KEYCORP /NEW/(KEY)Q2 2026 法說會逐字稿

Good morning, and welcome to Key Second Quarter 26 Earnings Conference Call. My name is Manan, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during that time, simply press *1 on your telephone keypad. As a reminder, this conference is being recorded, and I would now like to turn the conference over to Brian James Mauney, KeyCorp's Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I would like to thank you for joining KeyCorp's second quarter 26 earnings conference call. I am here with Christopher Gorman, our Chairman and Chief Executive Officer; Clark Khayat, our Chief Financial Officer; and Mohit 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. In the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures including non-GAAP measures. This covers our earnings materials, as well as remarks made on this morning's call. Actual results may differ materially from forward-looking statements. Those statements speak only as of today, 07/21/2026, and will not be updated. With that, I will turn it over to Christopher.

Thank you, Brian, and good morning, everyone. Our second quarter results reflect strong business momentum and continued progress against our strategic and financial commitments. We reported second quarter earnings of $0.44 per share, up 26% year over year. Revenue grew 7% year over year, and pre-provision net revenue grew 9%. Net interest margin expanded sequentially to 2.89%, and we are on track to meet or exceed 3% by year end, supported by several tailwinds that we expect will contribute to accelerated margin expansion in the second half of the year. Commercial loan growth remains strong. Period-end C&I loans increased $2.1 billion, or 3% sequentially, reflecting continued success in attracting new clients across our markets while concurrently deepening existing relationships. Our deposit franchise continues to perform well in a competitive environment, with total deposit costs declining 2 basis points during the quarter. Asset quality remains strong. While nonperforming loans increased modestly during the quarter, reflecting idiosyncratic items, broader portfolio performance remains stable, tightly managed, and consistent with our expectations. Our net charge-off ratio was 42 basis points during the quarter, and our year-to-date charge-offs remain at the low end of our 40 to 45 basis point full-year outlook. Given our stronger-than-expected business performance, I have even greater confidence in our ability to generate a return on tangible common equity exceeding 15% by the end of 2027 on our path to achieving our 16% to 19% long-term target. Importantly, we continue to deploy capital in a disciplined manner, supporting client growth, investing in the franchise, and returning capital to shareholders through ongoing share repurchases. During the quarter, we repurchased more than $340 million of common stock, putting us on pace to achieve our full-year share repurchase target of at least $1.3 billion. As we continue to repurchase our shares, our strong capital position enables us to concurrently drive organic growth and invest in our business. As an example, during the quarter, we announced an agreement to acquire Clearwater UK. This transaction represents a strategic extension of our leading middle market advisory franchise and expands our ability to serve M&A clients and prospects internationally. We expect this transaction to close in the second half of 2026. While the macroeconomic environment remains uncertain, our momentum continues to be strong. We are seeing healthy client engagement, solid activity levels across our businesses, and remain well positioned to perform through a range of potential economic scenarios. We continue to grow clients. In the second quarter, relationship households increased 3% and commercial clients increased 2% from the prior year. Commercial loan pipelines remain strong, up 6% from the prior year. Our priority fee-based businesses—investment banking, commercial payments, and wealth—continue to perform exceptionally well. In the first half of the year, these businesses collectively grew 8% when compared to the first half of 2025. Investment banking pipelines are up 9% sequentially and remain at historically elevated levels, supported by record M&A and DCM pipelines. While middle market M&A activity has yet to fully normalize, we continue to see significant client engagement and remain confident in our expectation for mid-single-digit investment banking fee growth this year. In commercial payments, total gross payment fees increased 12% compared to the prior year as investments we continue to make in bankers and scaling embedded banking build momentum. In wealth, Assets Under Management reached another record $74 billion. Since the launch of our mass affluent strategy in 2023, we have added 59 thousand households, over $4 billion of AUM, and nearly $8 billion of total client assets to Key. Wealth remains a significant opportunity for us, as we are less than 10% penetrated with respect to our base of currently existing mass affluent households. Overall, we are encouraged by our second quarter performance and the sustained momentum across the business. As a result of our continued favorable loan momentum, we have increased our full-year guidance with respect to net interest income, revenue, and loan growth. Our guidance implies substantial positive operating leverage as we expect to grow revenues twice as fast as expenses in 2026. As always, our guidance reflects a range of potential interest rate scenarios and assumes markets remain constructive. We enter the second half of the year from a position of strength. The underlying trends across Key remain favorable. We will continue to drive disciplined execution across our franchise. With that, I will turn it over to Clark.

Thanks, Chris. Starting on slide 4. We reported second quarter earnings per share of $0.44. Revenue was up 7% year over year while expenses increased by 5%. Tax-equivalent net interest income increased 9% year over year and 2% sequentially, primarily driven by commercial loan growth and portfolio repricing. Noninterest income increased 2% year over year. Loan loss provision of $92 million included $115 million, or 42 basis points, of net charge-offs and a reserve release of $23 million. The net release was driven by improvement in Moody's economic scenarios and a continued remix to higher credit quality relationships, partially offset by a qualitative build to account for increased economic uncertainty. We grew tangible book value per share 6% year over year. Moving to the balance sheet on slide 5. Average loans were up $2.3 billion sequentially. Period-end loans increased by $1.2 billion driven by C&I growth of $2.1 billion, or 3%, partly offset by the ongoing planned runoff of low-yielding consumer loans. Growth was largely from new relationships and broad-based across industries and regions. The largest industry contributors were utilities, power, and renewables; real estate; and technology. C&I line utilization decreased 50 basis points sequentially to 31% driven by higher commitments. Turning to slide 6, average deposit balances were relatively flat sequentially and year over year, consistent with historical seasonal trends. Average noninterest-bearing deposits increased 2.3% sequentially, representing 19% of total deposits or 24% when adjusted for our hybrid accounts. As expected, the average deposits for the quarter were consistent with Q1 when we saw end-of-period deposits up versus the prior quarter after troughing in May. At the end of June, deposit balances, which closed the quarter at $153 billion, were temporarily elevated by about $4 billion due to the timing of transaction activity among our relationship clients. Total deposit costs declined 2 basis points sequentially to 1.63%. Our cumulative interest-bearing deposit beta held steady at 56%. To support our continued strong commercial loan growth, we supplemented funding with short-term borrowings. Given our expectations that client deposits will grow in the second half, we used wholesale funds in the second quarter rather than repricing existing deposit relationships. As a result, total funding costs increased by 1 basis point. We continue to pay close attention to deposit dynamics, and we will take proactive actions to manage funding effectively to achieve our goals. We expect to increase average client deposits by more than 2% through year-end. Slide 7 provides drivers of NII and NIM in this quarter. Taxable-equivalent NII was up 2% and net interest margin increased 2 basis points from the prior quarter to 2.89%. The increase was driven by commercial loan growth, fixed-rate asset repricing, and an additional day in the quarter. We continue to manage our balance sheet to a fairly neutral interest rate risk position as we move through the remainder of 2026. On slide 8, noninterest income increased 2% year over year. Investment banking and debt placement fees were $169 million for the quarter. In the first half of 26, investment banking fees were $366 million, an increase of 4% compared to the same year-ago period. As Chris mentioned, our pipelines are at historically elevated levels. Compared to the prior quarter, overall pipelines are up 9%, and M&A pipelines are up 7% to a new record. We expect third quarter investment banking fees to be up 20%+ quarter-over-quarter and remain confident in delivering mid-single-digit investment banking fee growth for the year. Trust and investment services income grew 9% year over year, reflecting higher market values, and assets under management reached a new record high of $74 billion. Service charges on deposit accounts and corporate services fees each increased by 5% year over year. The increase in service charges was driven by growth in commercial payments, while corporate services income was driven by higher loan commitment fees. Commercial mortgage servicing fees were $49 million, down $21 million year over year, largely driven by lower deposit placement fees and special servicing fees. At quarter end, we were named primary or special servicer in approximately $735 billion of commercial real estate loans, of which about $270 billion is special servicing. Active special servicing third-party assets were flat sequentially at $10 billion, about half of which is office. We continue to expect commercial mortgage servicing fees to run about $50 million to $60 million per quarter for the remainder of the year. On slide 9, second quarter noninterest expenses were $1.2 billion, an increase of 3% sequentially and 5% compared to the year-ago quarter. The increase was driven by higher personnel expenses related to investments in frontline bankers, the impact of Key's higher stock price on incentive compensation, as well as higher benefits costs. Sequentially, expenses increased due to higher incentive compensation, professional fees, and marketing expenses, as well as an additional day in the quarter. Expenses are expected to modestly pick up through the second half of the year, reflecting our ongoing investments in people and technology and incentive compensation associated with expected seasonally higher fees. We continue to expect to be within our full-year expense growth guide of 3% to 4%. Turning to credit. Net charge-offs were $115 million, or an annualized 42 basis points of average loans. Criticized loans are relatively stable at an annualized 4.9%. Nonperforming assets increased by $126 million sequentially to an annualized 74 basis points of loans. The increase was largely driven by three credits in the real estate, consumer goods, and agriculture industries. Based on our current assessment, we do not expect these credits to result in meaningful incremental losses and they do not alter our outlook for net charge-offs. Moving forward, we expect several sizable nonperforming loans to resolve through the rest of the year. Overall, our portfolio remains healthy. Fundamental performance of our borrowers remains resilient and is tracking in line with expectations. Moving to slide 11: Our CET1 ratio was 11.2% and our marked CET1 ratio was 9.8% at quarter end. As Chris mentioned, we continue to expect to repurchase at least $1.3 billion of our shares for the year. Moving to slide 12, we are increasing our 2026 guidance to reflect our loan growth outperformance. We now expect revenue to grow 7% to 8% compared to approximately 7% as previously communicated. We also now expect full-year net interest income to increase 9% to 11% compared to the prior guide of 9% to 10%. This guidance holds under a fairly broad range of interest rate scenarios, including a Fed hike scenario. We now expect to exit the year with a net interest margin in the range of 3.0% to 3.05%, with average earning assets increasing between $1 billion to $2 billion from the second quarter. This outlook assumes continued loan growth and a stable competitive deposit environment. While incremental balance sheet growth may be modestly margin dilutive, we are willing to trade NIM to a degree to add quality relationship clients with a strong return profile. Additionally, we continue to expect the benefits of over $9 billion of low-yielding fixed asset repricing through year end, and disciplined deposit management to more than offset that impact. We now expect average loans to increase 4% to 5% compared to our previous guidance of 2% to 4%; average commercial loans are now expected to increase 8% to 10% this year. The higher outlook reflects strong loan growth in the first half of the year, continued success in adding and expanding client relationships, and healthy commercial loan pipelines that continue to support growth in the second half of 2026. All other guidance remains unchanged. In summary, subject to the usual macro caveats and a constructive environment that remains broadly consistent with today, we expect to maintain our strong momentum through the second half of the year and deliver a solid return on, and return of, capital to shareholders. With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Operator?

We will now begin the Q&A session. If you would like to ask a question, please press *1. If for any reason you would like to remove your question, please press *2. Again, to ask a question, please press *1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question will go to the line of Ryan Nash with Goldman Sachs. Ryan, your line is open.

Hey, good morning, guys. Clark, maybe to start on the net interest margin.

Hey, Ryan. It's Christopher. We cannot hear you.

Can you hear me now, Christopher?

Yes.

Sorry about that. You started to talk about it and then you faded out. I was saying, what drove the main pieces that drove the NIM miss?

I know you talked about the decision to use some wholesale funding and some lower loan yields. And then maybe just talk about what is embedded in reaching the 3.5% including deposit cost, fixed-rate asset repricing and any other impacts you think we will see that happened this quarter that may not repeat?

Thank you. And I have a follow-up.

Yeah. Ryan, first of all, thanks for the question. Let me just make a brief comment. NIM is clearly an important metric for us. But as you can imagine, what we are most intensely focused on is our long-term return targets, both of which are still intact. Clark, you can maybe step us through the detail.

Sure. And thanks for the question, Ryan. So maybe first, just to remind everyone, NIM was up in the quarter, just not up maybe as much as would have been expected. But maybe just a couple of factors in Q2. So stronger loan growth than we expected through the quarter. The loans we put on came in at a higher credit quality and therefore a little bit tighter spread. So bigger balance sheet, a little bit tighter spread. And then overnight SOFR was down about 4 basis points in the quarter. Put all those together: again, a little bit bigger balance sheet, a little thinner margin. We had a known seasonal low in deposits. As we told you, dropping in late May, that happened sort of as expected. But with the timing of that loan growth it created a little bit larger funding need in the period. We chose to fill that with wholesale funds rather than reprice the client deposit base because the expectation is we are going to see some good deposit growth here in the second half. As you transition then, what gets us confident that we will go from where we are to 3%: you hit most of the elements there, Ryan, but about $9 billion of fixed asset repricing coming in the back half with the pickup of about 1.25%. As I mentioned, solid client deposit growth—about 2% or $3 billion in the second half—largely from core operating deposits, which should be very solid growth with good relative pricing. Because that is coming, that is why we chose to bridge with short-term wholesale funds. While we do expect loan growth, we would expect it to moderate off the first-half pace; some of that is just a mix between the balance sheet and the market. Put all those together and I think what we see is a path to 3% plus which we think has relatively low execution risk based on what is in front of us today. The last piece I would say just on deposit cost is if rates are stable, we would expect deposit cost through the period to be pretty stable. If we see a hike, which is becoming more probable in the market's view, we would see deposit costs start to drift up a little bit but get the offset in loan yields, and frankly, do not think that will be material in the back half of 2026.

And then maybe as my follow-up, Chris, it seems that results on investment banking fell a little bit shy of expectations. We are obviously seeing strong results across the industry. I know Q1 was a record, but maybe just talk about what drove the miss and then when you look at pipelines, you mentioned you expect to be up 20% in Q3. Maybe just talk about expectations that are embedded for the back half of the year. Thank you.

We did come up short of what we had anticipated in the quarter. Obviously came off a great first quarter, and we are coming off strong comps in 2025. Having said that, we remain confident that we will have the ability to grow mid-single-digit. In the first half, we completed about $366 million, and so we are up about 4%. As we mentioned, the pipelines are very, very strong. We are up 9% linked quarter, up 31% year-over-year. There tends to be some seasonality in this business where middle market deals often get pushed to year end, so over time, we always see a step-up in the back half of the year. When you mentioned that people were having great quarters—and indeed they are—what is interesting is to date there has been a real bifurcation between large deals and the middle market deals. Transaction volume is down 24% year-to-date; however, deal value is up 83%. So there is a real skew to larger deals. I feel good about how we are positioned. It is not as though any of these deals fell apart—they got pushed out, which often happens in due diligence. When I speak about pipelines, these are engaged deals where people are spending valuable time and money. I think we will see them come out in the back half of the year. One last comment: in a higher-for-longer environment, when people think rates will be higher for longer or potentially even go up, today the 10-year is around 4.6%, and I think that is actually a better climate to get deals done than a climate where people anticipate a bunch of rate cuts and tend to sit on the sidelines. That is how I am thinking about the business.

Thank you, Ryan. Our next question will go to the line of Ebrahim Poonawala with Bank of America. Ebrahim, your line is open.

Hey, good morning. Clark and Christopher, you said something about being willing to trade NIM to add clients with a strong return profile. Maybe unpack that for us. If loan growth is stronger, my read is there is incremental pressure on NIM. But as a management team, how do you think about that in the framework of the 16% to 18% ROTCE target over the medium term? How long does it take to make up for the NIM you give up to drive growth on the fee side or otherwise? Thanks.

It's a great question. I do not think our target of 15%+ by 12/31/27 is in conflict with growing the business, generating more NII, and generating more EPS. We are very targeted on who we want to do business with. We are fortunate to bring a lot of these new-to-client customers onto the balance sheet. To put it in perspective, about 58% of our C&I loans are investment grade. Usually you start by providing some capital, but to get the kind of returns we target, we have to do a lot more for them. That often takes time. I do not think it is a trade that is in conflict; I actually think growing the business with our targeted customers is helpful on our long-term path to achieve the returns on tangible common equity that we are looking for.

Maybe a follow-up. You mentioned the 2% deposit growth in the back half and it looks like you have pretty decent line of sight. How should we think about drivers of that deposit growth? And Chris, to your point about the 15% ROTCE by Q4 2027, do you still feel good about the margin being the 3.25% plus that you have talked about in the past?

Ebrahim, we think we have very good visibility on that deposit growth. It will be largely commercial in nature and connected to relationship clients with whom we have very tight interaction. There is a seasonal build in the commercial book, and we have very good line of sight on what we think is a rich pool of operating deposits coming through. Some of that will be interest-bearing and some will be in our hybrid accounts, but we like the profile. Regarding the 15% return by Q4 2027 and the related NIM target, returns are the most important thing for us over time and making them sustainable. NIM is important, but at this point there is nothing that tells us we have concerns about hitting either of those targets in Q4 2027.

Thank you, Ebrahim. Our next question will go to the line of Chris McGratty with KBW. Chris, your line is open.

Great. Good morning, everybody. Clark or Chris, the operating leverage comment you received very well this year. I'm interested in sustainability and what is factored into the medium term in terms of operating leverage. Can you continue to generate operating leverage into next year?

Can you continue to generate operating leverage into next year? Yes.

Look, assuming a constructive macro environment, we feel very good about that. We've demonstrated over time we can manage expenses effectively. We like the pipelines, the current status of the business and the momentum going forward, and we feel comfortable that we can drive operating leverage. We've talked before about long-term expense growth and while we were a little higher last year, we expect to glide to our long-term target over time through continuous improvement efforts and finding opportunities to reinvest in the business, while covering inflation and people costs. There's nothing in our view that tells us we cannot deliver that sustainably. By the way, we are investing significantly in the business, whether it is hiring or the $1 billion we are going to spend this year on tech and operations.

Okay. Wonderful. And then Chris, on the buyback, you reiterated at least $1.3 billion this year. Interested in your views on the toggle between strengthening growth and returning capital? I know you had a comment in the release about return on and return of capital.

Our capital priorities remain unchanged. First is to support our clients and prospects. Second is to continue to invest heavily in the business because we think there is a great opportunity. Third is our dividend. Lastly would be share repurchases. We have an abundance of capital right now; we think of it as a roughly 100 basis point buffer. We have not given guidance yet with respect to 2027.

The only thing I would add is that we are on track for the $1.3 billion and a little ahead of schedule. I would assume a run rate of about $300 million a quarter in the back half, which gets us just north of that number. The takeaway is less about the number and more about a methodical, thoughtful quarter-by-quarter approach which gives us flexibility to support clients and absorb any macro deterioration that might happen.

We have reaffirmed the target of 9.5% to 10% on a marked basis. We think that is the right amount of capital, and we would not be adverse to going below that from time to time if needed because we are generating a lot of capital.

Thank you, Christopher. Our next question will go to the line of Erika Najarian with UBS. Erika, your line is open.

Hi. Good morning. My first question is for you, Clark. The stock is opening lower this morning, and I am wondering if it is just the lower exit rate. How much of the path from roughly 2.89% to the 3.0% to 3.05% exit is baked given the balance sheet dynamics you see? How safe is consensus EPS for 2027 relative to the NIM outlook?

Erika, good question. The difference between 3.00% and 3.05% is not significant enough to meaningfully change outlook for full-year 2027. Regarding structural drivers between now and 12/31/2027, we are looking at about $30 billion of fixed-rate asset repricing across the swap book, securities, and consumer mortgages, which is fairly well baked in and yields solid returns assuming current rates. We expect good paths to operating deposit growth starting in the second half, which helps funding optimization going forward. Loan growth has been strong and we will continue to play in that as it makes sense. We feel very good about that path and we think rates are likely relatively flat in the back half of the year. If there are hikes, we are prepared and continue to think the 3.25% target remains intact.

I'll follow up offline to unpack that more. Chris, my second question: where are we in the middle market investment banking cycle? As we see capital markets activity start with large cap and strategics, how tied is middle market activity to sponsors versus general sentiment and proactiveness?

The middle market activity is lagging the large-cap activity. Private credit dynamics have been a factor; 40% of our fees are driven by private equity. Exits have been fewer and more stretched out, so I think we are in the early innings of a renaissance in middle market M&A. I am encouraged by what I see. There is an inverse relationship between hold period and cash-on-cash return; eventually these transactions will come out.

Thank you. Our next question will go to the line of Manan Gosalia with Morgan Stanley. Manan, your line is open.

Hi. Good morning. Clark, you mentioned lower loan spreads are coming from pivoting to higher-quality clients. Several banks made that comment this quarter. What is driving that? Is it demand related to capex and AI-related investment spend from larger clients, or something else?

Good question. For us it is consistent with the industries we target and the clients we serve. Our book historically has been a bit more investment grade given our capital markets platform. So at least for us, the deals we saw in the quarter were consistent with our targeted approach. We are happy to serve those clients more broadly than just lending and it helps the credit profile turnover as well.

For example, a lot of the credit being provided is for build-out of the electrical infrastructure in the country. One of the things AI has made clear is the massive shortage of power generation and distribution. We are a significant player in that space and those companies are large, market-leading customers.

We also had some growth in our REIT portfolio that was almost entirely investment grade in nature. So again, tied to pockets of targeted scale for us.

Related question: you said it takes some time for fees and other higher-return businesses to come through from new clients. What is your level of conviction that you can bring in that fee business over the next year or so? A couple years ago many banks ran off low-return lending-only relationships. Why do you have more conviction this time around?

We do a deep dive every six months on significant exposures to understand what we are getting in addition to credit and what we are pitching. A properly graded commercial loan generally cannot return its cost of capital, which is why we are committed to targeted scale by industry. With new clients, we expect to hit our return hurdles within 12 to 18 months and we monitor that every six months. We have discipline, and while we will not bat a thousand, we have a good track record, particularly with our industry-focused approach which enables us to do more for these companies—payments, hedging, advisory, etc.

Thank you, Manan. Our next question will go to the line of John Pancari with Evercore ISI. John, your line is open.

Good morning. On the loan growth towards higher quality but lower yielding, is that an intentional shift on your part focusing on these borrowers, or is it more of a market shift where you are seeing this? And are you avoiding any pockets of lending like NDFI-related areas given the backdrop? Also, how would you describe loan pricing competition—has it intensified around new loan yields?

It is easier to describe where we focus and where we do not. We focus on seven industry verticals and understand who the winners and losers are in those spaces. As companies in those verticals grow, a greater percentage become investment grade and we continue to serve them. Regarding spreads over SOFR, there has been some degradation from a year ago but not significant. If you are going to provide capital, you better be able to do many other things because you are unlikely to get required returns from spreads alone.

Two additions: on NDFI, we were up about $600 million in the quarter. We don't really avoid that category; we grew our REIT business, and specialty finance lending grew about $100 million. We are not shying away from those areas, but we are doing deals that make sense for us and have walked away from some that did not. Also, people often conflate NDFI with private credit. Our NDFI numbers are more than twice our private credit numbers. Within private credit we have SFL, unitranche, our real estate lenders, and other relationships like insurance companies.

On the margin, you cited confidence in the Q4 exit rate with low execution risk. What about the Q2 margin performance that surprised you negatively is now less likely to surprise you again? Was it the type of growth, spreads, or rate backdrop?

Fair question. It was really a mismatch in timing between asset growth and deposit levels in the quarter. We trough in mid-May as expected, but had larger client balances on the loan side at that time. To the extent loan growth slows a bit—meaning we expect loan growth to be lighter as capital markets activity picks up—and given we believe we can fill the funding stack with quality deposits, that is the biggest difference. If loan growth had been more uniform, you would have seen a smoother movement in NIM.

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

Good morning. Could you elaborate on the small deal within investment banking in terms of what product or where exactly it is adding?

Happy to speak to that. The business we announced was a company we had a JV with for the last six years—an M&A boutique. When representing companies in the U.S., having distribution in the UK and on the continent is important. Conversely, sellers in Europe want access to private equity buyers in the U.S. Not many JVs work well in financial services, but this one has. We've worked on many deals together over the last six years and were able to put together the transaction. It's a fit both offensively and defensively and will be a good buttress to our leading M&A practice.

More broadly, as everyone leans into capital markets and fast banking businesses, is there an argument to be a little more diversified beyond current expertise? You have strength in the middle market, which hasn't been as strong as bigger transactions. Thoughts on branching out?

We are always looking. We have done a good job expanding our core middle market business into new cities. We look for adjacencies and tangential opportunities where there are big pockets of potential fees and where we have a good chance to win. Expect us to continue looking for opportunities.

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

Hi. I'm not sure your forecast will be correct that you have 2% deposit growth with flat deposit rates. Will you be on the third- or fourth-quarter call saying it didn't quite play out? And second, I am not sure the 40% of fees driven by private equity will translate to investment banking. We've been hearing that for three years. The big banks had investment banking up 50% year-over-year; yours is down 5%. You said Q3 should be up 20%+. Two pushbacks: deposit growth at 2% and private equity investment banking fees coming back.

Let me touch on the 2% deposit point. About 10 years ago on the commercial side we became very focused on primacy. 82% of our deposits we have primacy. Those same companies have deposits elsewhere and we know where they are and what they cost. We have discipline around that. Regarding investment banking: deal timing is always a challenge. Our pipelines are real and engaged. We came off a record year last year and a record first quarter. We've given conservative numbers and our job is to deliver them.

Mike, fair pushback. On operating deposit growth, some deposits will come from new clients we added this year and will not necessarily come on day one; we see the onboarding process. We have years of data supporting the seasonal build. We feel good about it, but we can revisit on the third-quarter call. To be clear on pricing: our 2% assumes relatively stable deposit pricing and assumes no hikes. If there are hikes, deposit costs will move, and that would be neutral to NII and NIM in the back half. I wanted to be clear on that.

Follow-up on investment banking: do you really think private equity will come back? You've been saying that for years. Do you have any evidence it's picking up? And do you really need it to accelerate more?

We do need private equity activity because it is a large portion of our fees—about 40%. I am confident it will come back. Looking at our specific pipelines, they are engaged. As I said, big companies moved first, which explains bifurcation; private equity holders have been last to move. We are starting to see activity—C&I loan growth is 12% year-over-year mostly investment grade, and pipelines are up 18% from year-end—so we are starting to see that activity. Private equity sponsors optimize exits, but at some point they must exit to generate returns for the next fund. I am optimistic about the back half of the year.

Thank you, Mike. Our next question is from Ken Usdin from Autonomous. Ken, your line is open.

Thanks. Two quick follow-ups. One on deposits: can you talk about noninterest-bearing mix—should we think of Q2 average as a growth point—and on consumer deposit side, ins and outs around maturing CDs and underlying account growth? Second, on credit: you noted potential resolution of some bigger NPAs in the back half. Can you give more granularity on why reserve went down and why direction of travel on NPA should be positive?

If you look at interest-bearing versus noninterest-bearing in Q2, think of that as relatively flat through the back half. Some operating deposits come on as interest-bearing at relatively low rates or in hybrid accounts. I would expect noninterest-bearing percentage to be relatively flat in the back half, but the operating deposits coming on are high quality. On the consumer side, we had 3% household growth in Q2. We continue to see positive growth—core checking accounts coming on with thousands of dollars at a time, which takes time to build. We expect a little pickup in CD and MMDA production in the second half; we've gone out in select markets with slightly higher rates, but I don't expect that to be the lion's share of deposit growth. On reserves and credit: let me make a broad comment and then Mohit will add color. One, we released reserves despite NPAs being up because the overall health of the portfolio is improving—some due to higher credit quality, some due to charge-off resolutions throughout the year, and some due to a continued constructive economic profile. Our quantitative measures would have called for a larger release, but given geopolitical uncertainty we overlaid a qualitative build to reduce the size of the release. We felt that was appropriate. Overall we feel good about the strength of the balance sheet.

Thanks, Clark. On credit, we have a proactive risk culture. We did see an uptick in criticized loans and NPLs, but it was driven by a few factors and none of the migration was private credit related. We had some names in the multifamily space, consumer goods, and our agriculture book that landed in this quarter. When we see migration we act quickly because it helps resolution. We have specific reserves against our NPLs and feel confident we remain on track for our NCO guide of 40 to 45 basis points for the year. Multifamily credits remain strong with sponsors having equity; we expect quick resolutions and do not see a lot of lost content. The consumer issues were episodic with a couple of names, and agriculture was impacted by fuel, fertilizer, and labor dynamics. Overall, we don't see this as a macro signal of broader deterioration.

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

Hi, Christopher and Clark. Christopher, the AI industry is on fire and growing rapidly. I look at second- and third-order impacts. Have you started preparing for second-derivative customers—suppliers to AI builders like contractors, HVAC, or others—who may face stress if the AI boom slows? How are you mapping potential downstream exposures?

Great question. We spend time thinking about that. While I wouldn't claim we are completely mapped out, we do discuss this area. In the near term—call it a five-year period—I think the need for power generation and distribution will persist. Large data centers consume significant power, and the shortage of electrons in the U.S. is real. That dynamic likely persists for some time. We are looking at build-outs and timing of when that will end. We are thinking through second-derivative effects as well.

More near-term, we are watching software companies—fortunately we have less than about $300 million of direct exposure to software companies despite a good tech business. Professional services—lawyers, consultants, accountants—are also areas where large language models could be applied and change demand. We conduct quarterly portfolio reviews and look for emerging risk hotspots. Your question about second derivatives is exactly the type of thing we are evaluating.

Regarding the idiosyncratic NPAs—on the consumer and agriculture names—was it overleverage or a lost major customer? Curious what happened in those specific cases.

Good question. One was a consumer name impacted by tariffs in a multi-bank deal; the company filed for bankruptcy and we expect a formal resolution later this year. That was tariff-related and idiosyncratic. Consumer will remain a choppy area given the K-shaped recovery and certain business types; we are increasingly selective. The agriculture exposure was in Western Washington and the biggest challenge there is a labor shortage. There are also fuel and fertilizer dynamics, but those were regionally specific. We expect quick resolutions and do not see broad lost content.

To add briefly, our ag exposure is largely in crops like potatoes in the Pacific Northwest; we have no exposure to lettuce farming. Labor constraints are the principal challenge in those localized ag credits.

The market for consumers has seen Amazon, COVID, tariffs back to back. The firms that are hanging in are resilient and durable, but it's a tough backdrop.

Thank you. Our next question will come from the line of David Giaverini with Jefferies. David, your line is open.

Hi. On fee income, good momentum in payments and wealth—up 8% collectively year over year. Could you talk about the outlook and drivers of that growth?

Let's start with payments. We've invested in payments for a long time; embedded banking is a double-digit grower for us for each of the last few years and we project it to be a double-digit grower going forward. We have traction there. For wealth, it's a strong business—$74 billion of AUM, up 9% year over year, and fees related to wealth management are growing at about 14%. Since launching our mass affluent strategy in 2023, we've added households and assets and see a large untapped opportunity in that segment.

On deposit pricing, it sounds rate-dependent. How would you characterize the competitive environment in your markets—more intense or about the same versus 3-6 months ago?

It varies by geography—Northeast, Midwest, and the West operate a bit differently. Certain places have been more intense from the beginning of the year due to unique competitive sets. Given loan growth and the rate environment, we're seeing a bit more deposit intensity overall, but betas and rate sensitivity will follow any Fed moves. We aren't expecting large movements in a flat-rate environment.

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

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

The meeting is now adjourned. That concludes today's conference call. Thank you for your participation, and enjoy the rest of your day.