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.

And 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 and 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 27 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 2020. 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 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 2x 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 and 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 and I line utilization decreased 50 basis points sequentially to 31% driven by higher commit.

Turning to slide 6, average deposit balances were relatively flat sequentially and year over year, consistent with historical seasonal trends. Average non interest bearing deposits increased 2.3% sequentially, representing 19% of total deposits or 24% when adjusted for our hybrid accounts.

As expected, the average deposits for the quarter were consistent with Q1 when we saw end of period deposits up versus 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 were 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 non interest expenses were $1.2 billion an increase of 3% sequentially and 5% compared to the year ago quarter.

The increase was driven by higher personnel expenses related to the investments in frontline bankers, impact of Key's higher stock price on incentive compensation, as well as higher benefits costs. 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%. Non performing assets increased by $126 million sequentially to an annualized 74 basis points of loans.

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

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 2020.

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 and A session. Operator?

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

Hey, Ryan. it is Christopher.

We cannot hear you.

Can you hear me now, Christopher?

Yes.

Sorry about that. You started to talk about you started to talk about it and then you faded out.

Sorry about that. So I was saying, what drove the main pieces that drove the NIM miss?

I know you talked about the decision to use some wholesale funding and some lower loan yields. 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. You know, 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. By the way, both of which are still intact.

So 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 expected. But maybe just a couple of factors in Q2, So stronger loan growth than we expected through the quarter.

We obviously covered that. I think the loans we put on came in at a higher credit quality and therefore a little bit tighter spread.

So bigger balance sheet, little bit tighter spread. And then overnight sulfur was down about 4 points in the quarter.

So put all those together, again, a little bit bigger balance sheet, a little thinner margin. We had a known seasonal low in deposits.

So as we told you, dropping in late May, that happened sort of as expected. But with the timing of that loan growth created a little bit larger funding need in the period.

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

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

And because that is coming, as I noted, that is why we chose to bridge with short term wholesale funds. And then while we do expect loan growth, we would expect it to moderate off the first half pace, and some of that is just not that client activity will be down, but it will be a mix between the balance sheet and the market.

So put all those together and I think what we see is a path to 3% plus with we think is 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 as is sort of becoming more probable, I guess, from the market standpoint. We would see deposit costs start to drift up a little bit but get the offset in loan yields.

And, frankly, do not think that will be really material in the back half of 2026. Got it.

And then maybe as my follow-up, Chris, seems that results on investment banking fell a little bit shy of expectations. We are obviously seeing strong results across the industry.

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

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

Sure. Well, thanks for the question.

And 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, you know, 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% So as we mentioned, the pipelines are very, very strong.

We are up 9% linked quarter, up 31% year-over-year. And as you know, Ryan, there tends to be some seasonality in this business and that in these middle market deals, a lot of people want to get them closed by year end.

that is just a natural thing. So over time, we always see a step up in the back half of the year.

When you mentioned that people were having great quarters and indeed they are, what is interesting is to date there is been a real bifurcation between large deals and the middle market deals. Transaction volume is actually down 24% year-to-date However, the value, believe it or not, is up 83%.

So as you can see, a real skew sort of to larger deals. I feel good about how we are positioned.

it is not as though any of these deals fell apart. They got pushed out, which often happens in due diligence etcetera.

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

I think we will see them, you know, come out in the in the back half of the year. And the last comment I would make, and this sounds kind of counterintuitive.

Clark just commented on the interest rate environment. I think in a higher for longer environment, when people think that, you know, rates are either gonna be higher for longer or potentially even go up.

Today, the 10 year is obviously around 4.6. I think that is actually a better climate to get deals done than a climate where people are anticipating a bunch of rate cuts and tend to kind of sit on the sidelines.

So that might be more than you are looking for, but that is how I am thinking about the business. Thanks for all the color, Christopher.

Sure.

Hey, good morning. Hey.

Good morning.

I guess, maybe on this whole NIM was the NII debate Christopher and Clark, you said something willing to trade NIM to add client. With a strong return profile.

Maybe unpack that for us in that if loan growth is stronger, my read is there is pressure on incrementally pressure on the NIM. But as a management team, how do you think about that in the framework of the 16% to 18% ROTCE that you want to hit over the medium term, just contextualize how long does it take to make up for that NIM that you give up to drive growth.

On the fee side or how we should think about the time line there? Thanks.

Yeah. So it is a it is a great question.

And I do not think I do not think our target of 15%+ by 12/31/27 is in conflict with growing the business generating more NII, generating more EPS. We are very targeted on who we want to do business with.

And we are fortunate enough to bring a lot of these new to client customers onto the balance sheet. We have about put it in perspective, about 58% of our C and I loans are investment grade.

So, obviously, and I have said this many times, you usually start by providing some capital. But in order to get the kind of returns that we have to get we have gotta do a lot more things for them.

And, usually, that takes a bit of time. But I do not think-- you know, I do not think it is a trade that is in conflict.

I actually think growing the business with our targeted customers is actually helpful on our long term path to achieve our the kind of returns on tangible common equity that we are looking for. Got it.

And I guess maybe just a follow-up. You mentioned the 2% deposit growth in the back half.

Looks like you have a pretty decent line of sight in terms of what is coming through. So how should we then think about, 1, if there is any more color on that deposit growth drivers of that, And then just, Chris, to your point about the 15% ROTC by fourth quarter 27, do we still feel good about the margin being the 3.25% plus that you talked about in the past?

Thank you.

So, Ebrahim, it is Clark. Thanks for the question.

So the we do have we think very good visibility on that deposit growth. It will be largely commercial in nature and connected to relationship clients with whom we have very tight interaction.

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

And again, appropriately priced, we think some of that will not, you know, will not all be non interest bearing, for example. Of that will be interest bearing.

Some of that will be in our hybrid accounts, etcetera, but we sort of like the profile of that for sure. As it relates to the 15% return in fourth quarter 27 and the related NIM target, what I would say is know, just to reiterate Christopher's point at the end of the day, returns really are the most important thing we are looking at over time and making them sustainable is not to say NIM is not an important factor and something know, that we keep track of.

At this point, there is nothing that would tell us we have concerns about hitting either of those targets in Q4 27. Very clear.

Thank you. Yep.

Great. Good morning, everybody.

Good morning.

Clark or Chris, the operating leverage comment you received very wide this year. Interested in, I guess, sustainability and, again, what is factored into you know, the medium term in terms of operating leverage?

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

Hey, Christopher. it is Clark.

Look. Again, assuming a constructive macro environment, we feel very good about that.

I think we have demonstrated over time We can manage expenses very effectively. And as Christopher has noted a few times here, we like the pipelines the current status of the business and the momentum going forward.

So you put those 2 together, we do feel comfortable that we can drive operating leverage going forward.

We have talked before about, you know, kind of long term expense growth, and we think we are-- you know, we are a little bit-- we were a little bit higher last year. We are still gonna be kind of above that long term target, but gliding to that over time.

And that is a combination of continuous improvement efforts and finding opportunities to reinvest in the business understanding that you have got to cover inflation and people and some of the other costs. So you know, there is there is nothing again, in our in our crystal ball as good or bad as it may be that tells us know, we are concerned about not being able to deliver that sustainably.

By the way, that is Okay. You know, while 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 ops.

Got it.

Okay. Wonderful.

And then Chris, on the buyback, you reiterated a billion 3 at least this year. Obviously, we have the Basel proposals that will be a tailwind.

But interested in just your views of the toggle between what appears to be strengthening growth and returning capital? I know you had a comment in the release about return on, and return of capital.

Thanks.

Sure. So our capital priorities remain unchanged, Christopher.

The first is to support our clients. our prospects, and that is where we are going to focus.

Secondly, what I just mentioned, we are gonna continue to invest heavily in the business because we think there is a great opportunity Third would be our dividend. And then lastly, would be share repurchases.

Obviously, we have an abundance of capital right now. We think of 100 basis points.

But we have not given any guidance yet with respect to 2027.

The only thing I would add there is, you know, as you noted, Chris, on track for the $1.3 billion. We are a little bit ahead of schedule.

I would just sort of assume a run rate of $300 million a quarter in the back half. Which gets us just north of that number.

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

The other thing I would add to the discussion is we basically have reaffirmed the target of 9.5% to 10% on a marked basis. We think that is the right amount of capital.

Having said that, we would not be adverse to going below that, you know, from time to time. If we needed to because we are generating a lot of capital.

Perfect. Thank you.

Thank you.

Hi. Good morning.

My first question is-- hi. My first question is for you, Clark.

You know, clearly, the stock is opening lower. And I am wondering if it is just a lower exit rate.

You know, as we think about that path to 3.25%, and, obviously, you know, fully hear everybody loud and clear that know, client growth is way more important than just NIM. How much of the path from, let's call it, 03/2002 of 26 to 03/25 is quote baked for relative to the balance sheet dynamics that you see.

So I guess we are I guess what the market is trying to figure out terms of the initial reaction is, you know, how safe is consensus EPS for 2027 relative to the NIM outlook? Yes.

Great question, Erika. So 1, and I am not being flippant at all.

I think that difference between 3.05 and 3 to 3.05 is not significant enough to get people or should not be significant enough to get people concerned about the full year 2027. And obviously, we have not provided full guidance for 2027, which we will do as we as we get through the year.

But I think to your question and just start sort of broadly on the structural piece, between now and 12/31/2027. We are looking at about $30 billion of fixed asset fixed rate asset repricing across the swap book securities and consumer mortgages.

So, you know, again, that is that is pretty well baked as you can imagine and assuming the rate environment is what it is today, the returns on that are pretty solid. We continue starting in the second half here to see good paths to operating deposit growth, which, helps on the funding optimization side going forward.

And, you know, we will see where loan growth goes from here, but obviously, it has been strong and we will continue to play in that as it makes sense. So I think just all around, you know, we feel very good about that path.

We think you know, our view, I think, would be rates are probably relatively flat in the back half of the year. But certainly, if there are hikes, we are prepared to manage those as well and think that the 3.25 will remain intact.

Thanks.

And I will follow-up offline to unpack that a little bit more. Chris, my second question is so where are we in the middle market investment banking cycle?

So I think there has been you know, hope that this capital markets run which is starting with large cap and strategics, is going to be multiyear. And I guess, like, you know, as we think about you know, a middle market activity, how much is key tied to sponsors versus how much is just tied to maybe sort of a lag in sentiment and proactiveness in terms of middle market activity.

Great question, Erika.

I think the middle market activity is lagging the large activity. And I think but I mentioned earlier about interest rates, I think, has been a factor.

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

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

I am I am actually very, very encouraged by, what I see. And, as you know, as long as there is an inverse relationship between hold period and cash on cash, eventually, those transactions will come out.

Thank you for that, guys.

Hi. Good morning.

Clark, you made the point that lower loan spreads are coming from pivoting to higher quality clients.

You know, I guess a number of banks have made that comment this quarter The question is, what do you see that is driving that? You know, is it more demand related to CapEx and AI related investment spend from larger clients?

Or is it something else?

Yeah. I mean, it is a great question, Manan.

I think it is consistent with the industries we are in and the clients we target. And frankly, our book historically has been a little bit more investment grade just given our capital markets platform because those are the clients that tend to need those capabilities.

So, I do not know if it is a you know, you have heard that across the industry. I do not know if it is a broad or sustained trend, but at least for us, you know, those are the deals that we saw in the quarter that were very consistent with our targeted approach.

And, you know, we are happy to serve those clients more broadly than just the lending, obviously, and, you know, it helps the credit profile turnover as well.

You know, for example, a lot of the credit that is being provided is for the build out of the electrical infrastructure in this country.

1 of the things that AI has made abundantly clear is that there is a massive shortage both of power generation and distribution.

And as you can well imagine, we are a significant player in that And specifically, the people that are market leaders in that are very significant. Companies for example.

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

So again, it is tied to Christopher's point and the REIT point to pockets of real targeted scale for us. Yep.

Got it.

And maybe as a related question, in your response to Ebrahim's question, you spoke about it taking some time for you know, the fees and other higher returning businesses coming through from some of the new clients. what is your level of conviction that you can bring in that business over the next year or so?

You know, I guess the reason I am asking that question is, you know, couple of years ago, we just went through around across the industry. For running off some of the low returning lending only relationships.

So maybe if you can unpack on why you have more conviction on bringing in those fee based businesses this time around?

Sure. So I guess the easy part of that question is with our existing customers where every 6 months, we go through a deep dive on all of our significant exposure, what are we getting in addition to the credit exposure?

What are we pitching? And this is a discipline that we have had for a long time.

You have probably heard me speak before that a properly graded commercial loan cannot return its cost of capital. that is why we are so committed to you know, this targeted scale approach by industry.

With respect to the new clients, we expect to hit our return hurdles, and we expect to hit them within 12 to 18 months. And we are looking at those every 6 months.

And so it is just it is a lot of discipline, and but it is something that, as you know, we have been at for a long time. And we do not we do not bat a thousand.

There will be some that we do not get the kind of returns that we expected, and we will exit those. But we have a pretty good track record, particularly with our focus by industry group we can do a lot more for these companies with respect to payments, hedging, advisory, etcetera.

Got it. Thank you.

Sure.

Good morning. Hey.

Good morning.

On the on back to the loan growth that you know, towards higher quality but lower yielding again.

To the answer to Manan's question, is there at all an intentional shift on your part focusing on these borrowers, or is it more of a market shift? Where you are where you are seeing this?

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

Is there outright intensification around new loan yields that you are seeing impact this? Thanks.

Yeah. So first of all, where we focus it is it is easier to talk about where we are focused and where we do not focus.

Because we are really focused on 7 industry verticals. And so within those verticals, we feel like we understand kind of who the winners are, who the losers are, who is gaining share, who is losing share, etcetera.

So we are very focused on those industry verticals. Because we are focused on those industry verticals, as those companies grow, a greater percentage of them become investment grade companies.

And we continue to serve them. So that is really it is all about our industry focus, which is a bit unique to us.

With respect to a similarly graded credit, if you look at kind of spreads over SOFR, you know, from a year ago to present, there is some degradation, but it is not that significant, John. Candidly.

It still goes back to my basic premise that if you are gonna provide capital, you better be able to do a lot of other things because you are never gonna get your returns based on the spreads today or last year.

And maybe the just 2 additions, John. 1, on NDFI, we noted we are up about $600 million in the quarter.

We do not really avoid that. We like the we do not actually think about it as a thing other than when we report it and answer questions on it.

We did grow our REIT business in the quarter that is in the NDFI category. We grew our specialty finance lending business a little bit, call it $100 million or so.

So not hugely significant. We are not shying away from those for the purposes of avoiding the NDFI designation.

We are not doing deals that do not make sense for us. So specialty finance lending in particular over the past years you know, few years, we have walked away from a handful of things that just did not make sense to us.

So it is not a function of you know, the categorization at all. We are just we are trying to make good, thoughtful underwriting decisions in those cases.

Just 1 other thing. A lot of times people conflate NDFI with private credit.

So our NDFI numbers are more than twice what our private credit numbers are. And within private credit, there is SFL, but we have a we have unitranche.

We have our real estate lenders and we also have some other things like insurance companies. Just some background.

Got it. Okay.

Thanks for that.

And then separately, back to the margin. Just want to get a little bit more color around your I mean, you cited the confidence in that 4Q exit rate.

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

Just is it was it the type of growth that you saw or the spreads, you know, or the rate backdrop? Maybe if you could just talk to us, like, why should we not worry about that as you cited the low execution risk on that exit NIM?

Thanks.

Yeah. So fair question.

I think it is really the mismatch in timing between the asset growth and the deposit levels in the quarter. So you trough in mid May and again, we trough sort of at the time and at the levels we expected.

We just had larger client balances on the loan side at that time. So to the extent loan growth does slow a bit and again, just to be clear, I do not mean client activity is slowing.

I mean loan growth, we think, will be a little lighter as the capital markets activity picks up. But given that we believe we can fill the funding stack with quality deposits here, that is really the biggest difference.

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

Appreciate that, Clark. Thanks.

Yep.

Good morning. I was hoping you guys could elaborate on the small deal that you did within the investment bank.

In terms of what product or you know, where exactly it is adding?

Sure, Matthew. I would be happy to speak to that.

So the business that we announced is some is a company that we had a JV with for the last 6 years. And so it is important.

it is an M&A boutique, basically. And it is important when you are representing companies in the states that you have distribution in The UK and on the continent.

And conversely, obviously, people selling their business in Europe wanna have access to among other things the private equity buyers in The United States. So not many JVs really work that well in the financial services industry.

This is 1 where we have worked together. We have worked on many deals over the last 6 years.

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

And then maybe more broadly speaking, I mean, everyone's kind of leaning into, you know, the capital market, fast banking, set of businesses. And is there an argument that you want to be a little more diversified?

You have got, obviously, the strength in the middle market, which, you know, as you alluded to earlier, has not been as strong as some of the bigger kind of transactions out there. Just thoughts on, you know, if you need to branch out a little bit from your current expertise.

We are always looking thank you for the question. We are always looking at other industry verticals where we think we could be really relevant.

And we also, as you know, have done, I think, a really good job of expanding our core middle market business in new cities that we have not been in the past. So we are always looking at where and, usually, it is something that is an adjacency or tangential to what we are doing.

But you can expect we will continue to look for opportunities where there is big pockets of potential fees and where we think we have a good opportunity to win. Okay.

Thank you. Thank you, Matthew.

Hi. So I am not sure if your forecast will be correct.

First, that you have 2% deposit growth. With flat deposit rates.

So that is the first point where, I guess, I am questioning if you will be it will be on the third quarter earnings call or the fourth quarter earnings call and say, well, it did not quite play out the way we thought. And the other thing I am not sure is if you that 40% of fees driven by private equity is actually going to you know, translate to something in investment banking.

We have been hearing that for 3 years from you and everybody else. And, the big banks had investment banking go up 50% year-over-year.

Yours is down 5%. So I do think, you know, like you said, that is kind of important.

I did hear you that it should be up 20% plus in the third quarter. But 2 pushbacks: deposit growth, 2%, and then private equity investment banking fees coming back.

Thank you.

Sure. Well, let me let me touch on the 2% because it is something we have not talked about on this call, but I think it is important.

So about 10 years ago on the commercial side, we became very, very focused on primacy. 82% of our deposits, we have primacy.

And the reason I share that is those same companies have other deposits that are elsewhere. We talked to the they are our client.

We know where the deposits are. We know what they cost, and we know we could go get them.

So I just I give you that kind of as a backdrop because we are really tight on our disciplines around that. With respect to giving you additional confidence, Mike, with respect to our investment banking numbers.

Know, these as I said, the these pipelines are real. Timing of investment banking deals, as you know, is always a challenge.

If you look at our long term compound annual growth rate, I think you will see that, you know, it is it is been very, very significant. We are coming off a record year last year.

We are coming off a record first quarter. I think we have given some pretty conservative numbers, and it is our job to go out there and deliver those, and we will.

Clark, what would you add to the 2% question?

Yeah. So, Mike, fair pushback.

I would say, as it relates to the operating deposit growth, some of that we know is coming from new clients we have added in the year and those operating deposits will come on if they do not come on necessarily on day 1. So we see the process of them coming on.

The second is just the visibility we have into standard client flows over the course of the year, and there is some seasonality to that. We have got you know, to Christopher's point, years of data that would support that.

So we feel good about it, but, well, we can have this, you know, rematch on the third quarter call when we are ready. To be clear on the pricing, because I just wanna make sure we are all saying the same thing, that assumes relatively stable deposit pricing for us, assumes no hikes.

If there are hikes, we are obviously gonna feel that in the deposit cost base. So we are not, you know, trying to say we are gonna keep deposit prices flat if there is a hike.

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

If there is a hike or 2, If there is not or if there are not any, we would expect deposit pricing to be stable. So I just wanted to be clear on Okay.

And 1 follow-up on the investment banking. And Chris, I know you built that business.

And once again, the 40% of fees from private equity, and again, it is you and everybody else who have talked about sponsors coming back for at least the last 3 years, and we are just waiting and 1 big competitor said, hey. They are starting to see momentum.

And I do not know. Do you really think it is gonna come back at some point, or do you have any evidence that it is picking up a little bit?

And do you really need it to come back for kind of a kind of an yeah. More a greater acceleration.

And, you know, for your C and I loan growth, I think what you have said is the new normal is that your clients are used to the geopolitical uncertainties. They are pursuing their capital expenditures and building their plants, and they are getting their equipment and all that.

They are so why would not that new normal also apply to middle market M&A? Thank you.

Sure. So the direct question is we do need because I mentioned it is 40% of the business with financial sponsors.

We do need that to come back. I am confident that it will come back.

Looking both at our specific pipelines, these are engaged pipelines, and also what we are out there in the market with. And I think your comments with respect to loans is true.

And what we have seen, and you saw it in the bifurcation between the big banks and the folks like us that are really focused on the middle market is the big companies moved first. that is why we were just talking about you know, the significant year over year.

We have 12% C&I loan growth mostly investment grade year over year. Real estate we have got a backlog now.

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

And I said earlier, I think 1 of the reasons they are the last to move is they try to optimize when they look for an exit, but you can only optimize so long before to generate the kind of returns that you need to so you can raise the next fund. You have gotta come out.

So thank you for the Alright. Thank you.

Okay. Great.

Thank you. Would never take the place of Gerard.

2 quick follow ups. 1 on the deposit side, just I know you have given us some color now about expected growth there was the transactional stuff in the second quarter.

But can you just talk about noninterest bearing mix Should we be thinking more about the second quarter average as a growth point And then and then related just on the consumer deposit side, can you just talk about ins and outs with regards to either maturing CDs and underlying account growth? Thanks.

Yes. So thanks for the question, Ken.

If I look at interest bearing, non interest bearing in the second quarter, would think about that as kind of flattish through the back half. So as we have talked about before and I referenced a little bit earlier, some of those operating deposits come on as interest bearing, albeit at relatively low rates.

Or they are in the hybrid accounts which we do try to adjust for, but I would expect non interest bearing as a percentage, again, be relatively flat in the back half. But the quality of the operating deposits coming on are quite strong.

On the consumer side, we talked about 3% household growth in the second quarter. We continue to see some positive growth there.

that is core checking accounts coming on in the, you know, thousands of dollars at a time. So that takes time to build.

And then I do think we will see a little bit of pickup in CD and MMDA production here in the second half So we have gone out in a few select markets with a little bit higher rates than we have had. Over the last 4 or 5 quarters.

And so we would expect a little bit of pickup, but I would not expect that to be the lion's share of the deposit growth. Got it.

Great. And just 1 other question on credit.

You in your prepared remarks, you put a fine point on the potential resolution of some of the bigger NPAs in the back half.

Just wonder if you could just give us a little bit more granularity on you had talked about this in conference season about how you were watching a couple of things.

So just want to understand, obviously, reserve went down. You mentioned that the underlying still feels really strong.

And so just any points you can further on giving us the confidence that, you know, that lost content is quite low and that the direction of travel on NPA should be positive? Thanks.

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

So, 1, we released despite the NPAs being up because generally the overall health of the portfolio is improving, some of that is the higher credit quality we talked about. Some of that is other charge off and resolutions that have happened throughout the year, and some of that is just economic continued sort of constructive economic profile.

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

So if it were purely quantitative here, we would have quite a bit more. We just did not feel like that was appropriate given the broad environment, but we generally, again, feel quite good about the strength of the overall balance sheet.

Yes. Thanks, Clark.

And just to continue that theme relative to credit, again, I think as you all know, we have a very proactive risk culture in terms of risk identification We did see an uptick in criticized and NPL but really kind of based on a few factors. First of all, none of the migration was private credit related.

And so we do not think that this is a harbinger of anything from a macro perspective. That we are overly concerned about.

We had some names in the multifamily space. Consumer goods, and then our agriculture book.

Just run a timing perspective. happened to have landed this quarter.

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

And again, just some other little tidbits. The multifamily space again, very strong.

We have got, you know, sponsors with equity in those deals. You know, we expect quick resolutions.

So, again, not a lot of lost content there. Consumer just sort of episodic with a couple of names.

And then agriculture, just given, you know, some of the few fuel and fertilizer and labor dynamics there as well. But overall, we do not feel like a lot of lost content relative to this move.

Thanks for all that. Yep.

Hi, Christopher and Clark.

Is this the real Gerard? Yeah.

Ken's smarter. That was good to have him go first.

The question Chris, is just a bigger picture question.

Obviously, the AI industry in this country is on fire. it is doing phenomenally well.

it is growing by leaps and bounds, and everybody is benefiting from it, it seems like.

So my question is, I am always looking at the second derivative or third derivative of a strong industry because eventually, the industry will slow down, the rate of growth. That second derivative is certainly gonna slow down.

And so have you guys been able to start preparing, you know, for credits that are not directly you know, I know you are not building data centers, you know, with construction loans. But what are the second derivative customers that and aside from the HVAC guys and plumbers that you may see have actually exposure to AI.

And when it slows down, may lead to some issues with them down the road. Have you guys tried to map that out, or how will you map it out?

that is a that is a great question. We have spent time not going to tell you that we are completely mapped out on it, but we spend time talking about it.

Let me talk about where I think the trajectory is gonna continue for a while and then by definition, eventually, as they say, trees do not grow to the sky. So eventually, there will be a reversal.

But in the near term and when I say near term, I am talking about a 5 year period. 1 of the things, and I mentioned it earlier on the call, 1 of the things that this has laid bare is just the absolute shortage of electrons in The United States.

We have a shortage of power we have a shortage of distribution. I have actually been very involved in this for the last couple of years in a couple of business groups.

I am in and I am part of. And so I think that is gonna continue, Gerard, literally for a long time.

And I think the problem existed before but it was exacerbated by the fact that these obviously huge data centers take down in some instances as much power as a small city. So that is on the positive side.

So we are looking at that, and I just wonder when the build out will finally end and what the how that will play out.

More near term is, you know, things like software companies. You know, we have fortunately less than about $300 million of exposure direct to software companies in spite of the fact we have a good tech business.

that is an area that we are worried about. Other areas that we are taking a look at are professional service areas.

Think about lawyers, consultants, accountants, You know, it is there is no question that large language models are most easily applied in some of those instances. So that is the kind of discussions we have been having you know, around our table here.

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

Thanks, Moe.

Anything else, Gerard? Appreciate the Yeah.

Real quick.

Just coming back to Mohit for a second. I know you mentioned the multifamily credit, but in those other and you guys have strong credits, so I am I am not terribly concerned about that today.

But I am curious, those 2 other credits, was it because the customers are over levered or did they lose a big customer of theirs that hit their cash flow? But I am just curious what happened.

in those idiosyncratic issues that you guys have identified. Thank you.

Yeah. No.

Great question, Gerard. 1 was just a consumer name that was being impacted by tariffs in a multi-bank deal, And so, we actually expect a probably formal resolution later this year, but it was a company that filed for bankruptcy.

So, again, sort of view that as it was tariff related. But sort of idiosyncratic relative to that space.

And I do think, again, consumer probably is gonna be still a choppy area relative to as you think about not only the k shaped economy, but certain types of businesses as well. And so we are, again, increasingly selective there.

Relative to the portfolio, but that was really the driver.

And then you might just talk about the ag deal was really Yeah. We so we have some ag exposure that is in Western Washington.

And the biggest challenge there, obviously people talk about fuel, they talk about fertilizer. The biggest challenge is workers.

There are-- there is not there are just not enough workers to properly to do the farming. And just as an add on, since it is topical, we have no exposure to lettuce farming.

So, typically, our ag book is, again, potatoes and other things you might find in the Pacific Northwest.

Think the market for consumers market at this point, Gerard, is Amazon COVID and tariffs like back to back to back. So the guys who are hanging there are resilient and durable and that is a lot to ask for any industry.

Yeah.

I agree with you, Clark.

Absolutely.

Hi. Thanks for taking my questions.

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

Yeah. So let's start with payments.

You know, we have been investing in payments for a long time. Places like embedded banking, that is been a double digit grower for us for each of the last few years, and we project it to be a double digit grower for us as we go forward.

So we have got a lot of traction there. With respect to our wealth business, that is a strong business.

We are at 74 billion of AUM. We show that is up 9% year over year.

But if you really looked at the fees related to wealth management, those are growing at about 14%. So that is a that is a business we feel good about.

And we have been very focused, as I mentioned, since 2023 on this massive fluid space which we think is a sort of an unmet need out there in the marketplace. Thanks for that.

And then on deposit pricing, it sounds like it is very rate dependent. But how would you characterize the competitive environment in your markets?

More intense or about the same versus, say, 3 to 6 months ago?

it is a good question. So when we talk about our markets, it is a little challenging to have 1 answer because we really view ourselves as being in 3 different geographic markets between the Northeast and Midwest.

And the Pacific Northwest or the West. They do operate a little bit differently.

They do have slightly different competitive set. Would say there are certain places where it has been much more intense from the beginning of the year.

I think that is owing to some unique circumstances of competitive set. But I think given the loan growth and the rate environment combination, we are definitely seeing, again, throughout the year, a little bit more deposit intensity in general, but the rate sensitivity comment, again, to be clear, it is really just the betas that are gonna follow from any Fed moves.

So we are not necessarily thinking about the rates in a flat environment moving meaningfully from where they are today. Very helpful.

Thank you. Sure.

Well, thank you, Manan, and thank you all for joining our call today. We appreciate your continued interest in Ken.

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.