Q3 2026 KeyCorp Earnings Call

October 20, 2026

Speaker #1: Representation, we can register a question by pressing star, followed by 1 on your telephone keypad. If you change your mind, please press star, followed by 2.

Speaker #1: As a reminder, this conference is being recorded. I would now like to turn the conference over to Troy Gates, KCORP'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 KCORP's Q3 2026 earnings conference call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer.

Speaker #2: Clark Khayat, our Chief Financial Officer and Head of Technology. And Mo Ramani, 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, October 20, 2026, and will not be updated. With that, I will turn it over to Chris.

Speaker #3: Thank you, Troy. And good morning, everyone. We reported Q3 earnings of 51 cents per share, up 24% year over year. Reflecting the strength of Key's relationship-driven franchise, the disciplined execution of our strategy, and the momentum we continue to build across the business.

Speaker #3: We reported record quarterly revenue of over $2 billion, which represents 8% year-over-year growth. PP&R growth of $60 million on a linked quarter basis, and importantly, return on tangible common equity that exceeded 15%.

Speaker #3: As we continue to make significant progress with respect to achieving and sustaining a 15%-plus return on tangible common equity by year-end 2027. On our path to achieving our current long-term target, between 16 and 19 percent.

Speaker #3: We continue to deliver on the commitments we have made. Our relationship-focused business model continues to differentiate Key and was evident again this quarter. Our deposit franchise continues to perform well in a competitive environment.

Speaker #3: Average total deposits grew 3.6 billion dollars, while interest-bearing deposit costs increased only 3 basis points during the quarter. Overall funding costs rose just 1 basis point.

Speaker #3: Net interest margin expanded 6 basis points sequentially to 2.95%, reflecting the continued fixed asset repricing and funding optimization. Our capital markets team delivered strong results with investment banking and debt placement fees increasing 27% sequentially with growth in M&A and syndications.

Speaker #1: $2 billion, which represents 8% year-over-year growth. PP&R growth of $60 million on a linked-quarter basis, and importantly, return on tangible common equity that exceeded 15%.

Speaker #1: As we continue to make significant progress with respect to achieving and sustaining a 15%-plus return on tangible common equity by year-end 2027. On our path to achieving our current long-term target, between 16 and 19%.

Speaker #3: Asset quality remains strong. Our net charge-off ratio improved to 32 basis points, and our non-performing asset ratio improved 19 basis points to 55 basis points.

Speaker #3: During the quarter, we repurchased 320 million dollars of common stock. Keeping us on pace to achieve our full-year share repurchase target of 1.3 billion dollars.

Speaker #1: We continue to deliver on the commitments we have made. Our relationship-focused business model continues to differentiate Key and was evident again this quarter. Our deposit franchise continues to perform well in a competitive environment.

Speaker #3: We remain comfortable with our current capital levels, with strong organic capital generation we will continue to take a measured approach to capital management. As a reminder, our capital priorities remain unchanged.

Speaker #1: Average total deposits grew $3.6 billion, while interest-bearing deposit costs increased only 3 basis points during the quarter. Overall funding costs rose just 1 basis point.

Speaker #3: First, we will continue to support our clients and prospects. Second, we will continue to invest in people and technology. Third, we will maintain our strong dividend.

Speaker #1: Net interest margin expanded 6 basis points sequentially, to 2.95%, reflecting continued fixed-asset repricing and funding optimization. Our capital markets team delivered strong results, with investment banking and debt placement fees increasing 27% sequentially, driven by growth in M&A and syndications.

Speaker #3: And finally, we will return capital to shareholders through share repurchases. While we continue to successfully complete tuck-in acquisitions, like Clearwater, traditional whole bank M&A is not a priority.

Speaker #3: The economic environment remains constructive, and our momentum continues to be strong. We are seeing healthy client engagement and activity across our businesses. We continue to organically grow clients.

Speaker #1: Asset quality remains strong. Our net charge-off ratio improved to 32 basis points, and our non-performing asset ratio improved 19 basis points to 55 basis points.

Speaker #3: In the third quarter, commercial clients increased 3%, and relationship households increased 2% from the prior year. Commercial loan growth remains strong and broad-based by both industry and geography.

Speaker #1: During the quarter, we repurchased $320 million of common stock, keeping us on pace to achieve our full-year share repurchase target of $1.3 billion.

Speaker #3: Period. NCNI loans increased 5% sequentially, reflecting both new client acquisition and a 200 basis point increase in line utilization to 33%. The highest level in over 3 years.

Speaker #1: We remain comfortable with our current capital levels. With strong organic capital generation, we will continue to take a measured approach to capital management. As a reminder, our capital priorities remain unchanged.

Speaker #3: The line utilization increase is reflective of clients' continuing to invest in their businesses. Our consumer trends remain strong and resilient, as our clients continue to benefit from a healthy labor market and the wealth effect.

Speaker #1: First, we will continue to support our clients and prospects. Second, we will continue to invest in people and technology. Third, we will maintain our strong dividend.

Speaker #1: And finally, we will return capital to holders. We continue to successfully complete tuck-in acquisitions, like Clearwater. Traditional whole bank M&A is not a priority.

Speaker #3: We continue to see strong performance in our gaining share across our priority fee-based businesses. Investment banking, commercial payments, and wealth management. In the third quarter, these businesses collectively grew 12% compared to the prior year.

Speaker #1: The economic environment remains constructive, and our momentum continues to be strong. We are seeing healthy client engagement and activity across our businesses. We continue to organically grow clients.

Speaker #3: Investment banking pipelines are up 5% sequentially, despite significant pull-through in the third quarter and remain a historically elevated level supported by record M&A pipelines.

Speaker #1: In the third quarter, commercial clients increased 3%, and relationship households increased 2% from the prior year. Commercial loan growth remained strong and broad-based by both industry and geography.

Speaker #3: 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: Period-end CNI loans increased 5% sequentially, reflecting both new client acquisitions and a 200 basis point increase in line utilization to 33%, the highest level in over three years.

Speaker #3: In commercial payments. Total gross payment fees increased 8% compared to the prior year. We continue to scale embedded banking, and are encouraged by our trajectory.

Speaker #3: In wealth. Assets under management reached another record this quarter. Wealth remains a significant opportunity for us, as we are less than 10% penetrated with respect to our current base of mass affluent households who bank with Key.

Speaker #1: The line utilization increase is reflective of clients continuing to invest in their businesses. Our consumer trends remain strong and resilient, as our clients continue to benefit from a healthy labor market and the wealth effect.

Speaker #3: We continue to invest in people and technology. We are attracting top talent and continue to hire frontline bankers. Our $1 billion technology budget this year has supported new product and service capabilities while allowing us to position the company for the future.

Speaker #1: We continue to see strong performance in our gaining share across our priority fee-based businesses: investment banking, commercial payments, and wealth management. In the third quarter, these businesses collectively grew 12% compared to the prior year.

Speaker #1: Investment banking pipelines are up 5% sequentially, despite significant pull-through in the third quarter, and remain at historically elevated levels, supported by record M&A pipelines.

Speaker #3: We continue to embed AI in enterprise-wide end-to-end processes. Currently targeting 4 domains: commercial onboarding and servicing, commercial originations, consumer servicing, and software engineering. Earlier this year, Clark assumed leadership of our technology organization, creating even tighter alignment among our business strategy, operating model, and technology investments.

Speaker #1: 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: In commercial payments, total gross payment fees increased 8% compared to the prior year. We continue to scale embedded banking and are encouraged by our trajectory.

Speaker #3: Under his leadership, we are accelerating the deployment of AI across these domains to simplify processes, increase productivity, and help our teammates spend more time delivering advice and solutions to clients.

Speaker #1: In Wealth, assets under management reached another record this quarter. Wealth remains a significant opportunity for us, as we are less than 10% penetrated with respect to our current base of mass-affluent households who bank with Key.

Speaker #3: While we remain in the early stages, we are encouraged by the opportunity in front of us. As we look ahead. The geopolitical and macro outlook remain uncertain.

Speaker #3: At Key, we remain focused on managing what we can control and remain well-positioned to perform through a range of potential economic scenarios. While our results are strong, we acknowledge there is uncertainty in the broader market.

Speaker #1: We continue to invest in people and technology. We are attracting top talent and continue to hire frontline bankers. Our $1 billion technology budget this year has supported new product and service capabilities, while allowing us to position the company for the future.

Speaker #3: We are actively managing the risks and maintaining discipline throughout the bank. We are well-positioned for a range of potential rate scenarios. And continue to intentionally manage our balance sheet to be fairly neutral from an interest rate perspective.

Speaker #1: We continue to embed AI in enterprise-wide, end-to-end processes. Currently, we are targeting four domains: commercial onboarding and servicing, commercial originations, consumer servicing, and software engineering. Earlier this year, Clark assumed leadership of our technology organization, creating even tighter alignment among our business strategy, operating model, and technology investments.

Speaker #3: In summary, we are proud of our third quarter performance and the sustained momentum across our business. These results would not be possible without the contributions from each of our teammates.

Speaker #3: Thank you for your dedication that will result in what we expect to be both a record revenue and record pre-provision net revenue year in 2026.

Speaker #1: Under his leadership, we are accelerating the deployment of AI across these domains to simplify processes, increase productivity, and help our teammates spend more time delivering advice and solutions to clients.

Speaker #3: We are currently in the midst of our planning process, and we'll have more to say on 2027 at year-end. But with our strong trajectory and healthy pipelines, I believe we are well-positioned to drive another year of outsized revenue and earnings growth in 2027.

Speaker #1: While we remain in the early stages, we are encouraged by the opportunity in front of us. As we look ahead, the geopolitical and macro outlook remain uncertain.

Speaker #1: At KEY, we remain focused on managing what we can control and are well-positioned to perform through a range of potential economic scenarios. While our results are strong, we acknowledge there is uncertainty in the broader market.

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

Speaker #2: Thanks, Chris. As Chris highlighted, continued execution of our relationship-based strategy drove strong performance in the quarter. For the third quarter, revenue exceeded $2 billion, PP&R reached a record level, and we approved returns inclusive of improving product quality.

Speaker #1: We are actively managing the risks and maintaining discipline throughout the bank. We are well positioned for a range of potential rate scenarios, and continue to intentionally manage our balance sheet to be fairly neutral from an interest rate perspective.

Speaker #2: Starting on slide 4. We reported third-quarter earnings per share of $51. Revenue was up 8% year-over-year, while non-interest expenses increased by 5% when excluding the FDIC special assessment in the year-ago quarter.

Speaker #1: In summary, we are proud of our third quarter performance and the sustained momentum across our business. These results would not be possible without the contributions from each of our teammates.

Speaker #2: Tax-equivalent net interest income increased 10% year-over-year, and 4% sequentially. Non-interest income increased 6% year-over-year. Provision for credit losses of $61 million included $89 million for 32 basis points of net charge-offs and a reserve release of $28 million.

Speaker #1: Thank you for your dedication. That will result in what we expect to be both record revenue and record pre-provision net revenue for the year 2026.

Speaker #2: The net release reflected improved portfolio performance, scenario impacts, and continued remix to higher credit-quality relationships, partially offset with some qualitative builds to reflect ongoing economic and geopolitical uncertainty.

Speaker #1: We are currently in the midst of our planning process, and we'll have more to say on 2027 at year-end. But with our strong trajectory and healthy pipelines, I believe we are well-positioned to drive another year of outsized revenue and earnings growth in 2027.

Speaker #2: We remained well-reserved for a range of economic outcomes. Return on average tangible common equity increased 260 basis points year-over-year to 15.1%. Moving to the balance sheet on slide 5.

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

Speaker #2: Thanks, Chris. As Chris highlighted, continued execution of our relationship-based strategy drove strong performance in the quarter. For the third quarter, revenue exceeded $2 billion, PP&R reached a record level, and we improved returns, inclusive of improving credit quality.

Speaker #2: Average loans were up 1.5 billion dollars sequentially. Average C&I loans increased 4% or 2.3 billion dollars, partly offset by the runoff of low-yielding consumer loans.

Speaker #2: On a period basis, C&I loans increased by 3.3 billion dollars or 5%. As Chris mentioned, growth came from a combination of broad-based new client acquisition and an increase in utilization.

Speaker #2: Starting on slide 4. We reported third-quarter earnings per share of $0.51. Revenue was up 8% year-over-year, while non-interest expenses increased by 5%, when excluding the FDIC special assessment in the year-ago quarter.

Speaker #2: Turning to slide 6. Average deposit balances increased 3.6 billion dollars or 2.4% sequentially, exceeding loan growth and allowing us to reduce wholesale funding. Client deposits, which exclude brokered CDs, grew 2.8 billion dollars or 1.9%, driven by growth in commercial operating balances.

Speaker #2: Tax-equivalent net interest income increased 10% year-over-year, and 4% sequentially. Non-interest income increased 6% year-over-year. Provision for credit losses of $61 million included $89 million, or 32 basis points, of net charge-offs, and a reserve release of $28 million.

Speaker #2: Last quarter, we communicated expectations for $3 billion or more of client deposit growth in the second half of 2026, and based on the growth in the third quarter, we have nearly achieved that.

Speaker #2: The net release reflected improved portfolio performance, scenario impacts, and continued remix to higher credit-quality relationships, partially offset by some qualitative builds to reflect ongoing economic and geopolitical uncertainty.

Speaker #2: While we continue to monitor deposit dynamics at a higher rate environment, we now expect incremental client deposit growth beyond the original $3 billion, and would expect our loan growth for the remainder of 2026 to be fully client deposit funded.

Speaker #2: We remain well reserved for a range of economic outcomes. Return on average tangible common equity increased 260 basis points year-over-year to 15.1%. Moving to the balance sheet on Slide 5.

Speaker #2: Total deposit cost increased 3 basis points sequentially to 1.66%, and total funding cost rose just 1 basis point. If market expectations materialize as currently estimated, we expect beta in the rate hiking cycle to be roughly symmetrical to the rate easing cycle, reaching a mid-50s cumulative beta over time, with the beta lag in the first few quarters.

Speaker #2: Average loans were up $1.5 billion sequentially. Average C&I loans increased 4%, or $2.3 billion, partly offset by the runoff of low-yielding consumer loans.

Speaker #2: On a period and basis, C&I loans increased by $3.3 billion, or 5%. As Chris mentioned, growth came from a combination of broad-based new client acquisition and an increase in utilization.

Speaker #2: Turning to the drivers of NII and NIM on slide 7. Taxable equivalent NII was up 4%, and net interest margin of 2.95% increased 6 basis points from the prior quarter.

Speaker #2: Turning to slide 6. Average deposit balances increased $3.6 billion, or 2.4% sequentially, exceeding loan growth and allowing us to reduce wholesale funding. Client deposits, which exclude brokered CDs, grew $2.8 billion, or 1.9%, driven by growth in commercial operating balances.

Speaker #2: The increase was driven by commercial loan growth, funding optimization via strong client deposit growth, swaps and securities repricing at higher rates, as well as an additional day in the quarter.

Speaker #2: We continue to manage our balance sheet to a fairly neutral interest rate position over a 12-month horizon, which we view as prudent from a risk management perspective, given continued rate uncertainty and our focus on driving performance through the cycle.

Speaker #2: While we continue to monitor deposit dynamics and a higher-rate environment, we now expect incremental client deposit growth beyond the original $3 billion and would expect our loan growth for the remainder of 2026 to be fully client deposit-funded.

Speaker #2: On slide 8. Non-interest income increased 6% year-over-year and included the negative impact of a $6 million visa-related charge in the current quarter. Investment banking debt placement fees were $214 million, a 27% increase sequentially driven by M&A and syndication activity.

Speaker #2: Trust and investment services income grew 10% year-over-year reflecting higher market values and positive net flows. Cards and payments and service charges on deposit accounts increased by 8% and 5% year-over-year, respectively, both reflecting strong commercial payment activity.

Speaker #2: Corporate services fees were stable compared to the year-ago quarter, as higher loan commitment and client FX fees were offset by lower hedging activity. Commercial mortgage servicing fees were $53 million.

Speaker #2: Turning to the drivers of NII and NIM on slide 7: taxable equivalent NII was up 4%, and net interest margin of 2.95% increased 6 basis points from the prior quarter.

Speaker #2: At quarter end, we remained primary for special service earned approximately $735 billion of commercial real estate loans, of which about $270 billion is in special servicing.

Speaker #2: The increase is driven by commercial loan growth, funding optimization via strong client deposit growth, swaps and securities repricing at higher rates, as well as an additional day in the quarter.

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

Speaker #2: On slide 9, third-quarter non-interest expenses were $1.2 billion up 2% sequentially. The increase was driven by investments in people and technology, higher incentive compensation related to strong fee growth, and an additional day in the quarter.

Speaker #2: On slide 8, non-interest income increased 6% year-over-year and included the negative impact of a $6 million Visa-related charge in the current quarter. Investment banking debt placement fees were $214 million, a 27% increase sequentially, driven by M&A and syndication activity.

Speaker #2: We continue to expect full-year expense growth 4%. A portion of our technology investment is focused on leveraging AI to create a more efficient and scalable operating model, as Chris mentioned, in addition to broad-based adoption of AI tools, we've selected 4 end-to-end processes against which to apply these capabilities at scale.

Speaker #2: Trust and investment services income grew 10% year-over-year, reflecting higher market values and positive net flows. Cards and payments, and service charges on deposit accounts, increased by 8% and 5% year-over-year, respectively—both reflecting strong commercial payment activity.

Speaker #2: The confluence of well-understood processes with supporting data and an opportunity to reimagine client and employee experiences is proving to be a valuable recipe for AI tools.

Speaker #2: We are still early in the process, but are optimistic that we can generate growth and efficiency while improving risk and controls. In commercial onboarding and servicing, we're focused on delivering a faster, client onboarding experience which speeds our time to revenue generation while simplifying client support.

Speaker #2: At quarter-end, we remain the primary or special servicer on approximately $735 billion of commercial real estate loans, of which about $270 billion is in special servicing.

Speaker #2: In consumer servicing, we're deploying AI to automate high-volume tasks, reduce fraud, and enable faster issue resolution. In commercial originations, we're streamlining the credit and collateral processes to improve client and banker experiences and accelerate cycle times.

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

Speaker #2: On slide 9, third-quarter non-interest expenses were $1.2 billion, up 2% sequentially. The increase was driven by investments in people and technology, higher incentive compensation related to strong fee growth, and an additional day in the quarter.

Speaker #2: And in software engineering, we're transforming how we build, deliver, and support technology through AI to achieve greater speed, quality, resiliency, and efficiency. In summary, I'm energized by the opportunities ahead and what AI can unlock across KEY.

Speaker #2: We continue to expect full-year expense growth of 4%. A portion of our technology investment is focused on leveraging AI to create a more efficient and scalable operating model.

Speaker #2: Turning to slide 10. Credit quality is broadly improving as our focus on disciplined client selection, prudent underwriting standards, and deep domain expertise in helping clients navigate the uncertain environment was evident this quarter.

Speaker #2: As Chris mentioned, in addition to broad-based adoption of AI tools, we've selected four end-to-end processes against which to apply these capabilities at scale. The confluence of well-understood processes with supporting data, and an opportunity to reimagine client and employee experiences, is proving to be a valuable recipe for AI tools.

Speaker #2: Net charge-offs were 89 million dollars or an annualized 32 basis points of average loans. As expected, non-performing assets decreased 191 million dollars or 19 basis points sequentially, and at 55 basis points is the lowest since late 2023.

Speaker #2: We are still early in the process but are optimistic that we can generate growth and efficiency while improving risk and controls. In commercial onboarding and servicing, we're focused on delivering a faster client onboarding experience, which speeds our time to revenue generation while simplifying client support.

Speaker #2: The decrease was driven by broad-based portfolio resolutions. The criticized loan ratio was stable at 4.9%. Moving to slide 11, our CET-1 ratio was 11.1%, and our marked CET-1 ratio was 9% at quarter end.

Speaker #2: Since the start of the year, we've repurchased over $1 billion of shares and have approximately 250 million dollars remaining to complete our targeted 1.3 billion dollars of repurchases in 2026.

Speaker #2: Moving to slide 12, we are updating our 2026 guidance. We are tightening our full-year net interest income growth outlook to approximately 10% compared to the prior guide of 9 to 11%.

Speaker #2: We now expect average loan growth to increase approximately 5% compared to the prior guide of 4 to 5%, and average commercial loan growth of approximately 10% compared to the prior guide of 8 to 10%.

Speaker #2: Turning to slide 10, credit quality is broadly improving, as our focus on disciplined client selection, prudent underwriting standards, and deep domain expertise in helping clients navigate the uncertain environment was evident this quarter.

Speaker #2: We see full-year net charge-offs coming in in the range of 37 to 39 basis points compared to the previous guidance of 40 to 45 basis points.

Speaker #2: Net charge-offs were $89 million, or an annualized 32 basis points of average loans. As expected, non-performing assets decreased $191 million, or 19 basis points sequentially, and at 55 basis points is the lowest since late 2023.

Speaker #2: The outlook reflects the improving credit trends we've seen in our portfolio to date. We now expect to generate a net interest margin of approximately 3% in the fourth quarter of 2026, reflecting average earning asset growth of approximately 1.5 to 2 billion dollars from the third quarter.

Speaker #2: The updated guide is primarily a function of continued commercial loan growth and preferred capital optimization, actions that are accretive to EPS and returns but are slightly diluted to NIM.

Speaker #2: Compared to our guidance in the second quarter, we now expect fourth-quarter earning assets excluding AOCI to be approximately 2.5 billion dollars higher. This increase is NII and returns but reduces NIM approximately 2 basis points.

Speaker #2: Since the start of the year, we repurchased over $1 billion of shares and have approximately $250 million remaining to complete our targeted $1.3 billion of repurchases in 2026.

Speaker #2: Moving to slide 12. We are updating our 2026 guidance. We are tightening our full-year net interest income growth outlook to approximately 10%, compared to the prior guide of 9% to 11%.

Speaker #2: We will continue to execute our relationship-based strategy to drive attractive returns from new and existing clients. With respect to preferred capital, we redeemed 525 million dollars of Series D preferred stock in September, and we're planning to operatistically issue new preferreds in the second half of the year.

Speaker #2: We now expect average loan growth to increase approximately 5%, compared to the prior guide of 4% to 5%, and average commercial loan growth of approximately 10%, compared to the prior guide of 8% to 10%.

Speaker #2: Based on prevailing market conditions, however, we've not yet made the decision to issue new preferreds. We'll continue to watch the market and act accordingly to optimize our capital structure.

Speaker #2: We see full-year net charge-offs coming in the range of 37 to 39 basis points, compared to the previous guidance of 40 to 45 basis points.

Speaker #2: As a result, we'll see lower preferred dividend payments in fourth Q, which from an earnings standpoint will be partially offset by slightly lower NII.

Speaker #2: The net result is de minimis on EPS but will impact NIM by about 1 basis point. All other guidance remains unchanged. In summary, we continue to see strong momentum in our business through the fourth quarter and expect to deliver on our commitments while navigating a dynamic and evolving environment.

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

Speaker #2: Compared to our guidance in the second quarter, we now expect fourth-quarter earning assets excluding AOCI to be approximately $2.5 billion higher. This increase boosts NII and returns, but reduces NIM by approximately 2 basis points.

Speaker #1: Thank you, Clark. To ask a question, please first start followed by 1 on your telephone keypad now. If you change your mind, please press start followed by 2.

Speaker #1: When preparing to ask your question, please ensure your device is on mute locally. Please kindly limit yourself to one question and one follow-up. If you have any further questions, please rejoin the queue.

Speaker #2: We will continue to execute our relationship-based strategy to drive attractive returns from new and existing clients. With respect to preferred capital, we redeemed $525 million of Series D preferred stock in September, and we're planning to opportunistically issue new preferreds in the second half of the year.

Speaker #1: Our first question today is from Manan Gosalia from Morgan Stanley. Your line is now open. Please go ahead.

Speaker #3: Hey, good morning. Clark, you saw a nice acceleration in average deposit growth this quarter. Can you unpack what drove that deposit growth and what goes into your expectations for that mid-50s deposit beta that you outlined?

Speaker #2: As a result, we'll see lower preferred dividend payments in Q4, which from an earnings standpoint will be partially offset by slightly lower NII.

Speaker #2: The net result is de minimis on EPS, but will impact NIM by about 1 basis point. All other guidance remains unchanged. In summary, we continue to see strong momentum in our business through the fourth quarter and expect to deliver on our commitments while navigating a dynamic and evolving environment.

Speaker #3: And actually, maybe if you can layer onto that, given that the deposit growth was higher than loan growth this quarter, how much opportunity is there to reduce the reliance on wholesale borrowings over the next few quarters?

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

Speaker #2: Yep. Thanks, Manan. So as you noted, we grew deposits by about 3.6 billion on average in the quarter with 2.8 billion of that being client deposits.

Speaker #1: Thank you, Clark. To ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2.

Speaker #2: And as you noted, deposit costs were only up about 3 basis points. So on the second quarter call, we noted we had some visibility into seasonal deposit flows, primarily commercial operating deposits.

Speaker #1: When preparing to ask your question, please ensure your device is unmuted locally. Please kindly limit yourself to one question and one follow-up. If you have any further questions, please rejoin the queue.

Speaker #2: And that view supported our guide at the time of 3 billion of client deposit growth in the second half. We obviously saw that and more in the third quarter alone, driven not just by the seasonal growth but by deepening deposit relationships with the existing clients and adding deposits from new to bank customers.

Speaker #1: Our first question today is from Manan Gosalia from Morgan Stanley. Your line is now open. Please go ahead.

Speaker #3: Hey, good morning. Clark, you saw a nice acceleration in average deposit growth this quarter. Can you unpack what drove that deposit growth, and what goes into your expectations for that mid-50s deposit beta that you outlined?

Speaker #2: Which would have come on with loans in the first half of the year. So overall, very pleased with the trajectory on the deposit side.

Speaker #2: I'd say the trends we're seeing now continue to be encouraging, which gives us confidence that we can fund our four Q loan growth with client deposits.

Speaker #2: Given the rate hike in September, we don't expect the same modest price increase to 3 basis points, but we do feel like we can effectively manage the cost along with the balance growth.

Speaker #2: Competition at this point is certainly intense, but it has been competitive all year, and we haven't really seen that intensity increase yet. Increased industry loan demand could ratchet that up, although we'd expect some of the loan growth for us to moderate actually in four Q.

Speaker #2: Yep. Thanks, Manan. So, as you noted, we grew deposits by about $3.6 billion on average in the quarter, with $2.8 billion of that being client deposits.

Speaker #2: And as you noted, deposit costs were only up about 3 basis points. On the second quarter call, we noted we had some visibility into seasonal deposit flows, primarily commercial operating deposits.

Speaker #2: To be clear, I'd say we aren't taking a victory lap here, and we're definitely not getting complacent. The deposit game requires consistent effort, so we're not going to let off the gas at all.

Speaker #2: And that view supported our guide at the time of $3 billion of client deposit growth in the second half. We obviously saw that and more in the third quarter alone, driven not just by the seasonal growth but by deepening deposit relationships with existing clients, and adding deposits from new-to-bank customers, which would have come on with loans in the first half of the year.

Speaker #2: I would say our focus on primacy, including deposits and commercial payments over the last decade, plus is serving us well. Our visibility here is based on name-by-name bottoms-up analysis and what and that's really what's driving our confidence.

Speaker #2: So to your point about kind of deposit growth outpacing loan growth in the quarter, we mentioned we expect to fund that loan growth with deposits in the fourth quarter, and I think going forward through '27 would expect to grow deposits at or better than loan growth.

Speaker #2: So, overall, very pleased with the trajectory on the deposit side. I'd say the trends we're seeing now continue to be encouraging, which gives us confidence that we can fund our Q4 loan growth with client deposits.

Speaker #2: Given the rate hike in September, we don't expect the same modest price increase—up to 3 basis points—but we do feel like we can effectively manage the cost along with the balance growth.

Speaker #3: Got it. And then maybe on the flip side, on the loan growth side, the CNI growth was really strong this quarter at up 5% Q on Q.

Speaker #3: I think you touched on this in your remarks a little, but can you expand on what's driving that strength, especially given that the utilization rate is up 200 basis points Q on Q?

Speaker #3: How sustainable is that, and how should we think about that into 2027?

Speaker #2: Yeah. Manan, it's Chris. Good morning. So it's broad-based. As I mentioned, it's broad-based from a geographic perspective. It's broad-based from an industry perspective. We're growing new clients, which obviously is helpful.

Speaker #2: I would say our focus on primacy, including deposits and commercial payments over the last decade-plus, is serving us well. Our visibility here is based on a name-by-name, bottoms-up analysis, and that's really what's driving our confidence.

Speaker #2: The other thing that obviously is driving it is people are investing in their business. And we've been looking forward to that happening for some time and you're seeing people spending money on CapEx, people buying small tuck-in acquisitions, and we're expanding the customer base.

Speaker #2: So, to your point about deposit growth outpacing loan growth in the quarter, we mentioned we expect to fund that loan growth with deposits in the fourth quarter. And I think, going forward through '27, we would expect to grow deposits at or better than loan growth.

Speaker #2: So it's pretty broad-based. The one area that I would point out where we've had really significant growth, and and it's an area that we're really strong in, is our utilities, power, and renewable.

Speaker #2: So you can imagine with all the discussion about the shortage of electrons in this country and the shortage of distribution, our good clients that are investment-grade utilities are also making some pretty significant investments.

Speaker #3: Got it. And then, maybe on the flip side, on the loan growth side, the C&I growth was really strong this quarter at 5% quarter-on-quarter.

Speaker #3: I think you touched on this in your remarks a little, but can you expand on what's driving that strength, especially given that the utilization rate is up 200 basis points quarter-on-quarter?

Speaker #1: Thank you, Manan. Our next question is from Scott Siefers from TD Securities. Your line is now open. Please go ahead.

Speaker #3: How sustainable is that, and how should we think about that going into 2027?

Speaker #2: Yeah. Manan, it's Chris. Good morning. So, it's broad-based. As I mentioned, it's broad-based from a geographic perspective. It's broad-based from an industry perspective. We're growing new clients, which obviously is helpful.

Speaker #4: Good morning, guys. Thanks for taking the question. Clark, I was hoping you could please help to put sort of a finer point on the margin progression.

Speaker #4: It sounds like there'll be some sort of just some noise in the fourth quarter, and then you'll also be impacted by the strong loan growth you're seeing.

Speaker #2: The other thing that obviously is driving it is people are investing in their business. And we've been looking forward to that happening for some time, and you're seeing people spending money on CapEx, people buying small tuck-in acquisitions, and we're expanding the customer base.

Speaker #4: But just sticking with the 325-plus margin by four Q '27, which is great. Maybe once we get through that sort of transitory noise in the fourth quarter, maybe if you can help sort of bridge the gap between now and end of '27, sort of what keeps you confident that you can still get there over the next several quarters.

Speaker #2: So, it's pretty broad-based. The one area that I would point out where we've had really significant growth—and it's an area that we're really strong in—is our utilities, power, and renewables.

Speaker #2: Sure. Thanks, Scott, and welcome back to the call. So first, maybe let me just zoom out a little bit and start with a broader objective of ROTCE.

Speaker #2: So you can imagine, with all the discussion about the shortage of electrons in this country and the shortage of distribution, our good clients that are investment-grade utilities are also making some pretty significant investments.

Speaker #2: So I'd just remind you the most important target we have out there for the fourth quarter '27 is delivering 15-plus percent ROTCE, and based on what we're seeing today and the performance, we're delivering we remain highly confident we're going to achieve that.

Speaker #1: Thank you, Manan. Our next question is from Scott Seifers from TD Securities. Your line is now open. Please go ahead.

Speaker #2: We are also maintaining, as we said, and you noted, the 325-plus NIM for four Q '27, so that remains intact as well. And I just note that when we first offered that target, the environment was quite different.

Speaker #4: Good morning, guys. Thanks for taking my question. Clark, I was hoping you could please help put a finer point on the margin progression.

Speaker #2: And we did note at the time that we thought we had multiple paths to achieve that, and we still believe that to be true.

Speaker #4: It sounds like there will be just some noise in the fourth quarter, and then you'll also be impacted by the strong loan growth you're seeing.

Speaker #2: So as we build the bridge I'd say the most valuable opportunity for sure is the fixed asset repricing opportunity. Between now and the end of '27, we have about 24 billion dollars of securities swaps and resi mortgages rolling off.

Speaker #4: But just sticking with the 325-plus margin by Q4 2027, which is great. Maybe once we get through that sort of transitory noise in the fourth quarter, maybe you can help sort of bridge the gap between now and the end of 2027—what keeps you confident that you can still get there over the next several quarters?

Speaker #2: And given the current view of rates and our forward starting swap positions, we see a weighted average yield pickup of about 165 basis points there.

Speaker #2: So if you consider that, say that alone drives roughly 70% of the NIM expansion required to hit that target. So more mechanical than it was a quarter ago, and that's just a function of the rate environment.

Speaker #2: Sure. Thanks, Scott, and welcome back to the call. So first, maybe let me just zoom out a little bit and start with the broader objective of ROTCE.

Speaker #2: So I'd just remind you, the most important target we have out there for the fourth quarter '27 is delivering 15-plus percent ROTCE, and based on what we're seeing today and the performance we're delivering, we remain highly confident we're going to achieve that.

Speaker #2: The second driver would be client deposit growth, which we just covered a little bit, but as we've discussed, we've seen great client deposit growth at attractive rates.

Speaker #2: And we feel we can fund our loan growth going forward with deposits. Third, and I'd say probably more of an expansion of the second, we think we can actually grow deposits client deposits faster than loans here, which allows us to pay down wholesale funding and again would be a creative to that NIM expansion there.

Speaker #2: We are also maintaining, as we said—and you noted—the 325-plus NIM for Q4 '27, so that remains intact as well. And I'll just note that when we first offered that target, the environment was quite different.

Speaker #2: And we did note at the time that we thought we had multiple paths to achieve that, and we still believe that to be true.

Speaker #2: And those deposit benefits are going to be partially offset by rate hikes given our modest liability sensitivity on the short end of the curve, but net-net we think those components get us there.

Speaker #2: So, as we build the bridge, I'd say the most valuable opportunity for sure is to fix asset repricing—opportunity between now and the end of '27.

Speaker #2: I think it's important to remember we're managing the balance sheet to be fairly neutral to rate moves here. And the pressure on deposits from higher rates often carries with it better reinvestment rates on the fixed asset repricing.

Speaker #2: We have about $24 billion of securities swaps and residential mortgages rolling off. Given the current view of rates and our forward-starting swap positions, we would see a weighted average yield pickup of about 165 basis points there.

Speaker #2: So there's a little bit of a trade in both directions there. And as I noted, the move-up in rates, particularly over the last month or so, has made achieving the target more mechanical than it was just a quarter ago.

Speaker #2: So, if you consider that, say, that alone drives roughly 70% of the NIM expansion required to hit that target. So, it's more mechanical than it was a quarter ago, and that's just a function of the rate environment.

Speaker #2: So hopefully that provides you a little bit of detail.

Speaker #4: Yeah. That's perfect. And thank you for that. And then maybe, Chris, one for you. So investment banking, great to see the better pull-through. I guess the change since last quarter is maybe there's been a little bit I guess just this little air pocket in overall activity industry-wide.

Speaker #2: The second driver would be client deposit growth, which we just covered a little bit. But as we've discussed, we've seen great client deposit growth at attractive rates.

Speaker #2: And we feel we can fund our loan growth going forward with deposits. Third, and I'd say this is probably more of an expansion of the second point, we think we can actually grow client deposits faster than loans here, which allows us to pay down wholesale funding and, again, would be accretive to that NIM expansion.

Speaker #4: So maybe just sort of your updated thoughts. It was good to hear you reiterate the full-year expectations for investment banking, but maybe sort of where are we?

Speaker #4: Where do you feel more and less confident than you may have felt, say, 90 days or so ago?

Speaker #2: And those deposit benefits are going to be partially offset by rate hikes, given our modest liability sensitivity on the short end of the curve. But net-net, we think those components get us there.

Speaker #2: Sure. So in this business, I never really Scott, as you know, focus a whole lot on one quarter or the other. The business just broadly has a lot of trajectory.

Speaker #2: I think it's important to remember that we're managing the balance sheet to be fairly neutral to rate moves here. The pressure on deposits from higher rates often carries with it better reinvestment rates on the fixed asset repricing.

Speaker #2: As you know, it's a business that's a mature business that we've had for some time. We have a public goal of getting to a billion dollars a year by 2028.

Speaker #2: We're very comfortable that we can hit our mid-single-digit number. Pipelines continue to be strong. The pipelines in spite of the pull-through are up 5% on a linked quarter basis and 20% year-over-year.

Speaker #2: So there's a little bit of a trade in both directions there. And as I noted, the move up in rates—particularly over the last month or so—has made achieving the target more mechanical than it was just a quarter ago.

Speaker #2: So hopefully that provides you a little bit of detail.

Speaker #2: Now, the one piece of that and I'm still comfortable with our guidance, by the way. The one piece of that that we have to watch is the real estate piece because transactional real estate, the cost of capital is such a significant part of those deals.

Speaker #4: Yeah, that's perfect, and thank you for that. And then maybe, Chris, one for you. So, investment banking—great to see the better pull-through. I guess the change since last quarter is maybe there's been a little bit, I guess, just this little air pocket in overall activity industry-wide.

Speaker #2: Every piece of transactional real estate right now is getting retraded. I personally think that we will get through this because I think once people come to grips with the fact that we're in a higher-for-longer environment, I think people will transact.

Speaker #4: So maybe just sort of your updated thoughts. It was good to hear you reiterate the full-year expectations for investment banking, but maybe, sort of, where are we?

Speaker #4: Where do you feel more and less confident than you may have felt, say, 90 days or so ago?

Speaker #2: But that's the one that's the one wildcard. But I feel as you know, I feel good about the business. We've been building it for a long time, and we've got a bunch of great clients.

Speaker #2: Sure. So in this business, I never really, Scott, as you know, focus a whole lot on one quarter or the other. The business just broadly has a lot of trajectory.

Speaker #1: Thank you, Scott. Our next question is from Ebrahim Poonawala from Bank of America. Your line is now open. Please go ahead.

Speaker #2: As you know, it's a mature business that we've had for some time. We have a public goal of getting to $1 billion a year by 2028.

Speaker #2: We're very comfortable that we can hit our mid-single-digit number. Pipelines continue to be strong. The pipelines, in spite of the pull-through, are up 5% on a linked-quarter basis and 20% year-over-year.

Speaker #5: Hey, good morning.

Speaker #2: Good morning.

Speaker #5: Maybe just, Chris, following up on I think you mentioned power, utility, driving loan growth or contributing meaningfully. It sounds like there is sort of a second derivative of when we think about the whole AI capex and compute build-out.

Speaker #2: Now, the one piece of that—and I'm still comfortable with our guidance, by the way—the one piece of that we have to watch is the real estate piece. Because in transactional real estate, the cost of capital is such a significant part of those deals.

Speaker #5: Maybe talk to us around when your visibility into the amount of growth that's being driven AI-related, second, third derivative versus non, and where I'm trying to get to is and I'd love your perspective if we see a stalling in AI financing in the markets and things slow down, does it meaningfully then slow down when we think about just customer activity across the board for key and your peers?

Speaker #2: Every piece of transactional real estate right now is getting retraded. I personally think that we will get through this, because I think once people come to grips with the fact that we're in a higher-for-longer environment, people will transact.

Speaker #2: But that's the one wildcard. But I feel, as you know, I feel good about the business. We've been building it for a long time, and we've got a bunch of great clients.

Speaker #2: Well, that's a great question. There's a lot in that. Let me kind of let me unpack that a little bit. The first part of the question is secondary and tertiary derivatives of the AI build-out.

Speaker #1: Thank you, Scott. Our next question is from Ibrahim Punawala from Bank of America. Your line is now open. Please go ahead.

Speaker #2: I would contend that the investment cycle for these publicly-owned utilities is one that's literally decades long. And we've been deficient in the amount of power that we've had.

Speaker #5: Hey, good morning. Maybe just, Chris, following up on—I think you mentioned power, utility, driving loan growth or contributing meaningfully. It sounds like that is sort of a second derivative when we think about the whole AI CapEx and compute build-out.

Speaker #2: So I don't think that stops. Is part of it driven on the margin driven by AI? Yes. I mean, it's obviously those are big consumers of power.

Speaker #2: With respect to our book of business, is it relates to data centers specifically? We have less than a billion dollars of exposure, and that exposure is directly to the hyperscalers as opposed to directly to people just building out the data centers.

Speaker #5: Maybe talk to us around when your visibility into the amount of growth that's being driven by AI-related, second, third derivative versus non. And where I'm trying to get to is—and I'd love your perspective—if we see a stalling in AI financing in the markets and things slow down, does it meaningfully then slow down when we think about just customer activity across the board for Key and your peers?

Speaker #2: I do think there are long tentacles to the build-out. And I think if you think about, for example, trying to buy a diesel generator, right now there's a waiting you'll have to wait 24 or 36 months in order to get one.

Speaker #2: So I do think the tentacles of the build-out are fairly long. It's hard for me to calculate for you exactly what the primary, secondary, and tertiary factors are there.

Speaker #2: That's a great question. There's a lot in that, so let me unpack that a little bit. The first part of the question is secondary and tertiary derivatives of the AI build-out.

Speaker #2: But I do think I think the tentacles are long.

Speaker #2: I would contend that the investment cycle for these publicly owned utilities is one that's literally decades long, and we've been deficient in the amount of power that we've had.

Speaker #3: Chris, I think that's well said. And maybe a couple other points from a risk management perspective. One, we do have internal sector limits. So utilities would, of course, fall into that.

Speaker #3: These relationships typically span over three decades. So again, we've been very careful with clients that are tried and true. We're not really focused on merchant power generation.

Speaker #2: So, I don't think that stops. Is part of it driven on the margin, driven by AI? Yes. I mean, obviously, those are big consumers of power.

Speaker #3: So again, we're looking for contracted power and again, to Chris's point, really there's a need for electrons, regardless of the AI build-out. Things like our largest sponsors are less than 7% of our portfolio.

Speaker #2: With respect to our book of business as it relates to data centers specifically, we have less than $1 billion of exposure. That exposure is directly to the hyperscalers as opposed to directly to people just building out the data centers.

Speaker #3: Again, take or pay contracts and the like. So again, we feel good about the exposure. And again, just a reminder that there are internal limits.

Speaker #2: I do think there are long tentacles to the build-out. And I think if you think about, for example, trying to buy a diesel generator, right now there's a wait—you have to wait 24 or 36 months in order to get one.

Speaker #3: On the AI front too, we did do a bit of a exercise relative to what sectors could be what I call adjacent. So we did kind of carve out what could be higher impact, what could be kind of neutral, and then what are some areas to watch.

Speaker #2: So, I do think the tentacles of the build-out are fairly long. It's hard for me to calculate for you exactly what the primary, secondary, and tertiary factors are there.

Speaker #3: And again, in terms of high-impact on what I call AI adjacency, outside of the data center point that Chris made, that number is very small, less than a billion dollars.

Speaker #2: But I do think the tentacles are long.

Speaker #3: So potential disruption there in business services. So we are looking at it from multiple angles. And we do feel comfortable with the exposure.

Speaker #3: Chris, I think that's well said. And maybe a couple other points from a risk management perspective. One, we do have internal sector limits, so utilities would, of course, fall into that.

Speaker #5: That's helpful. And maybe just a separate I know you talked about capital markets looking into with the fourth quarter, but just in terms of momentum and capital markets, if there are investments you've made that should help as we look into next year.

Speaker #3: These relationships typically span over three decades. So, again, we've been very careful with clients that are tried and true. We're not really focused on merchant power generation.

Speaker #3: So again, we're looking for contracted power, and again, to Chris's point, really there's a need for electrons regardless of the AI build-out. Things like our largest sponsors are less than 7% of our portfolio.

Speaker #5: And maybe, Chris, give us a mark-to-market on sponsor activity. I think you mentioned about 40% of the business is exposed to sponsors. Are higher rates more sort of geopolitic headlines is all that again serving as a wet blanket on activity there?

Speaker #3: Again, take-or-pay contracts and the like. So, again, we feel good about the exposure. And just as a reminder, there are internal limits.

Speaker #5: Thanks.

Speaker #2: Yeah. I do think I do think that mid-market, which, as as you correctly point out, sponsors are a big part of, has yet to normalize.

Speaker #2: I'll give you a statistic. Deals under a billion dollars this year are down 11%, whereas deals over a billion dollars are up 12%. However, as you well know, there's an inverse relationship between your cash-on-cash return and the holding period.

Speaker #3: And again, in terms of high impact on what I call AI-adjacency, outside of the data center point that Chris made, that number is very small—less than $1 billion.

Speaker #2: I think I'm optimistic that those deals will start to come out, and we're obviously when we talk about our pipeline, these are where we have a signed engagement letter and people are spending a lot of time on it.

Speaker #3: So, potential disruption there in business services. We are looking at it from multiple angles, and we do feel comfortable with the exposure.

Speaker #5: That's helpful. And maybe just separate—I know you talked about capital markets, looking into the fourth quarter—but just in terms of momentum and capital markets, if there are investments you've made that should help as we look into next year. And maybe, Chris, could you give us a mark-to-market on sponsor activity?

Speaker #2: So I do think and I think once obviously, when you have dislocations in the market like we had in the debt market over the last month, that obviously puts things on hold.

Speaker #2: But once people come to grips with we're in a hire-for-longer, pick-your-10-year 5%, 6%, I think people will transact there. So yes, it's still depressed.

Speaker #5: I think you mentioned about 40% of the business is exposed to sponsors. Are higher rates or more geopolitical headlines— is all that, again, serving as a wet blanket on activity there?

Speaker #2: Yes, it's in the backlog. And yes, I think it'll start to free up.

Speaker #5: Thanks.

Speaker #2: Yeah. I do think I do think that mid-market, which, as you correctly point out, sponsors are a big part of, has yet to normalize.

Speaker #3: And maybe just to respond to your question about investments, Ebrahim, just a reminder that we've added a fair amount of bankers over the last two years, most to fit the ground running pretty well.

Speaker #2: I'll give you a statistic. Deals under $1 billion this year are down 11%, whereas deals over $1 billion are up 12%. However, as you well know, there's an inverse relationship between your cash-on-cash return and the holding period.

Speaker #3: And then obviously, we close Clearwater here in the quarter. So we're continuing to build capability by market and industry.

Speaker #5: Thank you. Ebrahim? Our next question is from Mike Mayo from Wells Fargo. Your line is now open. Please go ahead.

Speaker #2: I think I'm optimistic that those deals will start to come out. And obviously, when we talk about our pipeline, these are where we have a signed engagement letter and people are spending a lot of time on it.

Speaker #6: Hi. Just more on the commercial loan growth. I'm trying to separate what's the industry tailwind from what's the drawdown, which a lot of banks are not seeing.

Speaker #2: So, I do think—and I think once, obviously, when you have dislocations in the market like we had in the debt market over the last month—that obviously puts things on hold.

Speaker #6: Those loan utilization improved. And kind of new business as a result of your hiring. So I see like kind of three different parts of that.

Speaker #2: But once people come to grips with the fact that we're in a higher-for-longer, pick-your-10-year—5%, 6%—I think people will transact there. So, yes, it's still depressed.

Speaker #6: And I know you hired a lot of commercial bankers and remind us how much you hired, what you're still hiring, and how much they contributed to the loan and deposit growth.

Speaker #2: Yes, it's in the backlog. And yes, I think it'll start to free up.

Speaker #6: Thank you.

Speaker #2: So there's a lot in that, Mike. Good morning. Let me start with the final part of the question. So last year, we increased our number of bankers on the ground by around 10%.

Speaker #4: And maybe just to respond to your question about investments, Ibrahim, just a reminder that we've added a fair amount of bankers over the last two years, most to hit the ground running pretty well.

Speaker #4: And then, obviously, we closed Clearwater here in the quarter. So we're continuing to build capability by market and industry.

Speaker #2: And we monitor very closely their ramp-up. We've always said that it takes 12 to 18 months for bankers to be successful. We were very pleased in that the cohort of middle-market bankers that we hired last year 90% of them brought in a piece of business.

Speaker #5: Thank you. Ibrahim? Our next question is from Mike Mayo from Wells Fargo. Your line is now open. Please go ahead.

Speaker #2: That doesn't mean they were profitable that they were profitable as a hire, but brought in a piece of business in the first quarter. So we're pleased with that trajectory.

Speaker #6: Hi. Just more on the commercial loan growth. I'm trying to separate what the industry tailwind from what the drawdown, which a lot of banks are not seeing, the loan utilization improve.

Speaker #2: And as you know, we've hired groups of people very successfully and integrated them. With respect to kind of bifurcating what is utilization and what is other loan growth, if you look at the end of period, 2 billion of our 3.3 billion in loan growth was utilization.

Speaker #6: And kind of new business as a result of your hiring. So I see kind of three different parts of that. And I know you hired a lot of commercial bankers, and remind us how many you hired, what you're still hiring, and how much they contributed to the loan and deposit growth.

Speaker #2: And I think that utilization plays out in a few areas. One is, as I said, I've said for some time, I expected people to start to go a little longer on inventory.

Speaker #6: Thank you.

Speaker #2: So there's a lot in that, Mike. Good morning. Let me start with the final part of the question. So last year, we increased our number of bankers on the ground by around 10%.

Speaker #2: And the environment that we're in, I think we're starting to see that. I think some of the utilization was actually people actually buying smaller businesses.

Speaker #2: And you can see strategic moves there. And also, we've talked about ever since the big, beautiful bill in July of 2025 that we expected people to be investing more in CapEx.

Speaker #2: And we've monitored very closely their ramp-up. We've always said that it takes 12 to 18 months for bankers to be successful. We were very pleased that, in the cohort of middle-market bankers that we hired last year, 90% of them brought in a piece of business.

Speaker #2: So those are some of the points. Now, as far as key being an outlier in terms of utilization, a portion of that, Mike, is our starting point.

Speaker #2: That doesn't mean they were profitable as a hire, but they brought in a piece of business in the first quarter. So we're pleased with that trajectory.

Speaker #2: 57% of our CNI loans are investment-grade. And as a consequence, a 31% utilization rate is probably below significantly below probably many of our peers.

Speaker #2: And as you know, we've hired groups of people very successfully and integrated them. With respect to kind of bifurcating what is utilization and what is other loan growth, if you look at the end of period, $2 billion of our $3.3 billion in loan growth was utilization.

Speaker #2: And the reason we're able to do that is because we can lend to investment-grade companies because we can do so much so many other things for them, payments, hedging, advice, etc.

Speaker #2: And I think that utilization plays out in a few areas. One is, as I said, I've said for some time, I expected people to start to go a little longer on inventory.

Speaker #2: So that's just a bit of a bit of the texture of kind of the puts and takes around utilization.

Speaker #6: And then just one follow-up. The newer question that comes up is exposure to data centers. Now, you have a choice to participate as much or as little as you want.

Speaker #2: And the environment that we're in, I think we're starting to see that. I think some of the utilization was actually people actually buying smaller businesses.

Speaker #2: And you can see strategic moves there. And also, we've talked about, ever since the big, beautiful bill in July of 2025, that we expected people to be investing more in CapEx.

Speaker #6: Is that an area that you're focused on, that you're worried about, that the growth area? Maybe is it just the early days of that whole process, or how do you kind of factor that in?

Speaker #6: With your experience in wholesale banking for several decades?

Speaker #2: So those are some of the points. Now, as far as Key being an outlier in terms of utilization, a portion of that, Mike, is our starting point.

Speaker #2: Sure. So it's not an area that we're focused on, Mike. As I mentioned, we have about a billion dollars of data center exposure. But that data center exposure is really to the hyperscalers.

Speaker #2: Fifty-seven percent of our C&I loans are investment grade, and as a consequence, a 31% utilization rate is probably significantly below many of our peers.

Speaker #2: It's not necessarily to the people building the data centers per se. My sense of it is having done this for a while, anytime you see growth at such a pace, I think it's time to be a little cautious.

Speaker #2: And the reason we're able to do that is because we can lend to investment-grade companies because we can do so much so many other things for them, payments, hedging, advice, etc.

Speaker #2: And so we're cautious in terms of lending directly into the data centers at this point.

Speaker #2: So that's just a bit of a bit of the texture of kind of the puts and takes around utilization.

Speaker #5: Thank you, Mike. Our next question is from Chris McGratty from KBW. Your line is now open. Please go ahead.

Speaker #6: And then just one follow-up. The newer question that comes up is exposure to data centers. Now, you have a choice to participate as much or as little as you want.

Speaker #7: Good morning. Thanks for the question. Clark on the capital ratios, the obviously, the moving rates, adjusted the ratios a bit this quarter. Could you just speak about appetite for buybacks?

Speaker #6: Is that an area that you're focused on, that you're worried about—that growth area? Maybe it's just the early days of that whole process, or how do you kind of factor that in?

Speaker #7: I hear you on the fourth quarter with the 1.3 billion. But as we contemplate fossil-free with rate uncertainty, and improving growth, how do we think about the toggle between the three over the medium term?

Speaker #6: With your experience in wholesale banking for several decades?

Speaker #2: Sure. So it's not an area that we're focused on, Mike. As I mentioned, we have about $1 billion of data center exposure. But that data center exposure is really to the hyperscalers.

Speaker #7: Thanks.

Speaker #3: Yeah. Thanks, Chris. So first of all, I'd say we feel very good about our current capital position and our ability to manage that. I think with market capital, which we've been talking about now for several years, it's really half the equation.

Speaker #2: It's not necessarily to the people building the data centers, per se. My sense of it, having done this for a while, is that anytime you see growth at such a pace, I think it's time to be a little cautious.

Speaker #3: And we haven't been including the benefit of the Basel III changes, which I think we all feel are highly probable to arrive early in '27 with implementation in '28.

Speaker #2: And so we're cautious in terms of lending directly into the data centers at this point.

Speaker #3: So as a reminder, when those come in on the risk-weighted asset reduction, we get roughly 100 basis points of additional benefit to the capital ratio.

Speaker #5: Thank you, Mike. Our next question is from Chris Magrati from KBW. Your line is now open. Please go ahead.

Speaker #3: And in that point, puts us squarely back into our range. So we'd expect not to be overly concerned about the current position. We've talked about being willing to be below that 9.5 to 10 range on a limited basis.

Speaker #7: Good morning. Thanks for the question. Clark, on the capital ratios, obviously the move-in rates adjusted the ratios a bit this quarter. Could you just speak about appetite for buybacks?

Speaker #7: I hear you on the fourth quarter with the $1.3 billion. But as we contemplate Basel III, with rate uncertainty and improving growth, how should we think about the toggle between the three over the medium term?

Speaker #3: And I wouldn't describe that as kind of spending in advance of that Basel III, but I think we'd be short-sighted not to include it given the timing and probability of that materializing.

Speaker #7: Thank you.

Speaker #3: So I think that's sort of the broad base. We did reiterate, as you noted, the fourth quarter buybacks to get to the 1.3 for the year.

Speaker #4: Yeah. Thanks, Chris. So first of all, I'd say we feel very good about our current capital position and our ability to manage that. I think with market capital, which we've been talking about now for several years, it's really half the equation.

Speaker #3: I think we'll have more conversation in January about how to think about the go-forward. But I would really consider buybacks as Chris went through the capital priority stack as managing sort of at the end of the discussion around capital ratios and capital return.

Speaker #4: And we haven't been including the benefit of the Basel III changes, which I think we all feel are highly probable to arrive early in '27 with implementation in '28.

Speaker #3: So I don't know that we'll give the same kind of clarity on expectations for buybacks going forward post '26. We are doing a few things.

Speaker #4: So as a reminder, when those come in on the risk-weighted asset reduction, we get roughly 100 basis points of additional benefit to the capital ratio.

Speaker #3: I think in the AFS to HTM realm that we'll insulate us a bit from further moves up. And happy to unpack that as well.

Speaker #4: And in that point, puts us squarely back into our range. So we'd expect not to be overly concerned about the current position. We've talked about being willing to be below that 9.5 to 10 range on a limited basis.

Speaker #3: But I think you can expect us we've been a low user of HTM historically for a variety of reasons. I think some of those are changing so you can see us you will see us move up the HTM percentage of our portfolio.

Speaker #4: And I wouldn't describe that as kind of spending in advance of that Basel III, but I think we'd be short-sighted not to include it, given the timing and probability of that materializing.

Speaker #3: But again, I think the capital priorities are pretty clear. And the buybacks to us are sort of the last decision we're making in that process.

Speaker #4: So I think that's sort of the broad base. We did reiterate, as you noted, the fourth quarter buybacks to get to $1.3 billion for the year.

Speaker #7: Okay. Great. And then on the operating leverage front, I hear you on the investments in AI and what you're doing there. Any notable expense projects over the medium term that would interrupt the momentum you have on the operating leverage?

Speaker #4: I think we'll have more conversation in January about how to think about the go-forward. But I would really consider buybacks, as Chris went through the capital priority stack, as managing sort of at the end of the discussion around capital ratios and capital return.

Speaker #7: Chris, I heard you talk about next year being another good year for PP&R and revenue growth. But anything on the expense horizon that we should be mindful of?

Speaker #4: So I don't know that we'll give the same kind of clarity on expectations for buybacks going forward post '26. We are doing a few things, I think, in the AFS to HTM realm that will insulate us a bit from further moves up and having to unpack that as well.

Speaker #2: No. We have we're going to continue to invest in people and in technology. Our technology budget's gone from 800 to 900 to a billion.

Speaker #2: But obviously, we're generating a lot of capital and there's nothing there's no huge expense out there, Chris, on the horizon. We're going to keep focusing on organic growth and keep continue to build the business brick by brick.

Speaker #4: But I think you can expect us we've been a low user of HTM historically for a variety of reasons. I think some of those are changing so you can see us you will see us move up the HTM percentage of our portfolio.

Speaker #3: Yeah. I do think the one reminder is just the full-year impact of Clearwater, which we talked a little bit about recently. That'll hit obviously for year over year.

Speaker #4: But again, I think the capital priorities are pretty clear, and the buybacks, to us, are sort of the last decision we're making in that process.

Speaker #3: So it will look a little bit higher than otherwise would be planned. But we don't see any reason why kind of post '27 we couldn't be managing to sort of 3% annual expense growth.

Speaker #5: Thank you, Chris. Our next question is from Erika Nigerian from UBS. Your line is now open. Please go ahead.

Speaker #7: Chris, I heard you talk about next year being another good year for PP&R and revenue growth. But is there anything on the expense horizon that we should be mindful of?

Speaker #8: Hi. Good morning.

Speaker #7: Good morning, Erika.

Speaker #8: Chris, just a struct morning. I was just struck by something you said in prepared remarks. You mentioned another outsized revenue growth year in '27.

Speaker #2: No. We're going to continue to invest in people and in technology. Our technology budget has gone from $800 million to $900 million to $1 billion.

Speaker #8: And fully appreciate you're in the middle of budget season. But if I just unpack the components, you're looking for 18 basis points of NIM expansion, four Q25 to four Q26.

Speaker #2: But obviously, we're generating a lot of capital, and there's nothing—there's no huge expense out there, Chris, on the horizon. We're going to keep focusing on organic growth and continue to build the business brick by brick.

Speaker #8: Your guidance implies 25 basis points of margin expansion, from four Q26 to four Q27. And so if I think about it and you're looking at 10% NII growth for '26, is that the right ballpark to think about 27?

Speaker #4: I do think the one reminder is just the full-year impact of Clearwater, which we talked a little bit about recently. That'll hit, obviously, for year-over-year.

Speaker #4: So it will look a little bit higher than otherwise would be planned. But we don't see any reason why, kind of post-'27, we couldn't be managing to sort of 3% annual expense growth.

Speaker #8: Or is there sort of an asset growth slowdown that we should consider?

Speaker #2: Well, a couple of things. One, you're kind to ask the question. But we'll obviously provide guidance for 2027 at the end of the year.

Speaker #5: Thank you, Chris. Our next question is from Erica Nigerian from UBS. Your line is now open; please go ahead.

Speaker #2: However, I think Clark mentioned something that I think is really important and that is of the increase in margin 70% of it is now mechanical based on the 24 billion dollars repricing in the last quarter of this year and next year.

Speaker #8: Hi. Good morning.

Speaker #7: Good morning.

Speaker #8: Chris, just to start—good morning. I was just struck by something you said in your prepared remarks. You mentioned another outsized revenue growth year in '27.

Speaker #2: And obviously, we've got a lot of momentum in our business. And we're going to continue we're going to continue to grow the business. And so we'll have more to say on specific targets after the fourth quarter.

Speaker #8: And I fully appreciate you’re in the middle of budget season. But if I just unpack the components, you’re looking for 18 basis points of NIM expansion, from Q4 '25 to Q4 '26.

Speaker #3: But I think, Erika, you're picking up on something we've been talking about in the industry has been talking about, which is the trade-off between good quality loan growth and NIM.

Speaker #8: Your guidance implies 25 basis points of margin expansion, from Q4 '26 to Q4 '27. And so if I think about it, and you're looking at 10% NII growth for '26, is that the right ballpark to think about for '27?

Speaker #3: And obviously, we've made as others have some trade-offs to go into what we believe will be very accretive long-term client relationships. At the expense of NIM, but not at the expense of returns, EPS, or NII.

Speaker #8: Or is there sort of an asset growth slowdown that we should consider?

Speaker #3: I think your comment about asset growth slowdown is probably the right place to be focused. And that trade-off is something that likely continues to present itself.

Speaker #2: A couple of things. One, you're kind to ask the question, but we'll obviously provide guidance for 2027 at the end of the year. However, I think Clark mentioned something that I think is really important.

Speaker #3: But with the visibility we have now, we think we can manage that combination.

Speaker #8: So just to follow up on that, obviously, deposit growth has been impressive. And there's a seasonal aspect. As we think about slowing earning asset growth, how should we think about year over year deposit growth progression?

Speaker #2: And that is, of the increase in margin, 70% of it is now mechanical based on the 24 billion dollars repricing in the last quarter of this year and next year.

Speaker #8: In other words, you hired a bunch of bankers. You clearly made the investments. And so how should we think about the progress year over year on deposit growth sort of eliminating for seasonality?

Speaker #4: But I think, Erica, you're picking up on something we've been talking about, and the industry has been talking about, which is the trade-off between good quality loan growth and NIM.

Speaker #3: Yeah. I think the way to consider that is when you make a loan to a client, we have a theory here that we've espoused for the last decade or so, which we refer to as kind of payments attachment, which means when you make a loan, the expectation to the bankers, you're going to get the deposit and you're going to get the payments with it.

Speaker #4: And obviously, we've made, as others have, some trade-offs to go into what we believe will be very accretive long-term client relationships—at the expense of NIM, but not at the expense of returns, EPS, or NII.

Speaker #4: I think your comment about asset growth slowdown is probably the right place to be focused, and that trade-off is something that will likely continue to present itself.

Speaker #3: I think we do a very good job with that. But it doesn't necessarily happen on day one. It takes a little bit of time to move accounts.

Speaker #3: And to get things changed. So some of the third quarter growth you would have seen would have been off new clients in the first half.

Speaker #4: But with the visibility we have now, we think we can manage that combination.

Speaker #8: So, just to follow up on that, obviously deposit growth has been impressive, and there's a seasonal aspect. As we think about slowing earning asset growth, how should we think about year-over-year deposit growth progression?

Speaker #3: And it's hard to predict exactly how long that time frame takes. But even if we had a little bit of new loan slowdown in '27, I think you'd still see some pull-through from the '26 production in terms of commercial deposits.

Speaker #5: Thank you, Erika. Our next question is from John Pancari from Evercore IFI, your line is now open. Please go ahead.

Speaker #7: Good morning.

Speaker #3: Good morning, John.

Speaker #4: Yeah. I think the way to consider that is when you make a loan to a client, we have a theory here that we've espoused for the last decade or so, which we've referred to as kind of payments attachment, which means when you make a loan, the expectation to the bankers, you're going to get the deposit and you're going to get the payments with it.

Speaker #7: Just to add back to the loan demand side, I mean, you saw the pretty good step up in utilization in the quarter, but you also cited the expected moderation in loan growth in the fourth quarter.

Speaker #7: Can you just elaborate a little bit more on what areas that you expect that moderation? And then also, are you beginning to see any erosion around loan demand at all amid the rise in rates?

Speaker #4: I think we do a very good job with that, but it doesn't necessarily happen on day one. It takes a little bit of time to move accounts.

Speaker #7: And is that what's influencing your expectation on that front in any way? Thanks.

Speaker #4: And to get things changed. So some of the third-quarter growth you would have seen would have been off new clients in the first half.

Speaker #2: I would say we're not seeing an erosion in loan demand with the notable exception, John, that I made earlier. And that's on transactional real estate.

Speaker #4: And it's hard to predict exactly how long that timeframe takes. But even if we had a little bit of new loan slowdown in '27, I think you'd still see some pull-through from the '26 production in terms of commercial deposits.

Speaker #2: I think some of those deals are clearly slowing down. No, we're seeing look, there's significant loan demand out there. And we're out talking to our clients.

Speaker #5: Thank you, Erica. Our next question is from John Pencari with Evercore ISI. Your line is now open. Please go ahead.

Speaker #2: Loan demand is never it's never it doesn't grow evenly quarter to quarter. But we feel good that there's a lot of demand out there.

Speaker #7: Good morning.

Speaker #2: And keep in mind, we're doing this at a time when we're distributing about 70 or 82 percent of the capital that we're raising. So there's a fair amount of activity out there.

Speaker #4: Good morning, John.

Speaker #7: Just to add back to the loan demand side, I mean, you saw a pretty good step-up in utilization in the quarter, but you also cited the expected moderation in loan growth in the fourth quarter.

Speaker #2: And we're being selective, but we've got a lot of opportunity.

Speaker #3: And John, we guided just to remind you of earning asset growth in the fourth quarter of about one and a half to two billion.

Speaker #7: Can you just elaborate a little bit more on what areas you expect to see moderation? And then also, are you beginning to see any erosion around loan demand at all amid the rise in rates?

Speaker #3: Just relative to where we were in the third quarter, that's a little bit of a step down. And some of that, I think, to Chris's point, we'll get placed in the market.

Speaker #7: And is that what's influencing your expectation on that front in any way? Thanks.

Speaker #7: Got it. Right. Okay. No, that helps. Thank you. And then on the deposit side, I know growth came in better than your expectation, your confident ability to fund upcoming loan growth with deposits.

Speaker #2: I would say we're not seeing an erosion in loan demand with the notable exception, John, that I made earlier. And that's on transactional real estate.

Speaker #2: I think some of those deals are clearly slowing down. No, we're seeing—look, there's significant loan demand out there, and we're out talking to our clients.

Speaker #7: How should we think about the mix and the non-disparing component of that? And on the beta front, I know you're looking for the mid-50s.

Speaker #7: Over time, how does that play out in the near term in terms of deposit cost progression as we look at the next few quarters from here?

Speaker #2: Loan demand is never—it doesn't grow evenly quarter to quarter. But we feel good that there's a lot of demand out there.

Speaker #7: I know you're up about three bits in the third quarter. Thanks.

Speaker #3: Sure. I think look, deposit competition or composition, sorry, on the commercial side, I think it's going to look more interest-bearing than non-interest-bearing from a reported standpoint, just given our use of hybrids.

Speaker #2: And keep in mind, we're doing this at a time when we're distributing about 70 or 82% of the capital that we're raising. So there's a fair amount of activity out there.

Speaker #2: We're being selective, but we have a lot of opportunity.

Speaker #3: And we continue to use that as a vehicle to sort of capture a full client relationship. But I think we'll see primary growth in operating accounts, which is allowing us to manage the overall expense.

Speaker #4: And John, we guided, just to remind you, to earning asset growth in the fourth quarter of about $1.5 to $2 billion.

Speaker #4: Just relative to where we were in the third quarter, that's a little bit of a step down. And some of that, I think, to Chris's point, will get placed in the market.

Speaker #3: So I think that commercial loan growth will come on kind of consistent with the portfolio rate we see today. Obviously, subject to indexed changes from rate hikes.

Speaker #7: Got it. Right. Okay. No, that helps. Thank you. And then on the deposit side, I know growth came in better than your expectation, and you're confident in your ability to fund upcoming loan growth with deposits.

Speaker #3: So we feel like it'll be a representative sample there broadly. On the consumer side, we have started to pick some places to raise some rates and do some targeted deposit raising, which we've had some early success on.

Speaker #7: How should we think about the mix and the non-interest-bearing component of that? And on the beta front, I know you're looking for the mid-50s.

Speaker #7: Over time, how does that play out in the near term in terms of deposit cost progression as we look at the next few quarters from here?

Speaker #3: And we're doing that to raise some balances, but not more broadly raise the overall consumer deposit rate. So we feel pretty good about our early returns there.

Speaker #7: I know you're up about three bps in the third quarter. Thanks.

Speaker #3: And based on how that materializes, I think we'll have the opportunity to do a little more of that. But we also still really aren't at the full offer to some of the competition.

Speaker #4: Sure. I think, look, deposit competition or composition, sorry, on the commercial side, I think it's going to look more

Speaker #9: Interest-bearing is reported as higher than non-interest-bearing from a reported standpoint, just given our use of hybrids. And we continue to use that as a vehicle to sort of capture a full client relationship.

Speaker #3: But we have picked up our MMDA promo and CD rates in certain markets in targeted ways in the last quarter. And again, we've seen some positive response to that.

Speaker #9: But I think we'll see primary growth in operating accounts, which is allowing us to manage the overall expense. So I think that commercial loan growth will come in kind of consistent with the portfolio rate we see today, obviously subject to index changes from rate hikes.

Speaker #3: So I think it's not going to be all commercial, but we'll start to see a little bit of consumer growth come on that we think will be valuable.

Speaker #3: And that commercial growth, we think, will be kind of representative of what it looks like today on a portfolio basis.

Speaker #5: Thank you, John. Our next question is from David Chiaverini from Jefferies, your line is now open. Please go ahead.

Speaker #9: So we feel like it'll be a representative sample there, broadly. On the consumer side, we have started to pick some places to raise some rates and, you know, do some targeted deposit raising, which we've had some early success on. We're doing that to raise some balances, but not more broadly raise the overall consumer deposit rate.

Speaker #8: Hi. Thanks for taking the questions. You mentioned about being neutral to interest rates. And the forward curve, does the path to 325 you mentioned about 70 to 75 percent of it is mechanical.

Speaker #9: So, we feel pretty good about our early returns there, and based on how that materializes, I think we'll have the opportunity to do a little more of that. But we also still really aren't at, you know, the full offer to some of the competition. We have picked up our MMDA promo and CD rates in certain markets, in targeted ways, in the last quarter.

Speaker #8: Does that mean with being rate kind of neutral, does that mean loan growth is the main swing factor? Can you unpack that a bit?

Speaker #3: Sure. I think it's really loan growth and deposit growth and the cost of the deposit growth. So I failed to fully answer the last question.

Speaker #3: I do think we'll see kind of low 40s beta here in the fourth quarter. And that'll over the next probably first or second quarter of '27 would start to move up to mid-50s.

Speaker #9: And again, we've seen some, some positive response to that. So I think it's not gonna be all commercial, but we'll start to see a little bit of consumer growth come on that we think will be valuable, and that commercial growth we think will be kind of representative of what it looks like today on a portfolio basis.

Speaker #3: Obviously, it depends on if there are or not additional rate hikes in the year. But we'd expect over sort of two to three quarters to get to that 50 to mid-50s number.

Speaker #10: Thank you, John. Our next question is from David Chaverini from Jefferies. Your line is now open. Please go ahead.

Speaker #3: If that were to be more loan growth or less deposit growth or more expensive deposit growth, I think that is the combination of things that we're watching really closely.

Speaker #11: Hi, thanks for taking the questions. You mentioned about being neutral to interest rates and the forward curve. Does the path to 3.25, you mentioned about, you know, 70 to 75% of it is mechanical.

Speaker #3: But the visibility we have now makes us feel like we can fund that loan growth with deposits. We can potentially pay down some wholesale funding with deposits.

Speaker #3: And we can effectively manage the cost of those deposits within the scope of where rates are. And there's that natural trade-off, as I mentioned, between higher rates on the front end, delivering better reinvestment rates in the counter if rates go down.

Speaker #11: Does that mean with being rate kind of neutral. Does that mean loan growth is the main swing factor? Can you unpack that a bit?

Speaker #9: Sure, I think it's really loan growth and deposit growth, and the cost of the deposit growth. So I failed to fully answer the last question.

Speaker #3: So we think there's a little bit of a natural hedge in that neutrality.

Speaker #8: Thanks. Very helpful. And my follow-up, in your prepared remarks, you mentioned about with the AI use cases, you mentioned four pillars. I was interested in the comment about commercial originations as being part of that AI use case.

Speaker #9: I do think we'll see kind of low 40s beta here in the, you know, fourth quarter. And that all, over the next, you know, probably first or second quarter of '27, would start to move up.

Speaker #9: To mid-50s—obviously, it depends on if there are or are not additional rate hikes in the year—but we'd expect, over sort of two to three quarters, to get to that 50 to mid-50s beta.

Speaker #8: Normally, when I think of commercial banks, it's relationship banking and somewhat insulated from AI. Can you walk through how you're using AI for commercial originations?

Speaker #9: If that were to be, you know, more loan growth or less deposit growth, or more expensive deposit growth, I think that is the combination of things that we're watching really closely.

Speaker #3: Yeah. If you think about if you think about particularly complex commercial relationships, they tend to be there's a lot of decision-making interaction and work that goes into that process.

Speaker #9: But you know, the visibility we have now makes us feel like we can fund that loan growth with deposits. We can potentially pay down some wholesale funding with deposits, and we can effectively manage the cost of those deposits within the scope of where rates are.

Speaker #3: And we just think there's opportunities to streamline that to make them more informed to improve the borrower experience. And the banker experience in something that historically been has been maybe a little bit more analog in nature because they tend to be to your point, person-to-person relationships.

Speaker #9: And there's that natural trade-off, as I mentioned, between higher rates on the front end delivering better reinvestment rates in the counter, if rates go down.

Speaker #9: So we think there's a little bit of a natural hedge in that neutrality.

Speaker #3: We just think we can build a chassis underneath that that is AI-enabled and streamlined. And then that is not at the expense of the relationship.

Speaker #11: Thanks, very helpful. And my follow-up, in your prepared remarks, you mentioned about with the AI use cases, you mentioned, you know, 4 pillars. I was interested in the comment about commercial originations as being part of that AI use case.

Speaker #3: It is to augment the relationship. So I think it's to reduce paper and a lot of back and forth and make that process more streamlined.

Speaker #7: So David, for example, you asked about you asked about commercial loans. But if you think about commercial onboarding and servicing, we completely re-engineered that process over the last three years, which now opens it up to use AI.

Speaker #11: Normally when I think of commercial banks, you know, it's relationship banking and somewhat insulated. from AI. Can you walk through how you're using AI for commercial originations?

Speaker #7: And our goal there is to have twice the throughput and half the time and frankly, have it be a better client experience and a better experience for our employees.

Speaker #11: Yeah, if you think about

Speaker #9: particularly complex commercial relationships, they tend to be, you know, there's a lot of decision-making interaction. and work that goes into that process. And we just think there's opportunities to streamline that, to make them more informed, to improve the borrower experience.

Speaker #7: That's kind of how we think about it. And these four domains that we're talking about are enterprise-wide. So it involves re-engineering the whole process.

Speaker #7: And then using AI as an enabler.

Speaker #9: And the banker experience is something that, historically, has been maybe a little bit more analog in nature because they tend to be, to your point, person-to-person relationships.

Speaker #5: Thank you, David. Our next question is from Gerard Cassidy from RBC. Your line is now open. Please go ahead.

Speaker #9: We just think we can build a chassis underneath that that is AI-enabled and streamlined. That is not at the expense of the relationship; it is to augment the relationship.

Speaker #6: Hi, Chris. Hi, Clark.

Speaker #7: Hey, Gerard.

Speaker #6: Chris, coming back to the investment banking comments about sponsor activity, and we all recognize that the uncertainty in the economy, the geopolitical risk, the political risk in this country is a constant.

Speaker #9: So I think it's to, you know, reduce paper and a lot of back and forth and make that process more streamlined. So David, for example, you asked about commercial loans, but if you think about commercial onboarding and servicing, we completely re-engineered that process over the last 3 years.

Speaker #6: We hear about them for years. So putting them aside for a moment, what has to happen to get that activity in the middle market M&A to really pick up?

Speaker #9: Which now opens it up to use AI. Our goal there is to have twice the throughput in half the time, and frankly, to provide a better client experience and a better experience for our bankers.

Speaker #6: Or is it the companies themselves that are in these portfolios are just not worth what the sponsors think they're worth? And it may never come back?

Speaker #9: For our employees. That's, that's kind of how we think about it. And these, these 4 domains that we're talking about are enterprise-wide, so it involves re-engineering the whole process and then using AI as an enabler.

Speaker #7: Well, I think part of it is I'm sure there's some element of sort of bid ask. What is the value? What's the exit strategy?

Speaker #7: What's the timing? I also think I personally think one of the big constraints has been the not only the volatility and interest rates, but the volatility in the forwards of interest rates.

Speaker #9: Thank you, David.

Speaker #10: Our next question is from Gerard Cassady from RBC. Your line is now open, please go ahead. Chris and Clark. Hey, Greg. Chris, coming back to the investment banking comments about sponsor activity,

Speaker #7: If, for example, you thought interest rates were if you thought they were going to be five cuts, and in fact, there were no cuts, and there were there was an increase, I think that kind of puts people on the sideline.

Speaker #9: And we all recognize that the uncertainty in the economy, and the geopolitical risks, the political risks in this country—those are constants. We hear about them.

Speaker #7: I think once people have a clear view of where rates are or where they think they're going to be over a period of time, Gerard, I think that frees it up.

Speaker #7: Another thing that has changed a bit, though, are these continuation funds. And so some of the some of the algorithms as to years holding period, I think some of those have changed with some of the continuation funds having said that there is a very significant backlog out there that at some point is going to have to clear.

Speaker #10: for years. So, putting them aside for a moment,

Speaker #9: What do you—what has to happen to get that activity in the middle market M&A to really pick up? Or is it the companies themselves that are in these portfolios?

Speaker #10: are just not worth what the sponsors think they're worth, and they may never come back?

Speaker #6: Very good. And I might regret asking this question. I asked it on one of your competitors' calls. But can you guys give us some insights on credit quality?

Speaker #9: Well, I think part of it is, I'm sure there's some element of sort of bid-ask—what is the value, what's the exit strategy, what's the timing?

Speaker #9: I also think, I personally think one of the big constraints has been not only the volatility in interest rates, but the volatility in the forwards of interest rates.

Speaker #6: Has there been a structural change in the way the industry and key corps in particular is underwriting credit today? Because credit is so resilient.

Speaker #6: And you guys had obviously some meaningful improvement this quarter. But across the board, the banking industry's credit is very strong now. We're certainly not naive enough to suggest that in a down economic cycle, credit's not going to get worse.

Speaker #9: If, for example, you thought interest rates were—if you thought there were going to be five cuts and, in fact, there were no cuts and there was, you know, an increase—I think that kind of puts people on the sideline.

Speaker #9: I think once people have a clear view of where rates are, or where they think rates are, or where rates are, or where they think they're going to be over a period of time, Gerard, I think that frees it up.

Speaker #6: We know that. But it just seems that things are really quite good. And as the industry has been more conservative or the financial crisis driving the regulators to de-risk the industry, what are your guys' thoughts on that?

Speaker #9: Another thing that has changed a bit, though, are these continuation funds. You know, some of the algorithms as to years holding period—I think some of those have changed with some of the continuation funds.

Speaker #7: So I'll give you some perspectives on what I think drives it industry-wide and then some things that I think are idiosyncratic to us. I think in the global financial crisis, there were a lot of lessons learned.

Speaker #9: Having said that, there is a very significant backlog out there. That at some point is going to have to clear. Very good. And I might regret asking this question.

Speaker #7: And so I think if you think about here at Key, where we built the underwrite-to-distribute model, including in real estate, that was a big fundamental change for our risk profile.

Speaker #9: I asked it on one of your competitors' calls.

Speaker #11: But can you guys give us some insights on credit quality? Has there been a structural change in the way the industry, and KeyCorp in particular—

Speaker #7: So that's the lessons learned in the global financial crisis. I think the advent of the private credit market, where in the private credit market, really dominated the small leverage deals, for some time, that's what a $3 trillion market, I think that would have been in the banking system.

Speaker #9: is underwriting credit today? Because credit is so resilient and you guys had obviously some meaningful improvement this quarter, but across the board, the banking industry's credit was very strong.

Speaker #9: Now, we're certainly not naive enough to suggest that in a down economic cycle, credit's not going to get worse—we know that. But it just seems that things are really quite good.

Speaker #7: And it's not in the banking system. So I think those are two kind of fundamental things Gerard. The other thing I would say is it's idiosyncratic to Key is on our consumer side.

Speaker #9: And has the industry been more conservative or the financial crisis driving the regulators to de-risk the industry? What are your guys' thoughts on that?

Speaker #7: As you know, we don't have a big card portfolio. And we have a super prime portfolio at funding our average FICO score is 766.

Speaker #7: And currently, it's 787. So on the consumer side, we have a super prime book. And then lastly, which I think is a huge advantage that is idiosyncratic to Key, is this notion of going to market by industry groups.

Speaker #9: So I'll give you some perspectives on what I think drives it industry-wide, and then some things that I think are idiosyncratic to us. I think in the global financial crisis, there were a lot of lessons learned.

Speaker #7: I think is really, really helpful because I think it enables you to decipher and discern among the people in the industry. So I think you put all that together, I think those are the things that have changed.

Speaker #9: And so I think if you think about, you know, here at KEY where we built the underwrite-to-distribute model, including in real estate, that was a, big fundamental change for our risk profile.

Speaker #3: And I might add one just data point, Gerard. If you go back to when I joined Key in 2012, I think our leverage book was about $2 billion.

Speaker #9: So, that's the lessons learned in the global financial crisis. I think the advent of the pandemic private credit market, where the private credit market really dominated the small leveraged deals for some time.

Speaker #3: I think today it's $2 billion. We're obviously a much larger bank. So that's not where I think the banks broadly have seen the growth.

Speaker #9: That's what, a $3 trillion market? I think that would've been in the banking system and it's not in the banking system. So I think those are 2 kind of fundamental things, Gerard.

Speaker #3: That growth is happening. It's just not happening, I think, in some of the traditional banking spaces.

Speaker #2: Hey, Gerard. Great question. I think the only thing about the other thing I would add is I think, again, from a supervisory perspective, the financial risks continue to be a major focus for them.

Speaker #9: The other thing I would say that's idiosyncratic to KEY is on our consumer side. As you know, we don't have a big card portfolio, and we have a super prime portfolio at funding.

Speaker #2: So again, tying our stress testing to our underwriting, to our portfolio limits, and having that all be one ecosystem we just continue to add that sophistication.

Speaker #9: Our average FICO score is 766, and currently it's 787. So, on the consumer side, we have a super prime book. And then lastly, which I think is a huge advantage that is idiosyncratic to Key, is this notion of going to market by industry groups. I think it's really, really helpful, because I think it enables you to decipher and discern...

Speaker #2: As well as, again, connecting the dots with data, across the enterprise as well. So we just continue to be expected to chin the bar.

Speaker #2: And we're chinning we're also just continuing to uplift these programs.

Speaker #1: Thank you, Gerard. Our next question is from Matthew O'Connor from Deutsche Bank, your line is now open. Please go ahead.

Speaker #12: among the people in the industry. So I think you put all that together, I think those are the things that have changed. And I might add one,

Speaker #7: Good morning. You guys are obviously focused on growing the commercial side of the loan book. And the results have been really good. Just remind us from the consumer side, you've been running down there.

Speaker #9: Just a data point, Gerard. If you go back to when I joined KEY in 2012, I think our leveraged book was about $2 billion. I think today it's $2 billion.

Speaker #9: We're obviously a much larger bank. So that's not where, I think the banks broadly have seen the growth. That growth is happening, it's just not happening, I think, in some of the traditional banking spaces.

Speaker #7: And where do those balances kind of level out? And are there any areas that you're kind of leaning into or would like to be better at over time on the consumer lending side?

Speaker #7: Thank you. Sure, Matt. So by design, we have been running down our consumer book. We would have said two quarters ago that the quarterly runoff would have been about $600 million, given where rates have gone, the current runoff is about $400 million.

Speaker #12: Hey Gerard, great question. I think the only— this is Beau— the only other thing I would add is I think again from a supervisory perspective, the financial risks continue to be a major focus for them.

Speaker #13: So again, you know, tying our stress testing to our underwriting, to our portfolio limits, and having that all be one ecosystem—we just continue to add that sophistication.

Speaker #7: And what we're doing is we're basically redeploying out of mortgages that are very, very safe mortgages, because they're made to they're jumbo mortgages to first mortgages to doctors and dentists.

Speaker #13: As well as again connecting the dots with data across the enterprise as well. So we just continue to be expected to chin the bar and we're also just continuing to uplift these programs.

Speaker #7: But we're redeploying that in our CNI portfolio where we have a really good track record of having a complete relationship and driving a bunch of revenue.

Speaker #7: We're going to continue to do that. The one area that we've tasked our consumer folks with doing is given some of the metrics I just gave about our consumer customer, many of our customers have significant equity in their homes.

Speaker #10: Thank you, Gerard. Our next question is from Matthew O'Connor with Deutsche Bank. Your line is now open. Please go ahead.

Speaker #11: Good morning. You guys are obviously focused on growing the commercial side of the loan book, and the results here have been really good. Just remind us, on the consumer side, you've been running that down. Where do those balances kind of level out?

Speaker #7: And what we're doing is we're building a digital interface that's as good as for home mortgage I'm sorry, for home equity that's as good as our home equity our home mortgage app.

Speaker #11: And are there any areas that you're kind of leaning into, or would like to be better at over time, on the consumer lending side?

Speaker #7: And so that'll be an area that you'll see grow in 2027. Okay. That's helpful. And then just one cleanup question on the fees. The corporate services income was down QQ and flat year over year.

Speaker #11: Thank you.

Speaker #12: Sure, Matt. So, by design, we have been running down our consumer book. We would have said two quarters ago that the quarterly runoff would have been about $600 million.

Speaker #12: Given where rates have gone, the current runoff is about $400 million. And what we're doing is we're basically redeploying out of mortgages that are very, very safe mortgages because they're made to— they're jumbo mortgages, first mortgages to doctors and dentists.

Speaker #7: Just a remind us kind of what well, one, what drove that? And then the interplay of that and, say, loan growth, as loans grow, is there a contra there?

Speaker #7: Or what that relationship is, if there is one? Thank you.

Speaker #12: But we're redeploying that in our C&I portfolio where we have a really good track record of having a complete relationship and driving a bunch of revenue.

Speaker #3: Yeah. Thanks, Matt. Generally, you would see corporate services increase with loan growth. So what's in there would be foreign exchange fees, derivatives, fees, and some loan fee categories.

Speaker #12: We're going to continue to do that. The one area that we've tasked our consumer folks with doing is, given some of the metrics I just gave about our consumer customer, many of our customers have significant equity in their homes.

Speaker #3: In the quarter, we saw derivatives or client hedging fees come down. And I think that's really just reflective of the rate volatility. So we might see that come back, I think, fourth quarter.

Speaker #3: We'd expect it to be pretty flat to fourth quarter of '25. But we did see a dip there in direct client activity off lending.

Speaker #12: And what we're doing is we're building a digital interface that's as good as for a home mortgage. I'm sorry, for home equity that's as good as our home equity, our home mortgage app.

Speaker #3: And again, just driven by sort of an unwillingness of clients to lock in rates with the current volatility. And I would say that's sort of the flip side of our spot and forward starting swaps are coming on at pretty attractive rates.

Speaker #12: And so that'll be an area that you'll see grow in 2027.

Speaker #11: Okay, that's helpful. And then just one cleanup question on the fees. The corporate services income was down in Q2 and flat year over year.

Speaker #3: And clients aren't wanting to take the other side of that in some cases.

Speaker #7: Yeah. And the other piece of it, of course, we do a lot of hedging around oil and gas. And as you can imagine, there's not a huge a lot of activity in terms of people hedging oil and gas right now.

Speaker #11: Just remind us kind of what— well, one, what drove that, and then the interplay of that and say loan growth. Like as loans grow, is there like a contra there or what that relationship is, if there is one?

Speaker #1: Thank you much. Our next question is from Ken Usdin from Autonomous Research. Your line is now open. Please go ahead.

Speaker #11: Thank you.

Speaker #9: Yeah, thanks, Matt. Generally, you would see corporate services increase with loan growth. So, what's in there would be foreign exchange fees, derivatives fees, and some loan fee categories.

Speaker #5: Thanks. Hey, good morning, guys. Clark, just wanted to ask you you talked about being slightly liability sensitive to the front end of the curve.

Speaker #9: In the quarter, we saw derivatives or client hedging fees come down, and I think that's really just reflective of the rate volatility. So, we might see that come back.

Speaker #5: And I wonder if you can kind of talk us through that and the incremental swap adds you've made? Does that get you to the point where you want to be in terms of balance?

Speaker #9: I think in the fourth quarter, we'd expect it to be pretty flat compared to the fourth quarter of '25, but we did see a dip there in direct client activity off lending.

Speaker #5: And how does that affect the future rate sensitivity when you consider all of that you've added this quarter and the forwards that are still coming on?

Speaker #9: And again, just driven by sort of an unwillingness of clients to lock in rates with the current volatility. And I would say that's sort of the flip side of, you know, our spot and forward starting swaps are coming on at pretty attractive rates and clients aren't wanting to take the other side of that.

Speaker #5: Thanks.

Speaker #3: Sure. Yeah. So the short-end rate sensitivity or liability sensitivity, if you really, when we talk about that, is if you think we're getting to the kind of mid-50s terminal betas that we talked about, the break-even is kind of low to mid-40.

Speaker #3: So we're going to be a little bit liability sensitive on the front end of that deposit beta. But again, as we noted, assuming no material change in the shape of the curve, we would assume we'd get some of that back on the reinvestment rate.

Speaker #12: Yeah, and the other piece of it, of course, we do a lot of hedging around oil and gas. And as you can imagine, there's not a huge, uh, a lot of activity in terms of people hedging oil and gas right now.

Speaker #3: I think we feel, again, quite good about the neutral position we're in. I think the steeper the curve is, the better that is for us.

Speaker #10: Thank you, Matt. Our next question is from Ken Austin from Autonomous Research. Your line is now open. Please go ahead.

Speaker #3: The flatter it is, obviously, is the inverse. And we've effectively been replacing swaps at this point as they roll off. And as we noted, replacing them at much higher levels right now.

Speaker #11: Thanks. Hey, good morning, guys. Clark, just, just wanted to ask you, you talked about being slightly liability sensitive to the front end of the curve, and I wonder if you can kind of talk us through that and the

Speaker #12: Incremental swap adds you've made, does that get you to the point where you want to be in terms of balance? And how does that affect the future rate sensitivity?

Speaker #3: And we've done a little bit of maintenance sort of out into '28 and '29 where we saw some portfolio gaps on the swap side.

Speaker #12: Um, when you consider all of that you added this quarter and the few— and the forwards that are still coming on? Thanks.

Speaker #3: But generally speaking, I think we're pretty much in maintenance mode and feel good about maintaining that neutrality.

Speaker #9: Sure. Yeah. So the short-end rate sensitivity or liability sensitivity, if you really— when we talk about that is if you think we're getting to the kind of mid-50s terminal betas that we talked about, the breakeven is kind of you know, low to mid-40s.

Speaker #1: Thank you, Ken. That concludes our Q&A session. I would now like to pass the conference call over to CEO Chris Gorman for any closing remarks.

Speaker #9: So we're gonna be a little bit liability sensitive on the front end of that deposit beta. But again, as we noted, you know, assuming no material change in the shape of the curve, we would assume we'd get some of that back on the reinvestment rate.

Speaker #7: Thank you. We appreciate your interest in Key. If you have any further questions, feel free to reach out to Troy Gates and the rest of our IR team.

Speaker #9: I think we feel again quite good about the neutral position we're in. I think The steeper the curve is, the better that is for us.

Speaker #7: Thank you.

Speaker #9: The flatter it is, obviously, is the inverse. And you know, we've effectively been replacing swaps at this point as they roll off, and, as we noted, replacing them at—

Speaker #9: At much higher levels right now, and we've done a little bit of maintenance sort of out into 28 and 29 where we saw some portfolio gaps on the swap side.

Speaker #9: But Generally speaking, I think we're pretty much in maintenance mode and feel good about maintaining that neutrality. Thank you, Ken.

Speaker #10: That concludes our Q&A session. I would now like to pass the conference call over to CEO Chris Gorman for any closing remarks.

Speaker #12: Thank you. We appreciate your interest in Key. If you have any further questions, please feel free to reach out to Troy Gates and the rest of our IR team.

Speaker #12: Thank you.