixed-rate asset repricing across the swapbook, securities, and consumer mortgages.

Speaker #6: So I guess what the market is trying to figure out in terms of the initial reaction is, how safe is consensus EPS for '27 relative to the NIM outlook?

Speaker #5: Yeah. Great question, Erica. So one, and I'm not being flip at all, I think the difference between 305 and 3 to 305 isn't significant enough to get people or shouldn't be significant enough to get people concerned about the full year '27.

Speaker #3: So again, that's pretty well baked, as you can imagine. And assuming the rate environment is what it is today, the returns on that are pretty solid.

Speaker #5: And obviously, we haven't provided full guidance for '27, which we'll do as we get through the year. But I think to your question, and just start sort of broadly on the structural piece, between now and 12/31 of '27, we're looking at about 30 billion dollars of fixed asset fixed rate asset repricing across the swapbook, securities, and consumer mortgages.

Speaker #3: We continue starting in the second half year to see good paths to operating deposit growth, which obviously helps on the funding optimization side going forward.

Speaker #3: And we'll see where loan growth goes from here. But obviously, it has been strong and we will continue to play in that as it makes sense.

Speaker #3: So I think just all around, we feel very good about that path. We think our view, I think, would be rates are probably relatively flat in the back half year, but certainly if there are hikes, we are prepared to manage those as well and think that the 325 will remain intact.

Speaker #5: So again, that's pretty well baked, as you can imagine. And assuming the rate environment is what it is today, the returns on that are pretty solid.

Speaker #5: We continue, starting in the second half here, to see good paths to operating deposit growth, which obviously helps on the funding optimization side going forward.

Speaker #2: Thanks. And I'll follow up offline to unpack that a little bit more. Chris, my second question is, where are we in the middle market investment banking cycle?

Speaker #5: And we'll see where loan growth goes from here. But obviously, it has been strong and we will continue to play in that as it makes sense.

Speaker #5: So I think, just all around, we feel very good about that path. Our view is that rates are probably relatively flat in the back half here, but certainly, if there are hikes, we are prepared to manage those as well and think that the 3.25% will remain intact.

Speaker #2: So I think there has been a hope that this capital markets renaissance, which is starting with large cap and strategics, is going to be multi-year.

Speaker #2: And I guess as we think about middle market activity, how much is key tied to sponsors versus how much is just tied to maybe sort of a lag in sentiment and proactiveness in terms of middle market activity?

Speaker #6: Thanks. And I'll follow up offline to unpack that a little bit more. Chris, my second question is, where are we in the middle market investment banking cycle?

Speaker #4: It's a great question, Erica. I think the middle market activity is lagging the large activity. And I think what I mentioned earlier about interest rates, I think, has been a factor.

Speaker #6: So I think there has been a hope that this capital markets renaissance, which is starting with large cap and strategics, is going to be multi-year.

Speaker #4: I think what's been going on, frankly, in the private credit market has been a factor for us. 40% of our fees are driven by private equity.

Speaker #6: And I guess as we think about middle market activity, how much is key tied to sponsors versus how much is just tied to maybe sort of a lag in sentiment and proactiveness in terms of middle market activity?

Speaker #4: And as you know, it's pretty well documented that the exits have been fewer and a lot more stretched out. So I think we are in the early innings of, to use your words, the renaissance of middle market M&A.

Speaker #3: That's a great question, Erica. I think the middle market activity is lagging the large-market activity. And what I mentioned earlier about interest rates has been a factor.

Speaker #4: I'm actually very encouraged by what I see. And as you know, as long as there's an inverse relationship between hold period and cash on cash return, eventually those transactions will come out.

Speaker #3: I think what's been going on, frankly, in the private credit market has been a factor for us. Forty percent of our fees are driven by private equity.

Speaker #2: Thank you for that, guys.

Speaker #3: And as you know, it's pretty well documented that the exits have been fewer and a lot more stretched out. So I think we are in the early innings of, to use your words, the renaissance of middle-market M&A.

Speaker #4: Thank you.

Speaker #1: Thank you, Erica. Our next question will go to the line of Manon Gassalia with Morgan Stanley. Manon, your line is open.

Speaker #5: Hi. Good morning. Clark, you made the point that lower loan spreads are coming from pivoting to higher quality clients. I guess a number of banks have made that comment this quarter.

Speaker #3: I'm actually very encouraged by what I see. And, as you know, as long as there's an inverse relationship between hold period and cash-on-cash return, eventually those transactions will come out.

Speaker #5: The question is, what do you see that is driving that? Is it more demand-related to capex and AI-related investment spend from larger clients, or is it something else?

Speaker #6: Thank you for that, guys.

Speaker #3: Thank you.

Speaker #1: Thank you, Erica. Our next question will go to Manon Gasalia with Morgan Stanley. Manon, your line is open.

Speaker #3: Yeah. I mean, it's a great question, Manon. I think it is consistent with the industry we're in and the clients we target. And frankly, our book historically has been a little bit more investment-grade, just given our capital markets platform because those are the clients that tend to need those capabilities.

Speaker #7: Hi. Good morning. Clark, you made the point that lower loan spreads are coming from pivoting to higher quality clients. I guess a number of banks have made that comment this quarter.

Speaker #3: So I don't know if it's you've heard that across the industry. I don't know if it's a broad or sustained trend, but at least for us, those are the deals that we saw in the quarter that were very consistent with our targeted approach.

Speaker #7: The question is, what do you see that is driving that? Is it more demand related to capex and AI related investment spend from larger clients, or is it something else?

Speaker #5: Yeah, I mean, it's a great question, Manon. I think it is consistent with the industry we're in and the clients we target. And frankly, our book historically has been a little bit more investment grade just given our capital markets platform, because those are the clients that tend to need those capabilities.

Speaker #3: And we're happy to serve those clients more broadly than just the lending, obviously, and it helps the credit profile turnover as well.

Speaker #4: For example, a lot of the credit that's being provided is for the build-out of the electrical infrastructure in this country. One of the things that AI has made abundantly clear is that there's a massive shortage, both of power generation and distribution.

Speaker #5: So I don't know if you've heard that across the industry. I don't know if it's a broad or sustained trend, but at least for us, those are the deals that we saw in the quarter that were very consistent with our targeted approach.

Speaker #4: And as you can well imagine, we are a significant player in that. And specifically, the people that are market leaders in that are very significant companies for example.

Speaker #5: And we're happy to serve those clients more broadly than just the lending. Obviously, and it helps the credit profile turnover as well.

Speaker #3: Yeah. And I guess maybe the other element I might raise is we had some growth in our REIT portfolio, which was almost entirely investment-grade in nature.

Speaker #3: For example, a lot of the credit that's being provided is for the build-out of the electrical infrastructure in this country. One of the things that AI has made abundantly clear is that there's a massive shortage—both of power generation and distribution.

Speaker #3: So again, it is tied to Chris's point and the REIT point to pockets of real targeted scale for us.

Speaker #4: Yeah.

Speaker #5: Got it. And maybe as a related question, Chris, in your response to Ibrahim's question, you spoke about it taking some time for the fees and other higher-returning businesses coming through from some of the new clients.

Speaker #3: And as you can well imagine, we are a significant player in that. And specifically, the people that are market leaders in that are very significant companies, for example.

Speaker #5: Yeah, and I guess maybe the other element I might raise is, we had some growth in our REIT portfolio, which was almost entirely investment grade in nature.

Speaker #5: What's your level of conviction that you can bring in that business over the next year or so? I guess the reason I'm asking that question is a couple of years ago, we just went through a round across the industry.

Speaker #5: So again, it is tied to Chris's point and the REIT point, to pockets of real targeted scale for us.

Speaker #5: For running off some of the lower-returning lending-only relationships. So maybe if you can unpack on why you have more conviction on bringing in those fee-based businesses this time around.

Speaker #3: Yeah.

Speaker #7: Got it. And maybe as a related question, Chris, in your response to Ibrahim's question, you spoke about it taking some time for the fees and other higher-returning businesses coming through from some of the new clients.

Speaker #4: Sure. So I guess the easy part of that question with our existing customers where every six months we go through a deep dive on all of our significant exposure, what are we getting in addition to the credit exposure?

Speaker #7: What's your level of conviction that you can bring in that business over the next year or so? I guess the reason I'm asking that question is, a couple of years ago, we just went through a round across the industry of running off some of the lower-returning, lending-only relationships.

Speaker #4: What are we pitching? And this is a discipline that we've had for a long time. You've probably heard me speak before that a properly graded commercial loan can't return its cost to capital.

Speaker #7: So maybe you can unpack why you have more conviction about bringing in those fee-based businesses this time around.

Speaker #4: And that's why we're so committed to this targeted scale approach by industry. With respect to the new clients, we expect to hit our return hurdles, and we expect to hit them within 12 to 18 months.

Speaker #3: Sure. So I guess the easy part of that question, with our existing customers, is that every six months we go through a deep dive on all of our significant exposure. What are we getting in addition to the credit exposure?

Speaker #4: And we're looking at those every six months. And so it's just a lot of discipline and but it's something that, as you know, we've been at for a long time.

Speaker #3: What are we pitching? And this is a discipline that we've had for a long time. You've probably heard me speak before that a properly graded commercial loan can't return its cost of capital.

Speaker #4: And we don't bat 1,000. There'll be some that we don't get the kind of returns that we expect to. And we will exit those.

Speaker #4: But we have a pretty good track record, particularly with our focus by industry group where we can do a lot more for these companies with respect to payments, hedging, advisory, etc.

Speaker #3: And that's why we're so committed to this targeted, scaled approach by industry. With respect to the new clients, we expect to hit our return hurdles, and we expect to hit them within 12 to 18 months.

Speaker #5: Got it. Thank you.

Speaker #3: And we're looking at those every six months. And so it's just a lot of discipline and but it's something that, as you know, we've been at for a long time.

Speaker #4: Sure.

Speaker #1: Thank you, Manon. Our next question will go to the line of John Pincari with Evercore ISI. John, your line is open.

Speaker #3: And we don't bat a thousand. There will be some that we don't get the kind of returns that we expect to, and we will exit those.

Speaker #6: Good morning.

Speaker #4: Okay. Good morning.

Speaker #6: On the back to the loan growth that towards higher quality, but lower yielding again. To the answer to Manon's question, is there at all an intentional shift on your part focusing on these borrowers, or is it more of a market shift where you're seeing this?

Speaker #3: But we have a pretty good track record, particularly with our focus by industry group, where we can do a lot more for these companies with respect to payments, hedging, advisory, etc.

Speaker #7: Got it. Thank you.

Speaker #3: Sure.

Speaker #1: Thank you, Manon. Our next question will go to John Penkari with Evercore ISI. John, your line is open.

Speaker #6: And related to that, are you avoiding any pockets of lending, whether it be NDFI-related or areas like that, just given the backdrop? And then maybe can you just talk about loan pricing competition?

Speaker #8: Good morning.

Speaker #3: Hi. Good morning.

Speaker #8: On the back to the loan growth that's towards higher quality but lower yielding—again, to answer Manon's question—is there at all an intentional shift on your part, focusing on these borrowers, or is it more of a market shift where you're seeing this?

Speaker #6: Is there outright intensification around new loan yields that you're seeing impact this? Thanks.

Speaker #4: Yeah. So first of all, where are we we focused? It's easier to talk about where we were focused than where we don't focus because we're really focused on seven industry verticals.

Speaker #4: And so within those verticals, we feel like we understand kind of who the winners are, who the losers are, who's gaining share, who's losing share, etc.

Speaker #8: And related to that, are you avoiding any pockets of lending, whether it be NDFI-related or areas like that, just given the backdrop? And then, maybe can you just talk about loan pricing competition?

Speaker #4: So we're very focused on those industry verticals because we're focused on those industry verticals. As those companies grow and greater percentage of them become investment-grade companies, and we continue to serve them.

Speaker #8: Is there outright intensification around new loan yields that you're seeing impact this? Thanks.

Speaker #4: So that's really it's all about our industry focus, which is a bit unique to us. With respect to a similarly graded credit, if you look at kind of spreads over SOFR, from a year ago to present, there's some degradation.

Speaker #3: Yeah. So first of all, where we focus—it's easier to talk about where we focus than where we don't focus—because we're really focused on seven industry verticals.

Speaker #3: And so within those verticals, we feel like we understand, kind of, who the winners are, who the losers are, who's gaining share, who's losing share, etc.

Speaker #4: But it's not that significant, John. Candidly, it still goes back to my basic premise that if you're going to provide capital, you better be able to do a lot of other things because you're never going to get your returns based on the spreads today or last year.

Speaker #3: So we're very focused on those industry verticals because we're focused on those industry verticals. As those companies grow, a greater percentage of them become investment-grade companies.

Speaker #3: And we continue to serve them. So that's really it's all about our industry focus, which is a bit unique to us. With respect to a similarly graded credit, if you look at kind of spreads over SOFR, from a year ago to present, there's some degradation.

Speaker #3: And maybe the just two additions, John. One on NDFI, we noted we're up about 600 million in the quarter. We don't really avoid that.

Speaker #3: We like the we don't actually think about it as a thing other than when we report it and answer questions on it. We did grow our REIT business in the quarter.

Speaker #3: But it's not that significant, John. Candidly, it still goes back to my basic premise that if you're going to provide capital, you better be able to do.

Speaker #3: That is in the NDFI category. We grew our specialty finance lending business a little bit, call it 100 million or so, so not hugely significant.

Speaker #3: A lot of other things, because you're never going to get your returns based on the spreads today or last year.

Speaker #3: We're not shying away from those for the purposes of avoiding the NDFI designation. We are not doing deals that don't make sense for us.

Speaker #5: And maybe just two additions, John. One on NDFI—we noted we're up about $600 million in the quarter. We don't really avoid that.

Speaker #3: So specialty finance lending in particular, over over the past years, a few years, we have walked away from a handful of things that just didn't make sense to us.

Speaker #5: We don't actually think about it as a thing, other than when we report it and answer questions on it. We did grow our REIT business in the quarter.

Speaker #3: So it's not a function of the categorization at all. We're trying to make good, thoughtful underwriting decisions in those cases.

Speaker #5: That is in the NDFI category. We grew our specialty finance lending business a little bit, call it $100 million or so, so not hugely significant.

Speaker #4: And just one other thing. A lot of times, people conflate NDFI with private credit. So our NDFI numbers are more than twice what our private credit numbers are.

Speaker #5: We're not shying away from those for the purposes of avoiding the NDFI designation. We are not doing deals that don't make sense for us.

Speaker #4: And within private credit, there's SFL, but we have Unitrons. We have our real estate lenders. And we also have some other things like insurance companies, just some background.

Speaker #5: So, specialty finance lending in particular, over the past few years we have walked away from a handful of things that just didn't make sense to us.

Speaker #5: So, it's not a function of the categorization at all. We're trying to make good, thoughtful underwriting decisions in those cases.

Speaker #6: Got it. Okay. Thanks for that. And then separately, back to the margin. Just want to get a little bit more color around your I mean, you cited the confidence in that 4Q exit rate.

Speaker #3: Just one other thing. A lot of times, people conflate NDFI with private credit. So our NDFI numbers are more than twice what our private credit numbers are.

Speaker #6: You cited that you see low execution risk. Just what about the second quarter margin performance that surprised you negatively is now less likely to surprise you again?

Speaker #3: And within private credit, there's SFL, but we have Unitrons. We have our real estate lenders and we also have some other things like insurance companies, just some background.

Speaker #6: Is it the was it the type of growth that you saw or the spreads? Were the rate backdrop? Maybe if you could just talk to us why should we not worry about that as you cited the low execution risk on that exit?

Speaker #8: Got it. Okay. Thanks for that. margin, just want to get a little bit more color around your I mean, you cited the confidence in that 4Q exit rate.

Speaker #6: Thanks.

Speaker #3: Yeah. So fair question. I think it's really the mismatch in timing between the asset growth and the deposit levels in the quarter. So you draw up in mid-May.

Speaker #8: You cited that you see low execution risk. Just what about the second quarter margin performance that surprised you negatively is now less likely to surprise you again?

Speaker #3: And again, we draw sort of at the time and at the levels we expected. We just had larger client balances on the loan side at that time.

Speaker #8: So, was it the type of growth that you saw, or the spreads? Was it the rate backdrop? Maybe if you could just talk to us—why should we not worry about that, as you cited the low execution risk on that exit?

Speaker #3: So to the extent loan growth does slow a bit, and again, just to be clear, I don't mean client activity is slowing. I just loan growth, we think, will be a little lighter as the capital markets activity picks up.

Speaker #8: Thanks.

Speaker #5: Yeah, so fair question. I think it's really the mismatch in timing between the asset growth and the deposit levels in the quarter. So you trough in mid-May, and again, we troughed sort of at the time and at the levels we expected.

Speaker #3: But given that we believe we can fill the funding stack with quality deposits here, that's really the biggest difference. And if the loan growth that we expect to see for the year had come in uniformly, I think you would see a smoother kind of movement in them.

Speaker #5: We just had larger client balances on the loan side at that time. So, to the extent loan growth does slow a bit—and again, just to be clear, I don't mean client activity is slowing.

Speaker #6: Okay. Appreciate that, Clark. Thanks.

Speaker #3: Yep.

Speaker #1: Thank you, John. Our next question will go to the line of Matthew O'Connor with Deutsche Bank. Matthew, your line is open.

Speaker #5: Loan growth, we think, will be a little lighter as capital markets activity picks up. But given that we believe we can fill the funding stack with quality deposits here, that's really the biggest difference.

Speaker #5: Good morning. I was hoping you guys could elaborate on the small deal that you did within the investment bank in terms of what product or what exactly it's adding.

Speaker #5: And if the loan growth that we expect to see for the year had come in uniformly, I think you would see a smoother kind of movement in them.

Speaker #4: Sure, Matt. I'd be happy to speak to that. So the business that we announced is a company that we had a JV with for the last six years.

Speaker #8: Okay. Appreciate that, Clark. Thanks.

Speaker #5: Yep.

Speaker #1: Thank you, John. Our next question will go to the line of Matthew O'Connor with Deutsche Bank. Matthew, your line is open.

Speaker #4: And so it's important it's an M&A boutique, basically. And it's important when you're representing companies in the States that you have distribution in the UK and on the continent and conversely, obviously, people selling their business in Europe want to have access to, among other things, the private equity buyers in the United States.

Speaker #7: Good morning. I was hoping you guys could elaborate on the small deal that you did within the investment bank in terms of what product, or what exactly it's adding.

Speaker #4: So not many JVs really work that well in the financial services industry. This is one where we've worked together. We've worked on many deals over the last six years.

Speaker #3: Sure, Matt. I'd be happy to speak to that. So, the business that we announced is a company that we had a JV with for the last six years.

Speaker #3: And so it's important—it's an M&A boutique, basically. And it's important when you're representing companies in the States that you have distribution in the UK and on the Continent. And conversely, obviously, people selling their business in Europe want to have access to, among other things, the private equity buyers in the United States.

Speaker #4: And as a consequence, we were able to put together the deal. I think it is both for offense and defensive purposes. And I think it'll be a good buttress to our leading M&A practice.

Speaker #5: And then maybe more broadly speaking, I mean, everyone's kind of leaning into the capital markets/banking set of businesses. And is there an argument that you want to be a little more diversified?

Speaker #3: So, not many JVs really work that well in the financial services industry. This is one where we've worked together. We've worked on many deals over the last six years.

Speaker #5: You've got, obviously, the strength in the middle market, which, as you alluded to earlier, has not been as strong as some of the bigger kind of transactions out there.

Speaker #3: And as a consequence, we were able to put together the deal. I think it is both for offensive and defensive purposes. And I think it will be a good buttress to our leading M&A practice.

Speaker #5: Just thoughts on if you need to branch out a little bit from your current expertise?

Speaker #4: Yeah. We're always looking. We're always looking at other industry verticals where we think we could be really relevant. And we also, as you know, have done I think a really good job of expanding our core middle market business in new cities that we haven't been in in the past.

Speaker #7: And then maybe more broadly speaking, I mean, everyone's kind of leaning into the capital markets/banking set of businesses. And is there an argument that you want to be a little more diversified?

Speaker #7: You've obviously got strength in the middle market, which, as you alluded to earlier, has not been as strong as some of the bigger transactions out there.

Speaker #4: So we're always looking at where and usually, it's something that is an adjacency or tangential to what we're doing. But you can expect we'll continue to look for opportunities where there's big pockets of potential fees and where we think we have a good opportunity to win.

Speaker #7: Just thoughts on whether you need to branch out a little bit from your current expertise?

Speaker #3: Yeah. We're always looking—thank you for the question—we're always looking at other industry verticals where we think we could be really relevant. And we also, as you know, have done, I think, a really good job of expanding our core middle-market business into new cities that we haven't been in in the past.

Speaker #5: Okay. Thank you.

Speaker #4: Thank you, Matt.

Speaker #1: Thank you, Matthew. Our next question will go to the line of Mike Mia with Wells Fargo. Mike?

Speaker #6: Hi.

Speaker #4: Hey, Mike.

Speaker #3: So we're always looking at where. And usually, it's something that is an adjacency or tangential to what we're doing. But you can expect we'll continue to look for opportunities where there's big pockets of potential fees and where we think we have a good opportunity to win.

Speaker #6: So I'm not sure if your forecast will be correct. First, that you'll have 2% deposit growth with flat deposit rates. So that's the first point where I guess I'm questioning if you'll be we'll be on the third quarter earnings call or the fourth quarter earnings call and go, "Well, it didn't quite play out the way we thought." And the other thing I'm not sure is if you'll that 40% of fees driven by private equity is actually going to translate to something in investment banking.

Speaker #7: Okay. Thank you.

Speaker #3: Thank you, Matt.

Speaker #1: Thank you, Matthew. Our next question will go to the line of Mike Mayo with Wells Fargo. Mike, your line is open.

Speaker #6: We've been hearing that for three years from you and everybody else. And the big banks had investment banking go up 50% year over year, yours is down 5%.

Speaker #7: Hi.

Speaker #3: Hey, Mike.

Speaker #7: So I'm not sure if your forecast will be correct. First, that you'll have 2% deposit growth with flat deposit rates. So that's the first point where I guess I'm questioning if you'll be— we’ll be on the third quarter earnings call or the fourth quarter earnings call.

Speaker #6: So I do think, like you said, that's kind of important. I did hear you that it should be up 20% plus in the third quarter.

Speaker #6: But two pushbacks, deposit growth, 2%, and then private equity investment banking fees coming back. Thank you.

Speaker #7: And so, well, it didn't quite play out the way we thought. And the other thing I'm not sure about is if that 40% of fees driven by private equity is actually going to translate to something in investment banking.

Speaker #4: Sure. Well, let me touch on the 2% because it's something we haven't talked about on this call. But I think it's important. So about 10 years ago, on the commercial side, we became very, very focused on primacy.

Speaker #7: We've been hearing that for three years from you and everybody else. And the big banks had investment banking go up 50% year-over-year; yours is down 5%.

Speaker #4: 82% of our deposits we have primacy. And the reason I share that is those same companies have other deposits that are elsewhere. We talked to the they are our client.

Speaker #7: So I do think like you said, that's kind of important. I did hear you that it should be up 20% plus in the third quarter.

Speaker #7: But two pushbacks: deposit growth—2%—and then private equity investment banking fees coming back. Thank you.

Speaker #4: We know where their deposits are. We know what they cost. And we know we could go get them. So I give you that kind of as a backdrop because we're really tight on our disciplines around that.

Speaker #3: Sure. Well, let me touch on the 2% because it's something we haven't talked about on this call, but I think it's important. So, about 10 years ago on the commercial side, we became very, very focused on primacy.

Speaker #4: With respect to giving you additional confidence, Mike, with respect to our investment banking numbers, as I said, these pipelines are real. Timing of investment banking deals, as you know, is always a challenge.

Speaker #3: Eighty-two percent of our deposits, we have primacy. And the reason I share that is those same companies have other deposits that are elsewhere. We talked to them—they are our client.

Speaker #4: If you look at our long-term compound annual growth rate, I think you'll see that it's been very, very significant. We're coming off a record year last year.

Speaker #3: We know where the deposits are. We know what they cost. And we know we could go get them. So, I give you that as a backdrop because we're really tight on our disciplines around that.

Speaker #4: We're coming off a record first quarter. I think we've given some pretty conservative numbers. And it's our job to go out there and deliver those.

Speaker #3: With respect to giving you additional confidence, Mike, regarding our investment banking numbers—as I said, these pipelines are real. The timing of investment banking deals, as you know, is always a challenge.

Speaker #4: And we will. Clark, what would you add to the 2% question?

Speaker #3: Yeah. So Mike, fair pushback. I would say, as it relates to the operating deposit growth, some of that we know is coming from new clients we've added in the year.

Speaker #3: If you look at our long-term compound annual growth rate, I think you'll see that it's been very, very significant. We're coming off a record year last year.

Speaker #3: And those operating deposits will come on, and they don't come on necessarily on day one. So we see the process of them coming on.

Speaker #3: Second is just the visibility we have into standard client flows over the course of the year. And there is some seasonality to that. We've got to Chris's point, years of data that would support that.

Speaker #3: We're coming off a record first quarter. I think we've given some pretty conservative numbers. And it's our job to go out there and deliver those.

Speaker #3: So we feel good about it, but we can have this rematch on the third quarter call when we're ready. To be clear on the pricing, though, because I just want to make sure we're all saying the same thing, that assumes relatively stable deposit pricing for us, assumes no hikes.

Speaker #3: And we will. Clark, what would you add to the 2% question?

Speaker #5: Yeah, so Mike, fair pushback. I would say, as it relates to the operating deposit growth, some of that we know is coming from new clients we've added in the year.

Speaker #5: And those operating deposits will come on. And they don't come on necessarily on day one. So we see the process of them coming on.

Speaker #3: If there are hikes, we're obviously going to feel that in the deposit cost base. So we're not trying to say we're going to keep deposit prices flat if there is a hike.

Speaker #5: The second is just the visibility we have into standard client flows over the course of the year. And there is some seasonality to that.

Speaker #3: My point was that that will be relatively neutral from an impact standpoint on NII and NIM in the back half of the year. So we think we can insulate ourselves through Q4.

Speaker #5: We've got to Chris's point, years of data that would support that. So we feel good about it. But we can have this rematch on the third quarter call when we're ready.

Speaker #3: If there is a hike or two, if there isn't, or if there aren't any, we would expect deposit pricing to be relatively stable. So I just wanted to be clear on that.

Speaker #5: To be clear on the pricing, though, because I just want to make sure we're all saying the same thing, that assumes relatively stable deposit pricing for us, assumes no hikes.

Speaker #6: Okay. And one follow-up on the investment banking. And Chris, I know you've built that business. And once again, the 40% of fees from private equity.

Speaker #5: If there are hikes, we're obviously going to feel that in the deposit cost base. So we're not trying to say we're going to keep deposit prices flat if there is a hike.

Speaker #6: And again, it's you and everybody else who've talked about sponsors coming back for at least the last three years. And we're just waiting. And one big competitor said, "Hey, they're starting to see momentum." And I don't know.

Speaker #5: My point was that will be relatively neutral from an impact standpoint on NII and NIM in the back half of the year. So, we think we can insulate ourselves through Q4 if there is a hike or two.

Speaker #6: Do you really think it's going to come back at some point? Or do you have any evidence that it's picking up a little bit?

Speaker #6: And do you really need it to come back for kind of an a greater acceleration? And for your CNI loan growth, I think what you've said is the new normal is that your clients are used to the geopolitical uncertainties.

Speaker #5: If there isn't, or if there aren't any, we would expect deposit pricing to be relatively stable. So, I just wanted to be clear on that.

Speaker #7: Okay. And one follow-up on the Investment Banking. Chris, I know you built that business, and once again, 40% of fees are from private equity.

Speaker #6: They're pursuing their capital expenditures and building their plans. And they're getting their equipment and all that. So why wouldn't that new normal also apply to middle market M&A?

Speaker #7: And again, it's you and everybody else who's talked about sponsors coming back for at least the last three years. And we're just waiting. And one big competitor said, "Hey, they're starting to see momentum." And I don't know.

Speaker #6: Thank you.

Speaker #4: Sure. So the direct question is, we do need because I mentioned it's 40% of the business with financial sponsors. We do need that to come back.

Speaker #7: Do you really think it's going to come back at some point? Or do you have any evidence that it's picking up a little bit?

Speaker #4: I am confident that it will come back. Looking both at our specific pipelines, these are engaged pipelines, and also what we're out there in the market with.

Speaker #7: And do you really need it to come back for kind of an a greater acceleration? And for your CNI loan growth, I think what you've said is the new normal is that your clients are used to the geopolitical uncertainties.

Speaker #4: And I think your comments with respect to loans is true. And what we've seen and you saw it in the bifurcation between the big banks and the folks like us that are really focused on the middle market is the big companies moved first.

Speaker #7: They're pursuing their capital expenditures and building their plans, and they're getting their equipment and all that. So why wouldn't that new normal also apply to middle market M&A?

Speaker #7: Thank you.

Speaker #3: Sure. So the direct question is, we do need—because I mentioned it's 40% of the business with financial sponsors—we do need that to come back.

Speaker #4: That's why we were just talking about the significant year-over-year. We have 12% CNI loan growth. Mostly investment-grade year-over-year. Real estate, we've got a backlog now.

Speaker #3: I am confident that it will come back. Looking both at our specific pipelines—these are engaged pipelines—and also at what we're out there in the market with.

Speaker #4: We expect pipelines to be up 18% from they're up 18% from year-end. So we're starting to see this activity. And I just think the middle market and frankly, the private equity the private equity holders are the last to move.

Speaker #3: And I think your comments with respect to loans are true. And what we've seen—and you saw it in the bifurcation between the big banks and the folks like us that are really focused on the middle market—is the big companies moved first.

Speaker #4: And as I said earlier, I think one of the reasons they're the last to move is they try to optimize when they look for an exit.

Speaker #3: That's why we were just talking about the significant year over year. We have 12% CNI loan growth. Mostly investment-grade year over year. Real estate, we've got a backlog now.

Speaker #4: But you can only optimize so long before to generate the kind of returns that you need to so you can raise the next fund.

Speaker #4: You've got to come out. So thank you for the follow-up.

Speaker #3: We expect pipelines to be up 18% from they're up 18% from year-end. So we're starting to see this activity. And I just think the middle market and frankly, the private equity the private equity holders are the last to move.

Speaker #6: All right. Thank you.

Speaker #2: Thank you, Mike. Our next question will go to the line of Gerard Cassidy with RBC. Oh. My apologies. The next question is actually from Ken Uzun from Autonomous.

Speaker #3: And as I said earlier, I think one of the reasons they're the last to move is they try to optimize when they look for an exit.

Speaker #2: Ken, your line is open.

Speaker #6: Okay. Great. Thank you. We'd never take the place of Gerard. Two quick follow-ups. One on the deposit side, just I know you've given us some color now about expected growth.

Speaker #3: But you can only optimize so long before to generate the kind of returns that you need to so you can raise the next fund.

Speaker #3: You've got to come out. So thank you for the follow-up.

Speaker #6: And there was a transactional stuff in the second quarter. But can you just talk about non-interest-bearing mix? Should we be thinking more about the second quarter average as a growth point?

Speaker #7: All right. Thank you.

Speaker #2: Thank you, Mike. Next question, we'll go to the line of Gerard Cassidy with RBC. Oh, my apologies—the next question is actually from Ken Usdin from Autonomous.

Speaker #6: And then related, just on the consumer deposit side, can you just talk about ins and outs with regards to either maturing CDs and underlying account growth?

Speaker #2: Ken, your line is open.

Speaker #7: Okay, great, thank you. We’d never take the place of Gerard. Two quick follow-ups. One on the deposit side, just—I know you’ve given us some color now about expected growth.

Speaker #6: Thanks.

Speaker #3: Yeah. So thanks for the question, Ken. If I look at interest-bearing non-interest-bearing in the second quarter, I would think about that as kind of flat-ish through the back half.

Speaker #7: And there was some transactional stuff in the second quarter. But can you just talk about the non-interest-bearing mix? Should we be thinking more about the second quarter average as a growth point?

Speaker #3: So as we have talked about before, and I referenced a little bit earlier, some of those operating deposits come on as interest-bearing, albeit at relatively low rates or they're in the hybrid accounts.

Speaker #7: And then related, just on the consumer deposit side, can you talk about the ins and outs with regards to either maturing CDs and underlying account growth?

Speaker #3: Which we do try to adjust for, but I would expect non-interest-bearing as a percentage, again, to be relatively flat in the back half. But the quality of the operating deposits coming on are quite strong.

Speaker #7: Thanks.

Speaker #5: Yeah. So, thanks for the question, Ken. If I look at interest-bearing and non-interest-bearing in the second quarter, I would think about that as kind of flattish through the back half.

Speaker #3: On the consumer side, we talked about 3% household growth in the second quarter. We continue to see some positive growth there. That's core checking accounts coming on in the thousands of dollars at a time.

Speaker #5: So, as we have talked about before, and I referenced a little bit earlier, some of those operating deposits come on as interest-bearing, albeit at relatively low rates, or they're in the hybrid accounts, which we do try to adjust for.

Speaker #3: So that takes time to build. And then I do think we'll see a little bit of pickup in CD and MMDA production here in the second half.

Speaker #5: But I would expect non-interest-bearing, as a percentage, again, to be relatively flat in the back half. But the quality of the operating deposits coming on is quite strong.

Speaker #3: So we have gone out in a few select markets with a little bit higher rates than we've had over the last four or five quarters.

Speaker #5: On the consumer side, we talked about 3% household growth in the second quarter. We continue to see some positive growth there. That's core checking accounts coming on in the thousands of dollars at a time.

Speaker #3: And so we would expect a little bit of pickup. But I wouldn't expect that to be the lion's share of the deposit growth.

Speaker #6: Got it. Great. And just one other question on credit. In your prepared remarks, you put a fine point on the potential resolution of some of the bigger NPAs in the back half.

Speaker #5: So that takes time to build. And then I do think we'll see a little bit of pickup in CD and MMDA production here in the second half.

Speaker #6: I was just wondering if you could just give us a little bit more granularity. On you had talked about this in conference season about how you were watching a couple of things.

Speaker #5: So, we have gone out in a few select markets with slightly higher rates than we've had over the last four or five quarters.

Speaker #6: So I just want to understand, obviously, the reserve went down. You mentioned that the underlying still feels really strong. And so just any points you can further on giving us the confidence that that loss content is quite low and that the direction of travel on NPA should be positive.

Speaker #5: And so we would expect a little bit of pickup, but I wouldn't expect that to be the lion's share of the deposit growth.

Speaker #7: Got it. Great. And just one other question on credit. In your prepared remarks, you put a fine point on the potential resolution of some of the bigger NPAs in the back half.

Speaker #6: Thanks.

Speaker #3: Yeah. So let me maybe just make a broad comment about the reserve and then Mo can hit some of the more fine points here.

Speaker #3: So one, we released despite the NPAs being up because generally, the overall health of the portfolio is improving. Some of that is the higher credit quality we talked about.

Speaker #7: I'm just wondering if you could give us a little bit more granularity. You had talked about this during conference season—about how you were watching a couple of things.

Speaker #7: So I just want to understand. Obviously, the reserve went down. You mentioned that the underlying still feels really strong. And so just any points you can further share on giving us the confidence that that loss content is quite low and that the direction of travel on NPA should be positive?

Speaker #3: Some of that is other charge-off and resolutions that have happened throughout the year. And some of that is just economic continued sort of constructive economic profile.

Speaker #3: So when we look at that, our quantitative measures would have actually called for a significantly larger release just given some of the geopolitical uncertainty we still feel out there and some of the again, some of maybe the lack of clarity on path forward caused us to overlay some qualitative build there and just reduce the size of that.

Speaker #7: Thanks.

Speaker #5: Yeah, so let me maybe just make a broad comment about the reserve, and then Mo can hit some of the more fine points here.

Speaker #5: So, one, we released despite the NPAs being up because, generally, the overall health of the portfolio is improving. Some of that is the higher credit quality we talked about.

Speaker #5: Some of that is other charge-offs and resolutions that have happened throughout the year, and some of that is just continued, constructive economic profile.

Speaker #3: So if it were purely quantitative here, we would have released quite a bit more. We just didn't feel like that was appropriate given the broad environment.

Speaker #5: So, when we look at that, our quantitative measures would have actually called for a significantly larger release, just given some of the geopolitical uncertainty we still feel out there, and again, some of maybe the lack of clarity on path forward caused us to overlay some qualitative build there and just reduce the size of that.

Speaker #3: But we generally, again, feel quite good about the strength of the overall balance sheet.

Speaker #5: Yeah. Thanks, Clark. And just to continue that theme, relative to credit, again, I think as you all know, we have a very proactive risk culture in terms of risk identification.

Speaker #5: We did see an uptick in credit class and NPL, but really kind of based on a few factors. First of all, none of the migration was private credit related.

Speaker #5: And so we don't think that this is a harbinger of anything from a macro perspective. That we are overly concerned about. But we had some names in the multifamily space, consumer goods, and then our agriculture book, that just from a timing perspective, happened to land this quarter.

Speaker #5: So if it were purely quantitative here, we would have released quite a bit more. We just didn't feel like that was appropriate given the broader environment.

Speaker #5: But we generally, again, feel quite good about the strength of the overall balance sheet.

Speaker #6: Yeah. Thanks, Clark. And just to continue that theme, relative to credit, again, I think as you all know, we have a very proactive risk culture in terms of risk identification.

Speaker #5: Again, as we mentioned, when we see signs of migration, we act quickly because we also think that helps us from a resolution perspective. We do have specific reserves against our NPLs, which again is why we feel relatively confident that from an NCO guide perspective, we're still on track for our 40 to 45 basis points for the year.

Speaker #6: We did see an uptick in credit, class, and NPL, but really, that's based on a few factors. First of all, none of the migration was private credit related.

Speaker #6: And so, we don't think that this is a harbinger of anything from a macro perspective that we are overly concerned about. But we had some names in the multifamily space, consumer goods, and then our agriculture book that, just from a timing perspective, happened to land this quarter.

Speaker #5: And again, just some other little tidbits. The multifamily space, again, very strong. We've got sponsors with equity in those deals. We expect quick resolutions.

Speaker #6: Again, as we mentioned, when we see signs of migration, we act quickly because we also think that helps us from a resolution perspective. We do have specific reserves against our NPLs, which again is why we feel relatively confident that from an NCO guide perspective, we're still on track for our 40 to 45 basis points for the year.

Speaker #5: So again, not a lot of loss content there. Consumer just sort of episodic with a couple of names. And then agriculture just given some of the fuel and fertilizer and labor dynamics there as well.

Speaker #5: But overall, we don't feel like a lot of loss content relative to this move.

Speaker #6: Thanks for all that.

Speaker #6: And again, just some other little tidbits. The multifamily space, again, very strong. We've got sponsors with equity in those deals. We expect quick resolutions.

Speaker #3: Yep.

Speaker #2: Thank you, Ken. The next question will come from the line of Jared Cassidy with RBC. Jared, your line is now open.

Speaker #6: So again, not a lot of loss content there. Consumer is just sort of episodic with a couple of names. And then agriculture, just given some of the fuel, fertilizer, and labor dynamics there as well.

Speaker #7: Hi, Chris. I'm Clark.

Speaker #3: Is this the real Jared?

Speaker #7: Yeah. Ken's smarter. That was good to have him go first. The question, Chris, is just a bigger picture question. Obviously, the AI industry in this country is on fire.

Speaker #6: But overall, we don't feel like a lot of lost content relative to this move.

Speaker #7: Thanks for all that.

Speaker #7: It's doing phenomenally well. It's growing. By leaps and bounds, and everybody is benefiting from it, it seems like. So my question is, I'm always looking at the second derivative or third derivative of a strong industry.

Speaker #5: Yep.

Speaker #2: Thank you, Ken. The next question will come from the line of Gerard Cassidy with RBC. Gerard, your line is now open.

Speaker #8: Hi, Chris. I'm Clark.

Speaker #7: Because eventually, the industry will slow down. The rate of growth, that second derivative is certainly going to slow down. And so have you guys been able to start preparing for credits that are not directly I know you're not building data centers with construction loans, but what are the second derivative customers that aside from the HVAC guys and plumbers, that you may see have actually exposure to AI and want to slow down, may lead to some issues with them down the road?

Speaker #5: Is this the real Gerard?

Speaker #8: Yeah, Ken's smarter—that was good to have him go first. The question, Chris, is just a bigger-picture question. Obviously, the AI industry in this country is on fire.

Speaker #8: It's doing phenomenally well. It's growing by leaps and bounds, and everybody is benefiting from it, it seems like. So my question is, I'm always looking at the second derivative or third derivative of a strong industry.

Speaker #7: Have you guys tried to map that out, or how will you map it out?

Speaker #8: Because, eventually, the industry will slow down. The rate of growth—that second derivative—is certainly going to slow down. And so, have you guys been able to start preparing for credits that are not directly— I know you're not building data centers with construction loans.

Speaker #8: So that's a great question. We have spent time I'm not going to tell you that we're completely mapped out on it, but we spend time talking about it.

Speaker #8: Let me talk about where I think the trajectory is going to continue for a while, and then by definition, eventually, as they say, trees don't grow to the sky.

Speaker #8: But what are the second derivative customers that aside from the HVAC guys and plumbers that you may see have actually exposure to AI and want to slow down, may lead to some issues with them down the road?

Speaker #8: So eventually, there will be a reversal. But in the near term, and when I say near term, I'm talking about a five-year period. One of the things, and I mentioned it earlier on the call, one of the things that this has laid bare is just the absolute shortage of electrons in the United States.

Speaker #8: Have you guys tried to map that out, or how will you map it out?

Speaker #8: We have a shortage of power, and we have a shortage of distribution. I've actually been very involved in this for the last couple of years, in a couple of business groups.

Speaker #3: That's a great question. We have spent time—I'm not going to tell you that we're completely mapped out on it—but we spend time talking about it.

Speaker #3: Let me talk about where I think the trajectory is going to continue for a while, and then, by definition, eventually—as they say—trees don't grow to the sky.

Speaker #8: I'm part of. And so I think that is going to continue, Jared, literally for a long time. And I think the problem existed before but it was exacerbated by the fact that these obviously huge data centers take down in some instances, as much power as a small city.

Speaker #3: So eventually, there will be a reversal. But in the near term—and when I say near term, I'm talking about a five-year period—one of the things, and I mentioned it earlier on the call, one of the things that this has laid bare is just the absolute shortage of electrons in the United States.

Speaker #8: So that is on the positive side. So we're looking at that, and I just wonder when the build-out will finally end and kind of what the how that will play out.

Speaker #3: We have a shortage of power, and we have a shortage of distribution. I've actually been very involved in this for the last couple of years, in a couple of business groups.

Speaker #8: More near term is things like software companies. We have fortunately less than about 300 million dollars of exposure, direct to software companies in spite of the fact we have a good tech business.

Speaker #3: I'm part of it. And so, I think that is going to continue, Gerard, literally for a long time. I think the problem existed before, but it was exacerbated by the fact that these obviously huge data centers in some instances take down as much power as a small city.

Speaker #8: That's an area that we're worried about. Other areas that we're taking a look at are professional service areas. Think about lawyers, consultants, accountants. There's no question that large language models are most easily applied in some of those instances.

Speaker #3: So that is on the positive side. So we're looking at that, and I just wonder when the build-out will finally end and kind of what the how that will play out.

Speaker #3: More near term is things like software companies. We have, fortunately, less than about $300 million of exposure direct to software companies, in spite of the fact we have a good tech business.

Speaker #8: So that's the kind of discussions we've been having around our table here.

Speaker #5: And just from a portfolio rigor perspective, again, we conduct quarterly portfolio reviews and we are looking for emerging risk hotspots. So this is something your question about second derivative is actually perfect because those are the types of things that we're thinking about as well.

Speaker #3: That's an area that we're worried about. Other areas that we're taking a look at are professional service areas—think about lawyers, consultants, accountants. There's no question that large language models are most easily applied in some of those instances.

Speaker #8: Thanks, Moe.

Speaker #6: Anything else, Jared?

Speaker #7: I appreciate that. Yeah, real quick, just coming back to Moe for a second. I know you mentioned the multifamily credit, but in those other and you guys have strong credits, so I'm not terribly concerned about that today.

Speaker #3: So that's the kind of discussions we've been having around our table here.

Speaker #7: But I'm curious, those two other credits, was it because the customers are over-levered or did they lose a big customer of theirs that hit their cash flow?

Speaker #6: And just from a portfolio rigor perspective—again, we conduct quarterly portfolio reviews, and we are looking for emerging risk hotspots. So this is something—your question about second derivative is actually perfect, because those are the types of things that we're thinking about as well.

Speaker #7: But I'm just curious what happened in those idiosyncratic issues that you guys have identified. Thank you.

Speaker #5: Yeah, no, great question, Jared. One was just a consumer name that was being impacted by tariffs. Multibank deal, and so again, we actually expect a probably formal resolution later this year, but it was a company that filed for bankruptcy.

Speaker #7: Thanks, Moe.

Speaker #8: All right. I appreciate that. Yeah. Real quick, just coming back to Moe for a second—I know you mentioned the multifamily credit, but in those other areas you guys have strong credits.

Speaker #5: So again, we sort of view that as it was tariff-related, but sort of idiosyncratic relative to that space. And I do think, again, consumer probably is going to be still a choppy area relative to, as we think about not only the K-shaped economy, but certain types of businesses as well.

Speaker #8: So I'm not terribly concerned about that today. But I'm curious—those two other credits, was it because the customers were over-levered, or did they lose a big customer of theirs that hit their cash flow?

Speaker #8: But I'm just curious—what happened in those idiosyncratic issues that you guys have identified? Thank you.

Speaker #5: And so we're, again, increasingly selective there relative to the portfolio, but that was really the driver.

Speaker #6: Yeah, I know. Great question, Gerard. This one was just a consumer name that was being impacted by tariffs—multibank deal. And so again, we actually expect a probably formal resolution later this year, but it was a company that filed for bankruptcy.

Speaker #8: And then you might just talk about the ag deal was really so we have some ag exposure that is in western Washington. And the biggest challenge there, obviously, people talk about fuel, they talk about fertilizer.

Speaker #6: So again, we sort of view that as it was tariff-related, but sort of idiosyncratic relative to that space. And I do think, again, consumer probably is going to be still a choppy area relative to, as we think about not only the K-shaped economy, but certain types of businesses as well.

Speaker #8: The biggest challenge is workers. There's just not enough workers to properly do the farming.

Speaker #5: And just as an add-on, since it's topical, we know exposure to lettuce farming. So typically, our ag book is, again, potatoes and other things you might find in the Pacific Northwest.

Speaker #6: And so we're, again, increasingly selective there relative to the portfolio. But that was really the driver.

Speaker #3: And then you might just talk about the ag deal. Really, we have some ag exposure that is in western Washington, and the biggest challenge there—obviously, people talk about fuel, they talk about fertilizer.

Speaker #3: And I think the March consumer consumer market at this point, Jared, is Amazon, COVID, and tariffs like back to back to back. So the guys who are hanging in there are resilient and durable, and that's a lot to ask for any industry.

Speaker #3: The biggest challenge is workers. There's not there are just not enough workers to properly to do the farming.

Speaker #8: Yeah, I agree with you, Clark. Absolutely. Thank you.

Speaker #6: And just as an add-on, since it's topical, we have no exposure to lettuce farming. So typically, our ag work is, again, potatoes and other things you might find in the Pacific Northwest.

Speaker #2: Thank you, Jared. Our next question will go to the line of David Chiavarini with Jefferies. David, your line is open.

Speaker #9: Hi, thanks for taking the questions. I'm the income. A good momentum in payments and wealth up 8% collectively year over year. Could you talk about the outlook there and drivers of that growth?

Speaker #5: I think the March for Consumers consumer market at this point, Gerard, is Amazon, COVID, and tariffs back to back to back. So the guys who are hanging in there are resilient and durable and that's a lot to ask for any industry.

Speaker #8: Yeah. So let's start with payments. We've been investing in payments for a long time. Places like embedded banking, that's been a double-digit grower for us for each of the last few years, and we project it to be a double-digit grower for us as we go forward.

Speaker #8: Yeah. I agree with you, Clark. Absolutely. Thank you.

Speaker #2: Thank you, Gerard. Our next question will go through the line of David Chiavarini with Jefferies. David, your line is open.

Speaker #8: So we've got a lot of traction there. With respect to our wealth business, that's a strong business. We're at $74 billion of AUM. We show that is up 9% year over year.

Speaker #4: Hi, thanks for taking the questions. On fee income, there is good momentum in payments and wealth, up 8% collectively year over year. Could you talk about the outlook there and the drivers of that growth?

Speaker #8: But if you really looked at the fees related to wealth management, those are growing at about 14%. So that's a business we feel good about.

Speaker #3: Yeah, so let's start with Payments. We've been investing in payments for a long time. Places like embedded banking have been double-digit growers for us for each of the last few years.

Speaker #8: And we've been very focused, as I mentioned, since 2023 on this mass affluence space, which we think is a sort of an unmet need out there in the marketplace.

Speaker #3: And we projected to be a double-digit grower for us as we go forward. So we've got a lot of traction there. With respect to our wealth business, that's a strong business.

Speaker #9: Thanks for that. And then on deposit pricing, it sounds like it's very rate-dependent. But how would you characterize the competitive environment in your markets?

Speaker #3: We're at 74 billion of AUM. We show that is up 9% year over year. But if you really looked at the fees related to wealth management, those are growing at about 14%.

Speaker #9: More intense or about the same versus, say, three to six months ago?

Speaker #8: It's a good question. So

Speaker #3: when we talk about our markets, it's a little challenging to have one answer because we really view ourselves as being in three different geographic markets between the Northeast, the Midwest, and the Pacific Northwest or the West.

Speaker #3: So that's a business we feel good about. And we've been very focused, as I mentioned, since 2023, on this mass affluent space, which we think is a sort of unmet need out there in the marketplace.

Speaker #3: They do operate a little bit differently. They do have a slightly different competitive set. I would say there are certain places where it has been much more intense from the beginning of the year.

Speaker #4: Thanks for that. And then on deposit pricing, it sounds like it's very rate-dependent. But how would you characterize the competitive environment in your markets?

Speaker #3: I think that's owing to some unique circumstances of the competitive set. But I think given the loan growth and the rate environment combination, we are definitely seeing again, throughout the year, a little bit more deposit-intensity in general.

Speaker #4: More intense or about the same versus, say, three to six months ago?

Speaker #3: It's a good question.

Speaker #5: So, when we talk about our markets, it's a little challenging to have one answer, because we really view ourselves as being in three different geographic markets: the Northeast, the Midwest, and the Pacific Northwest or the West.

Speaker #3: But the rate sensitivity comment, again, just to be clear, is really just the betas that are going to follow from any Fed move. So we're not necessarily thinking about the rates in a flat environment moving meaningfully from where they are today.

Speaker #5: They do operate a little bit differently. They do have a slightly different competitive set. I would say there are certain places where it has been much more intense from the beginning of the year.

Speaker #5: I think that's owing to some unique circumstances of the competitive set. But I think, given the loan growth and the rate environment combination, we are definitely seeing, again throughout the year, a little bit more deposit intensity in general.

Speaker #9: Very helpful. Thank you.

Speaker #8: Sure.

Speaker #2: Thank you, David. That concludes our Q&A session. I would now like to pass the conference call over to our CEO, Christopher Gorman, for any closing remarks.

Speaker #8: Well, thank you, Megan. And thank you all for joining our call today. We appreciate your continued interest in Key. If you have any additional questions, please do not hesitate to reach out directly to Troy or others on the Investor Relations team.

Speaker #5: But the rate sensitivity comment, again, just to be clear, is really just the betas that are going to follow from any Fed move. So we're not necessarily thinking about the rates in a flat environment moving meaningfully from where they are today.

Speaker #8: Thank you all. The meeting is now adjourned.

Speaker #4: Very helpful. Thank you.

Speaker #5: Sure.

Speaker #2: Thank you, David. That concludes our Q&A session. I would now like to pass the conference call over to our CEO, Christopher Gorman, for any closing remarks.

Speaker #3: Well, thank you, Megan. And thank you all for joining our call today. We appreciate your continued interest in Key. If you have any additional questions, please do not hesitate to reach out directly to Troy or others on the investor relations team.

Speaker #3: Thank you all. The meeting is now adjourned.

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