Good morning, and welcome to KeyCorp's Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's second quarter 2025 earnings conference call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer; and Clark Khayat, our Chief Financial Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. In the back of the presentation, you will find our statement on forward-looking disclosures 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, July 22, 2025, and will not be updated. With that, I will turn it over to you, Chris.

Thank you, Brian, and good morning, everyone. Today, we reported strong second quarter results in what can be described as a dynamic and complex macro environment. Earnings per share were $0.35, even while we added $36 million to our loan loss reserves and elected to prefund our charitable foundation this quarter. Revenues were up 21% from a year ago, while expenses were up about 6%, excluding the charitable contribution. Our pre-provision net revenue increased by $44 million sequentially, marking the fifth straight quarter that our PPNR has increased. In the aggregate, our PPNR has grown over 60% since the first quarter of 2024. We continued to demonstrate strong commercial loan growth. As of June 30, we had already achieved our full year plan to grow commercial loans by about $3 billion in 2025, and our backlogs in both institutional and middle market continue to build as we look to the second half of the year. We also continue to drive incremental value from our high-quality deposit franchise entering the year with a historically low loan-to-deposit ratio of 70%, combined with the runoff of low-yielding consumer mortgages, has afforded us the flexibility to prioritize beta management in the first half of the year. As a result, we have been able to manage down our deposit costs, which are now below 2%. Additionally, our cumulative down beta has reached the mid-50% range, which matches our terminal beta from the rising rate cycle. With respect to fees, which grew 10% from a year ago, our priority fee-based businesses all continued to perform very well. Investment banking had its second best first half of the year in history as debt and equity issuance normalized after pausing in April, particularly as we approach the end of the quarter. We raised over $30 billion of capital for our clients in the quarter, retaining 22% on our balance sheet. Commercial Payments fee equivalent revenue grew high single digits year-over-year. Assets under management reached a record $64 billion. Additionally, sales production in our mass affluent segment was a record in the first half of the year. Finally, commercial mortgage servicing continued its strong performance as named special servicing balances reached record levels and active special servicing balances remained near record levels. While top line momentum remains robust, concurrently, all of our credit metrics continue to migrate in the right direction. Net charge-offs, criticized loans, and delinquencies all declined from the first quarter while NPAs were essentially stable. Our overall credit migration improved for the sixth consecutive quarter, with commercial upgrades exceeding downgrades this quarter. Our strong first half results, combined with our healthy pipelines and active client engagements, drive our optimism that we will meet or exceed all of the full year and exit rate financial targets that we detailed for you at the beginning of the year. As Clark will discuss in more depth shortly, we are increasing our net interest income and loan growth guidance. Based on the rebound in client activity, we continue to feel good about our ability to deliver 5% or better fee growth this year. Investment Banking pipelines remain at historically elevated levels, essentially flat on a linked-quarter basis. Concurrently, we remain committed to holding expense growth in the low to mid-single-digit range, even while investing meaningfully in our frontline bankers and increasing our tech spend by nearly $100 million this year. On the hiring front, we are on track to increase our frontline bankers and client advisers by roughly 10% this year. We have successfully recruited highly skilled investment bankers, middle market relationship managers, wealth managers, and payments advisers to our platform, and our active recruiting pipelines remain strong. I'm also encouraged by our strong retention rates, which are reflective of our highly engaged sales force. As a reminder, we accelerated investments in people and technology late last year, and we are already seeing returns on those investments. For example, in the case of our middle market banking, the teams that we onboarded in Chicago and Southern California this last November have already driven new client growth, loan volumes, payments, and investment banking business. Our platform is very attractive to bankers with specific expertise that aligns to our industry verticals. Our new teammates can join the Key team and be more impactful to both their clients and their prospects. To wrap up, we had a solid first half of the year. We remain vigilant in a dynamic environment and are well positioned for a wide range of scenarios. We are operating from a position of strength. We have a leading capital position among our peers and ample liquidity that gives us the flexibility to take advantage of the inevitable market dislocations. Our clearly defined structural net interest income tailwind is materializing as expected. We are enjoying significant success in the marketplace while concurrently making investments in people and technology that will drive our future growth. With that, I'd like to turn it over to Clark.

Thanks, Chris. Starting on Slide 4. We reported second quarter earnings per share of $0.35. Revenue was up 21% year-over-year, while expenses increased 7% or 6%, adjusting for a charitable foundation contribution that we've historically done later in the year. Tax equivalent net interest income was up 4% sequentially and 28% year-over-year. Noninterest income increased 10% year-over-year, reflecting continued momentum across investment banking, commercial mortgage servicing, commercial payments, and wealth. We achieved approximately 1,400 and 300 basis points of total and fee-based operating leverage, respectively, year-over-year. Provision for credit losses of $138 million included $102 million of net charge-offs and a $36 million reserve build. Roughly half of the build is driven by loan growth and mix shift, and the remainder from the net impact deterioration in the Moody's macroeconomic scenario. Recall, last quarter, we made a qualitative adjustment to account for the heightened uncertainty at the time. We reversed some of that build this quarter as the uncertainty is now reflected in the Moody's scenario. Tangible book value per share increased 3% sequentially and 27% year-over-year. Moving to the balance sheet on Slide 5. Average loans were up $1.4 billion sequentially and increased $1.6 billion on a period-end basis. On a spot basis, C&I loans grew $1.7 billion and CRE loans grew $0.5 billion, partially offset by the intentional runoff of low-yielding consumer loans, namely residential mortgages. Within C&I, the growth continues to be broad-based across industries and regions with both large institutions and middle market clients. Most of the growth was from new clients to Key. C&I line utilization ticked up approximately 50 basis points to 32%. The CRE growth was primarily driven by project-based deals and affordable housing, traditional multifamily, and data centers. On Slide 6, average deposits declined by less than 1% from last quarter as we prioritized beta management in the first half of the year and primarily reflected a reduction in higher cost commercial client balances and retail CDs. Compared to the prior year, total deposits and client deposits both increased by 2%, reflecting growth in consumer balances. 95% of commercial balances are with clients that have an operating account with Key. Noninterest-bearing deposits were 19% of total deposits or 23% when adjusted for the noninterest-bearing deposits in our hybrid accounts, stable to the first quarter. Interest-bearing deposit costs decreased by 9 basis points during the quarter, and total deposit costs were managed below 2%. Cumulative deposit betas to the Fed rate cuts continue to perform better than expectations, reaching 55% in the second quarter. Overall, interest-bearing funding costs declined by 6 basis points, and our cumulative interest-bearing funding beta was 69% through the second quarter. Slide 7 provides drivers of net interest income and NIM this quarter. Tax equivalent net interest income was up 4% sequentially and net interest margin increased by 8 basis points to 2.66%. The increase was largely driven by proactive deposit beta management, fixed rate asset repricing, swap maturities, and commercial loan growth. NII also benefited from an additional day in the quarter. While client sentiment has improved compared to where it was on our last earnings call in mid-April, the environment remains dynamic. Given the macro uncertainty, we continue to hold roughly $4 billion to $5 billion more cash and other short-term liquidity than we anticipate needing over the medium term. This excess cash position had a 4 to 5 basis points impact on NIM but a de minimis impact to NII. Turning to Slide 8. Noninterest income was $690 million, up 10% year-over-year, with all of our priority fee-based businesses growing mid-single digits or better. Investment banking and debt placement fees were $178 million, an increase of 41% year-over-year. For the first half of 2025, investment banking fees were $353 million, the second best first half in our company's history. This quarter's growth was driven by syndication, commercial real estate, and equity issuance activity. Several clients accelerated their transactions into the end of the quarter to take advantage of lower yields and tighter spreads. While this does pull forward some activity from the third quarter, we have since backfilled a good majority of that pipeline, and so if current conditions hold, we're optimistic that the third quarter investment banking fees could look similar to 2Q levels. Elsewhere, commercial mortgage servicing fees continue to perform well, growing approximately 15% year-over-year. As of June 30, we were the named primary or special servicer on approximately $710 billion of CRE loans, of which about $260 billion is special servicing. Active special servicing balances remain elevated at approximately $11 billion, up 59% compared to the prior year. Our service charges and corporate services fees increased roughly 11% and 12%, respectively. The increase in service charges was largely driven by continued momentum in commercial payments while corporate services income was driven by loan derivative and FX client activity. Despite market volatility earlier in April and a 1-month lag in how we book our fees, trust and investment services income grew 5% and assets under management reached a record high of $64 billion. On Slide 9, second quarter noninterest expenses of $1.15 billion increased 2% from the prior quarter and 7% year-over-year on a reported basis. Year-over-year expense growth was driven by higher personnel expense related to the strong fee generation, continued investments in people and technology, as well as higher other business services and professional fees. During the quarter, we made a $10 million contribution to our charitable foundation. Consistent with prior guidance, we expect expenses to increase through the remainder of the year, reflecting continued hiring and technology investments anticipated growth in noninterest income and client activity, day count, and other seasonality factors. As shown on Slide 10, credit quality is broadly stable to improving. On a linked quarter basis, net charge-offs were $102 million, down 7% or an annualized 39 basis points of average loans. Nonperforming asset trends were stable. Dollars increased by 1% but NPAs to loans and OREO declined by 1 basis point to 66 basis points. Criticized loans declined by about $200 million or 3%. Turning to Slide 11. Our CET1 ratio was 11.7% at quarter end as loan growth and a change in loan mix offset net earnings generation. Our marked CET1 ratio, which includes unrealized AFS and pension losses, rose slightly to 10%. We believe both ratios continue to be at or near the top of the peer group. Moving to Slide 12. We are positively revising our 2025 guidance given the strong first half of the year and encouraging pipelines we see heading into the back half. This guidance continues to incorporate a range of potential scenarios, anywhere from 0 to 4 cuts as we move through the balance of the year. We now expect full year net interest income growth of 20% to 22% compared to prior guidance of approximately 20%. As a reminder, roughly 8% of our NII growth this year is due to the Scotiabank investment and related securities portfolio repositioning that we executed late in 2024, implying organic NII growth in the low teens this year. We also now expect our fourth quarter exit rate NII to grow 11% or better compared to the fourth quarter of 2024 and fourth quarter NIM to be approximately 2.75%. We've also improved our loan guidance for the year. As a reminder, our previous guidance for average loans was down 2% to 5% with loans flat on a period-end basis, including commercial loans up 2% to 4%. We now expect average loans for the full year to be down 1% to 3%. On a period-end basis, loans are now expected to be up approximately 2%, with commercial loans growing about 5%. Other P&L guidance remains broadly unchanged. We continue to expect adjusted fees will grow 5% or a little better with the upside primarily dependent on IV pipelines pulling through the second half. Expenses up 3% to 5% and note that we are currently planning to be at the midpoint of this range given client activity levels and pipelines to date. Net charge-offs as a percent of loans in the 40 to 45 basis point range. With respect to capital, we continue to target marked CET1 ratio of 9.5% to 10% over time, but as the macro outlook remains dynamic, it's our intention to manage to the high end of this range in the near term. With that, I will now turn the call back to the operator to provide instructions for the Q&A session.

The first question comes from Ryan Nash with Goldman Sachs.

You had better-than-expected investment banking fees and stronger loan growth in the quarter. It seems like the pipelines are still quite healthy as we move into the second half of the year. Clark, you mentioned some optimistic comments about third-quarter investment banking. To start off, Chris, can you discuss what you're hearing from clients regarding their sentiment and willingness to borrow and engage in transactions? And Clark, can you explain how all this has affected your financial outlook, particularly concerning the increased net interest income and loan growth? I have a follow-up question.

Sure. Well, let me start. From a client sentiment perspective, I would say that our clients are cautiously optimistic. I'm out, as you know, talking to our clients all the time, and it's interesting, they go through all the macro concerns, geopolitical, tariffs, trade. And then you ask about their business, and they say they feel pretty good about their business. So let me start with the consumer, Ryan. Our consumer is just fine. Just as a reminder, at funding, our consumers have a FICO score of about 767. And so as you look at how the credits are performing, if you look at how spending volumes are performing, our clients are in good shape. I think one of the things that the models really failed to pick up is the wealth effect. And the fact that household wealth in the United States over the last 15 years has increased by about $100 trillion, and that is not inconsequential. And I think when people start looking at hours worked and they start looking at the labor participation rate, I think sometimes that's missed. For example, we're a Main Street bank, and we have perfect information; 1 million of our 2.5 million customers have between $0.5 million and $2 million to invest. So that's the consumer. The consumer is in good shape. Let's talk about commercial for a second. I think balance sheets are healthy. Their liquidity is in good shape. I think the companies are a lot more agile, Ryan, than they were even going into the pandemic. If you look at their supply chains, if you look at their ability to just make changes on the fly, it's interesting. We performed a very detailed survey on 850 customers that borrowed $10 million or more. 50% of them think that the current environment is an opportunity for growth. As it relates to tariffs, because that's always a topic for everyone, 30% of our customers are impacted by tariffs. But here's the interesting thing. Of the $56 billion that we have outstanding in C&I, only 3% are significantly impacted in a direct way by tariffs. So that's just a little bit of a rundown there. The one thing I would add that I don't think people are talking about enough. It's not that pertinent to publicly traded companies. But for private companies, this 100% bonus depreciation, I think that's very significant. And none of that is in any of the plans that we're sharing with you today in any of our updated guidance. I think in the back half of the year, for the first time in a long time, you're going to see a significant ramp up in CapEx. And I'll just close by just giving a couple of watch points, as I always do. I think while we at Key, our criticized loans are down 13% year-over-year, the areas that we're watching very, very closely are any place there's leverage. One of my views is we could very well be in a higher for longer scenario. And if that's the case, we've got to really watch these leveraged companies. Only 2% to 3% of our loans are leveraged. The other place we're watching is any place that's dependent on Medicare funding. So that's hospitals and other places. We're watching those. And then we have a little bit of an outside-in perspective from our third-party commercial loan servicing business. As you know, we're named special servicer on $267 billion of loans. And when they go into active, we're basically the workout agent. And it won't surprise you, but what's in active special servicing right now is office, multifamily, principally in the Sunbelt. And then what's new is there's been a little bit of a surge in lodging, which I thought was interesting. But that's kind of a round robin on how we see the customers. Clark, what would you add to that?

Let's maybe start with NII since I think that's been in focus most of the year and another good quarter for us, up 4% first quarter to second quarter. And that's led to the kind of revised guidance here. So just as a reminder and for avoidance of doubt, we went from approximately 20% NII up year-over-year to 20% to 22%. And fourth quarter exit rate from 10% plus to 11% plus, and we picked up the NIM there as well. I think it's important to note that we have the equivalent level of confidence in the revised guidance we did in the previous, which means we believe we can deliver this across a range of conditions, inclusive of no cuts to port cuts and barring any significant macro or event-driven shifts. Built on strong first half performance, so more C&I growth than planned, better deposit performance, so down 9 basis points on interest-bearing deposits in the quarter. So really good performance on both there. We expect that to continue, but not likely at the same rate in the second half as competition begins to pick up a little bit on the deposit side. I think it's also important to note that the potential upside that Chris referenced in things like bonus depreciation and CapEx spend is not part of that guide. So if that materializes in any significant way, that could be potential upside there. I would say achieving the middle of the improved guidance range of the 20% to 22% does imply a pretty healthy 2% to 3% quarterly organic growth rate of second quarter levels. So we don't think it's a layup, to be sure. On fees, we had a very good second quarter across all the priority fee categories, and again, aided by a late rally the last few weeks of June in Investment Banking. I think back in early June, I noted the April pause was making the 5%-plus guide on fees a little tighter. Since then, obviously, activities picked up considerably. I think that's reflective of clients' willingness and ability to act quickly and a significant amount of investor capital that's on the sidelines waiting to get into the market. I think if we see that level of capital markets activity continue in the second half, we feel like we can deliver on the plus component of that fee guide. As for expenses, we continue to invest, as we've shared. We'll see an uptick in the second half based on continued hiring and investments in technology. I'd remind you, we accelerated the same types of investments in the fourth quarter last year, and we've seen those benefits already in 2025, very confident on this expense guide. And to the extent the market turned, and we saw some softness, we have ways to address fee growth through the back half of the year, but we don't plan to do that at the expense of sound investments for future profitable growth. And then lastly, credit metrics, stable to improving across the board. We're quite comfortable with our reserve at the moment and the direction of travel there; as it always does, will obviously depend on how the economy unfolds in the second half.

Got it. I appreciate the in-depth response. So maybe just as my quick follow-up, sort of where you left off, Clark. Results in the first half coming in better than expected, and this should set you up well for 2026 revenue growth. And when you think about expenses, you talked about in the midpoint of the range for this year. Can you maybe just talk about how you're thinking about the pacing of investments over the short to medium term? It feels like you're playing more offense now in terms of hiring and technology investing. And maybe just as we look ahead, what is the right way to think about the pacing of positive operating leverage over the medium term?

Ryan. So a couple of things. Obviously, positive operating leverage for us is a fait accompli this year. We focused on generating positive operating leverage from a fee perspective, and we'll continue to focus on that. We've also continued to invest at the current rates. We mentioned in our prepared remarks that we're growing bankers, middle market relationship managers, wealth managers, and payment advisers. We're going to continue to invest there. We, frankly, have been investing in technology the whole time. Every year, we've replaced core systems. We've actually migrated half of our apps now to the cloud. Our systems are in the cloud. We'll continue along that investment. But I'm a big believer that you've got to continually, through continuous improvement, be able to take out costs and serve our clients better. We were an early adopter when you think about robotic process automation. We've been an early adopter on machine learning. That goes as far back as our performance in PPP, you'll remember. And we're very focused on using technology to take not only out expense, but to have it be a better experience for both our teammates and our employees.

The next question comes from Scott Siefers with Piper Sandler.

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

Sure. To clarify your previous comment, our loan-to-deposit ratio stands at the lower end of our peer group, at 70%. This gives us some flexibility. While our deposit costs are slightly elevated, we have room to maneuver, especially with various CDs and MMDA promotional rates changing monthly. This trend will persist in the second half of the year. One aspect that hasn't unfolded as we anticipated at the start of the year, but still proves beneficial for liquidity, is the trade of residential real estate paydowns, leading to funds being redirected into C&I loans. Although this shift didn't occur as extensively as we expected, it still positively impacts liquidity. We also experienced favorable pricing this quarter. We made a deliberate choice to let some deposits roll off in specific areas, particularly in high-end commercial clients where the competition for pricing was robust, and we opted not to match those offers. Those clients remain with us, and we could regain those funds if necessary. Additionally, we allowed about $1.4 billion in retail CDs to roll off, which we are not replacing at the same pace. Despite the decline in our front book production for CDs and promotional MMDA due to our market rates, our client retention in these areas exceeded our expectations. It seems consumers may not be pursuing a 25 basis point difference at these levels. Another point about deposits is that we noticed CRE clients using cash for acquisitions instead of making paydowns, which would have otherwise contributed to our deposits. This trend also applies to our servicing book, resulting in lower deposits in those segments. We will monitor how this develops in the second half. Typically, our deposit low point occurs around mid- to late-April post-tax season, and we observed a slight shift into May. However, we have seen a nice recovery, especially in commercial deposits, as we approach the end of the quarter. Our commercial deposit pipelines are strong, and we anticipate growth in this area as we move into the second half, while also keeping a close eye on competitors' deposit activities based on industry commentary this quarter.

Got you. Perfect. And then if I could switch to capital for just a second. So I think you're now at the high end of the mark, common equity Tier 1 target. Just maybe a thought on where we are sort of with resuming repurchase and sort of order of magnitude in terms of appetite as we look into the second half of the year?

So Scott, it kind of our thought on capital is, one, yes, we are at the high end of our targeted marked CET1, right at 10%. Having said that, we've said that in this environment, we think it's good to carry a little additional capital and preserve optionality. There are a few things going on. One, our underlying organic business is very strong right now, and we want to make sure we have capital to support our clients, first and foremost, in the marketplace. Secondly, I think there's going to be an opportunity out there for us to continue to invest in people, and if they may come in groups, invest in technology, which I just talked about; that's high on our list. The next thing that I think you'll see us kind of continuing, that we always look at is kind of niche or tuck-in acquisitions. I think we're pretty good at buying these entrepreneurial groups and plugging them into our platform. Obviously, the dividend is important. And then that gives you kind of at the bottom of the stack that gives you two things that we could do with the excess capital. One is we could do tweaking of our balance sheet, which we're constantly looking at, or we could resume our share repurchases. I think we'll do that, but it will be kind of a crawl, walk, run approach. I would say that in the third quarter, you can assume that we would have modest share repurchases and then probably stepping up later in the fourth quarter. That's how we're thinking about it now based on the opportunities that we have in front of us.

The following question comes from Ebrahim Poonawala with Bank of America.

I guess maybe just Clark, following up with you on the NII and the margin outlook. I think in the past, you've talked about the margin potentially hitting 3% as you think about a normalized level for the margin. So if you don't mind, as we think about the 2.75% exit run rate in the fourth quarter, one, do you think we can get to 3% by next year? And in that world, I know you talked about the loan-to-deposit ratio, like is the balance sheet larger or smaller before you get to the 3% NIM?

Yes. So look, I think one note, we were at $2.66 in the quarter. And as we noted, we are carrying a little bit extra cash that probably cost us 4 or 5 basis points on NIM. So I think there's continued strong performance there. We still feel confident that by end of '26, we can be at 3% at the current course and speed. In terms of balance sheet size, I'd say there's probably a couple of ways to think about it. One, in our business model, and this is not an NII-specific answer, but we don't feel that we necessarily need to grow the balance sheet to grow the business given some of our capital markets distribution capabilities. That said, we will continue to see residential real estate runoff, something like about $600 million a quarter is what we've seen this year, maybe another $2 billion or so next year that affords us some liquidity to invest in C&I growth on an ongoing basis. And at this point, given our liquidity position, we could take down cash and/or reduce the securities book a little bit if we wanted to. So I think there's ways to actually grow NII and reflect that in a better NIM over time without necessarily a significantly larger balance sheet. But again, we'll operate based on, to some degree, where the environment is, and we've carried additional cash in the quarter, just given the April pause and some of the uncertainty we've seen out there.

Got it. My takeaway from your responses is that the momentum in both lending and capital markets appears to be strengthening as we look toward the latter half of the year. Chris, you mentioned the hiring of bankers. Could you remind us of the number of bankers you plan to hire and whether they will be within your existing verticals? What is the focus regarding additional banker hiring?

Yes, we mentioned that we would increase our frontline personnel by 10%, specifically focusing on investment bankers. We're expanding within our verticals. We also discussed middle market relationship managers, who typically operate in specific geographies while serving various industry verticals where we see the most potential in the market. Additionally, our wealth managers have a unique role, particularly in mass affluent markets, where we have a substantial opportunity as we've only tapped about 10% of that segment in our current business. Therefore, our recruitment strategy in that area is distinct. Furthermore, our payment advisers are primarily software specialists, as our focus is on implementing our complex embedded banking solutions. This is the type of talent we are bringing on board, and as we noted earlier, there is a considerable talent pool available at the moment.

The next question comes from Chris McGratty with Keefe, Bruyette, & Woods.

Chris, on the deregulatory question, I think you addressed kind of uses of capital. But if we think about where Key is spending money, you talked about the increase in tech spend. If we do get broader deregulatory reform, is there a reallocation of where you're allocating dollars maybe towards more productive revenue producers versus more back office regulatory costs?

The interesting aspect, Chris, is that even though the final details of Basel III are still pending and there are existing liquidity rules, we have essentially implemented all the proposals as they have emerged. We believe we have made the necessary investments in our foundational processes. Consequently, we see an opportunity to increase hiring frontline staff because we have a distinctive business model, as well as to invest in technology. We expect to make strides regardless of the situation. Clearly, the regulatory environment will only become more favorable, and we believe we are starting from a strong position.

The next question comes from Ben Risbeck with Autonomous.

Guys, it's Ken Usdin. Chris, you mentioned in your prepared remarks that you kept about 20% of the $30 billion originated for clients. It's a little higher of a keep rate than you had in the past. I'm just wondering how much more are you willing to push that in terms of both seeing the improved potential originations out there and your comfort with like your hold levels of that origination capacity?

Yes, that's a great observation. Typically, we've held about 18%, and as you pointed out, we were above 20%; we reached 22% last quarter. This is primarily driven by what’s best for our clients. During a brief market dislocation in April, we had the chance to structure investments and place them on our balance sheet in a way we felt good about. As I've mentioned before, when everything appears positive, it can be challenging. However, a little dislocation in the market is beneficial for us, and it certainly proved advantageous last quarter.

Okay. You mentioned earlier in the quarter that the line was expected to increase, but it only rose by about 0.5% for the quarter. Could you discuss the factors influencing this, particularly regarding unfunded growth and clients' readiness to utilize their lines?

Yes. That's a great question, and it's one that frankly has confounded us. I would have thought that people would have been aggressively forward buying all the tariffs. It's interesting, in the middle of the quarter, we were actually up more like 1%, and we ended up the quarter up about 0.5%. It continues to be something that we're watching. Obviously, that's the easiest way for us to grow loans. I think as we get into an environment where there's probably more certainty, we may see people forward buying the tariffs, but we have not seen a lot of that in our book, and we're pretty close to our customers. I've been surprised.

One other slight point on that utilization rate, Ken, is the denominator grew a little bit in the quarter as well. So that wouldn't offset the entire 0.5%, but would certainly bring it down a little bit.

We have a question from Manan Gosalia with Morgan Stanley.

Can you talk about just pricing competition on both the loan and deposit side? I think some of your peers have noted some pressure on spreads, and you also called out tighter spreads in the capital markets. So as you think about your forward loan growth, can you talk about how you expect spreads to trend? And maybe also on the deposit side, I think you called out that you expect more competition there. So if you can talk a little bit more about that.

Sure. So let's start with loans because we've touched a little bit on deposits this morning. So on the loans, if you look at the pricing of our loans, we're basically flat year-over-year. We are seeing additional competition, additional market participants, and that sometimes manifests itself in people taking larger hold levels. It manifests itself in people stretching maybe a bit on structure. We clearly aren't doing that. But as I've said many times, a properly graded commercial loan can't return its cost of capital, and that's why our business model is so important, Manan, and that we can do so many other things for these clients. So our pricing has actually stayed flat. But I think pricing on quality loans will continue to be a challenge just based on what I see is excess capacity out there. Having said that, as you can see, we are able to monetize these relationships in a variety of ways. Well over 95% of our borrowing commercial customers, in fact, have a more wholesome relationship than just borrowing. So I think that's really important. I think that's the key. And that, frankly, is how banks like Key can compete with a variety of competitors. On the deposit front, I think Clark covered that. We've seen very rational pricing to date, although obviously, we, like you have heard some of the recent discussions of increased focus on pricing. Clark, what would you add to that?

Look, we noted a little bit more competitive pricing on the commercial deposit side; we'll watch that closely, particularly as we expect some growth in that book in the second half. I think broadly, in our markets at least, consumer pricing has been pretty rational, as Chris noted. There are some spots where we've seen either a push on premiums or a push on some teaser rates. We have seen conversely, in a couple of Western markets, some large players actually take their front book rates down. So it's a little bit of a mixed bag. And I think when you get to this level in the deposit game, it is a very local market-to-market business, and we're watching it in exactly that way.

Got it. Very helpful. Maybe on the credit side, with the strong C&I growth and the mix shift in loans, how should we think about the reserve ratio from here? Has it bottomed here? Or is there more room to bring it down if criticized loans and NPLs keep moving lower?

Yes. I mean, look, three things, as you know, drive the reserve, right? The loan growth, the general credit quality of our own book, and then the macroeconomic environment. So I think, as we said, our credit metrics overall stable to improving. If we continue in that direction, you would see that reflected appropriately in the reserve. Half of our build this quarter was really loan growth. So that's a high-class problem, generally speaking. And then the macroeconomic conditions, obviously, are a little bit outside of our control. We will reflect that appropriately. I think if some of the upside that Chris referenced earlier came to pass and that led to a stronger, more constructive economy, there's clearly room to reduce the reserve, but we still see a fair amount of uncertainty, and that's why we didn't pull off the entirety of the qualitative reserve we put out in the first quarter.

The following comes from Erika Najarian with UBS.

I wanted to discuss the loan growth guidance. Ending loans have increased by 2%, and you've already achieved that for the first half of the year. Are you expecting a similar trend for the second half related to Clark's comments about potential residential growth influencing loan growth? Chris seemed very optimistic, mentioning that the underlying organic growth is robust, likely referring to commercial and industrial lending. Additionally, you mentioned that reaching the midpoint of the net interest income guidance would require 2% to 3% organic growth, and I wanted to clarify that point.

Sure. To start with the second quarter results, reaching the midpoint of our guidance at 21% would require us to achieve growth in the range of 2% to 3% in the upcoming quarters. We believe this is quite achievable, even if it may not be straightforward. If this isn’t clear, please let me know, and I can provide more details. Regarding loan growth, I think it aligns with your observation. Please go ahead.

Look, we saw stronger growth in the first half than we expected. We continue to expect to see growth, just again, not necessarily on balance sheet at the same level. It will be offset by what we would expect right now, which is a little bit of CRE paydown and some resi real estate paydowns. So right now, we're sort of kind of net neutral on a balance basis but moving more and more to that C&I profile, which we prefer. The other way I would think about it is if the capital markets get really strong, you could actually see more of that loan production go straight into the market and even some come off balance sheet and get refinanced into the market, that's pretty typical, and that would be our model, which is often reflected in kind of the lower retention rate of the capital we raised in the quarter. Conversely, if things slow, as Chris noted, we might use the balance sheet a little bit more, but it's probably on aggregate lower volume. So it gets us kind of similarly to a balance sheet growth rate on the C&I side, which again, we think gets offset by the runoff in those other portfolios. All of that to say, if some of the upside based on the CapEx and bonus depreciation provisions does occur, that's not really in the guide, and you could see some potential for a little bit of outperformance on C&I.

We have a question from John Pancari with Evercore.

Just looking for additional color on the loan growth drivers within C&I. I know it sounds like you do expect some strengthening there, particularly as you see the continued roll-off in CRE, and you're investing the residential roll-off into C&I. What are the industries? And what type of lending do you expect to gain the greatest momentum within the C&I book throughout the back half? And does your guidance for commercial growth reflect that expectation at the Capital Markets gain steam and you could see some financing go into the markets?

So let me start with the last part of the question first. It does not. I mean, we sort of assume kind of continuation of the way the markets are currently operating because that's just an easier way to plan. In terms of where we see the volume, it's pretty broad-based. But we're fortunate in that we are significant players in certain areas that lend themselves to sort of continuous new projects. One would be renewables. And obviously, renewables have been in the media a lot lately. We finance literally the best players in the renewable energy space. The way the bill was written is as long as you're completed in 4 years, you're in good shape. And so our backlogs there are intact, and talking to our leaders there, we feel good about that. The next area where we get a lot of growth in is affordable housing. Affordable is one of the few areas that I've always said people on both sides of the aisle really agree on, and there's a bunch of things that are very good on a net basis for affordable. So those pipelines are strong. And then the other place where we're getting a fair amount of growth is around both our health care business. Obviously, health care is going through a big transformation; there's opportunity there. We also have a public sector business that's having a good year. And then just broadly, our middle market bankers are gaining share broadly. So that's where the growth is coming from both that which we funded and that which we see in the pipeline.

Got it. Great. And then separately on the capital front, we've seen a pickup in sector M&A amid the regional activity. And just curious in your updated thoughts around bank M&A. Where is it on your priority list, and would you consider smaller transactions on that front if something interesting came up? And then maybe just an updated outlook around nonbank.

I'll begin with banks and specifically discuss our interest in them. It's not a top priority for us. As I mentioned about our capital priorities, it doesn't rank high. Currently, in the larger banks, there seem to be many buyers with little interest from sellers. Conversely, with smaller banks, there are likely many sellers but few buyers. Despite this, I believe we will start to see an increase in bank mergers and acquisitions, and we've already observed some early signs of that. The second point is crucial for our business: an overall increase in M&A activity. We have a substantial M&A business, but middle market M&A has seen a significant decline. I anticipate a rebound in activity after Labor Day. Despite the strong performance of our investment bank, we haven't seen much boost in M&A yet. However, people are beginning to understand what is achievable and how fast approvals can come through, which applies to both banking and nonbanking sectors.

And maybe just the last add-on is the non-bank acquisition front for us, which, Chris, I think, noted once or twice and just that is a little bit of our bread and butter. We consistently look at that, whether it's capital markets, payments, or anything else that fits our priority fee businesses generally, and we'll continue to do that.

Yes. We have a long history there. I'm really proud of our ability to buy entrepreneurial businesses. This goes back to all the partnerships we did with fintechs and all the boutiques. Not many large companies, I don't think, do a really good job of bringing on entrepreneurial businesses, and I think we do. We look at a lot of them, John. We obviously don't act on many, but I think that's an opportunity for us.

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

Good point, Mohit.

We have a question from Matthew O’Connor with Deutsche Bank.

Can you frame how far along you are in terms of adding the 10% bankers across the businesses? Are you halfway? Have you front-ended it a bit?

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

Okay. That's helpful. And then just separately, any updated thoughts on consumer lending strategy. I know you talked about continued rundown in the mortgage book, and obviously, other areas have been running off as well. But just any updated strategic thoughts on consumer lending?

Sure, Matt. I think what you'll see us is lean into HELOCs. We have the capability to do it. We're in the business right now. And obviously, our client base is older, has equity in their home for a variety of reasons that you know well, probably won't be moving and we'll be looking at tapping into the equity. And so I think that's probably a $2 billion or $3 billion opportunity for us as we ramp that up. Thank you, Matt.

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

Well, we appreciate everyone's interest in Key and the discussion this morning. If anyone has any further questions, please reach out to our Investor Relations team directly. Thank you. We're adjourned. Goodbye.

This concludes today's conference call. Thank you for your participation. You may now disconnect your lines.