KeyCorp ($KEY)

Good morning, and welcome to KeyCorp's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp's Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's First Quarter 2026 Earnings Conference Call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer; Clark Khayat, our Chief Financial Officer; and Mo Ramani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. 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, April 16, 2026, and will not be updated. With that, I will turn it over to Chris.

Thank you, Brian, and good morning, everyone. Our strong first quarter performance demonstrates disciplined execution and significant momentum as we continue to deliver on our commitments. We reported first quarter earnings of $0.44 per share, up 33% year-over-year. Return on tangible common equity exceeded 13% as we continue to make significant progress with respect to our goal of 15% plus return on tangible common equity by year-end 2027. Revenue grew 10% year-over-year with revenue growing more than 2x the rate of expenses. Adjusted pre-provision net revenue grew an additional $29 million sequentially, marking the eighth consecutive quarter of adjusted PPNR growth. Net interest margin expanded 5 basis points sequentially to 2.87% as we remain on track to exceed 3% net interest margin by year-end. Commercial loan growth was strong and broad-based across industries and geographies, increasing $3.3 billion or 4% sequentially on a period-end basis. We continue to be disciplined with respect to funding cost management. Total funding costs declined by 15 basis points during the quarter with interest-bearing deposit costs decreasing 22 basis points resulting in a cumulative through-the-cycle down beta of 56%. Asset quality metrics remained strong, with a net charge-off ratio of just 38 basis points. In addition to improving our return on capital, we remain committed to substantial return of capital to our shareholders. During the quarter, we took advantage of the pullback in regional bank stock prices and repurchased nearly $400 million of common stock, well in excess of the $300 million plus commitment we made in January. We are also encouraged by the latest Basel III end game proposal. Our preliminary estimate shows a 100-plus basis point benefit to our marked CET1 ratio under the revised standardized approach, if implemented as currently proposed. This would imply a fully phased-in ratio of around 11%, higher than our peers and higher than we believe we need to operate our business in the ordinary course. Our capital position gives us flexibility to continue to lean in aggressively this year and in the coming years to support our clients, to support our own organic growth and to repurchase our shares. Subject to market conditions, we expect to buy back at least $1.3 billion of our shares in 2026, up from the $1.2 billion we previously communicated. While the macroeconomic environment has continued to be dynamic, we will remain laser-focused on managing what we can control, the delivery of our differentiated capabilities, acceleration of new client acquisition and exceptional service to all our clients. We continue to grow clients. Commercial clients were up 3%, and relationship households were up 2% from the prior year in the first quarter. We continue to gain share across our priority fee-based businesses, wealth, investment banking and commercial payments. In the first quarter, these businesses collectively grew by 12% when compared to the prior year. This past quarter, we raised nearly $47 billion of capital on behalf of our clients, retaining 19% on our balance sheet. Investment Banking pipelines continue to remain elevated, up 5% from year-end with M&A pipelines at record levels. While we do currently expect investment banking fees to decline in the second quarter compared to the record first quarter given current market conditions, we continue to feel very comfortable that we can grow investment banking fees in the mid-single digits for the full year. Commercial loan pipelines also remained very healthy, up nearly 20% from year-end despite the strong pull-through in the first quarter. Our mass affluent wealth strategy continues to bring in new households, net flows and client assets to Key reaching 57,000 households and $7.4 billion of total client assets as of March 31. With a mass affluent household opportunity of 1.15 million customers, we remain less than 10% penetrated implying a significant runway going forward. We continue to hire frontline bankers. This past quarter, we hired a middle market banking team based in Atlanta and a family office and private capital team based in Kansas City. We also hired talented investment bankers and wealth managers as our differentiated platforms continue to attract top bankers. We will continue to grow our banker ranks including evaluating team hires and niche tuck-in nonbank transaction opportunities as they arise in order to leverage our unique but currently underleveraged platforms. Lastly, we are investing approximately $1 billion in technology this year that will give us new product and service capabilities and deliver better outcomes and experiences for those we serve. As it pertains to AI, we are focused on a few thematic use cases that will enhance client experiences, accelerate credit decisioning, increased technology productivity and strengthen risk and security monitoring. Given the strong start to the year and the favorable dynamics we are seeing across loans and deposits, we have increased our full year net interest income and loan guidance while reiterating each of our other financial commitments. While we enjoy strong momentum, we will remain vigilant as it pertains to a wide variety of potential macroeconomic outcomes. Our updated NII guidance assumes a wide range of interest rate scenarios. Additionally, we have added to our already elevated qualitative loan loss reserves this past quarter in order to account for a wider range of potential macroeconomic outcomes. As it pertains to private credit, we have provided additional disclosures this quarter. The summary here is we continue to be very comfortable with these books of business. Finally, the first quarter was a strong quarter, and our business enjoys a significant amount of momentum. Before turning it over to Clark, I am pleased to announce that Clark has assumed an expanded role to lead our technology and operations organization, in addition to his role as CFO. We look forward to the contributions he will bring to our technology and operations teams at a pivotal and exciting time as we leverage AI to grow our business and better serve our clients. With that, I'd like to turn it over to Clark. Clark?

Thanks, Chris. Starting on Slide 4. We reported first quarter earnings per share of $0.44. Revenue was up 10% year-over-year, while expenses increased by 4%. Taxable equivalent net interest income increased 11% year-over-year and was up 1% sequentially despite impact from 2 fewer days in the quarter and seasonally lower deposits. Noninterest income increased 8% year-over-year as our priority fee-based businesses collectively grew by 12%. Loan loss provision of $106 million included 38 basis points of net charge-offs and a reserve build of $5 million. The net build reflected additional qualitative reserves to account for the macro uncertainty, offsetting improvement in Moody's economic scenarios and credit migration trends. Tangible book value per share increased 10% year-over-year. Moving to the balance sheet on Slide 5. Average loans were up $1.4 billion sequentially and increased $2.6 billion on a period-end basis. Average C&I loans and average CRE loans both grew by 3%, partly offset by the ongoing intentional runoff of low-yielding consumer loans. On a period-end basis, C&I loans grew by $3 billion or 5%. Growth was broad-based across industries and regions with both institutional and middle-market clients. The largest industry contributors were within our financial services and utilities, power and renewables industry verticals. C&I line utilization increased 1% sequentially to 31.5% as loan growth outpaced commitments. Turning to Slide 6. With the attention that NDFI and private credit have been getting lately, we provided some additional disclosures with respect to our portfolio, and we want to share how we manage the businesses. First, a reminder that the NDFI nomenclature is a regulatory definition. As you know, these definitions have changed and continue to be refined, and we will continue to apply our best efforts to categorize these loans within the spirit of these definitions. In the quarter, we grew NDFI loans by $2.4 billion. A 1/3 of that growth is a result of the reclassification of existing loans. So that's not actual loan growth but rather an expansion of what had previously been included in the category based on further examination of the regulatory guidance. The loans here are real estate nonowner occupied. The additional growth of approximately $1.6 billion comes from three areas. About half of these are loans connected to real estate debt funds run by sophisticated sponsors with whom we have deep relationships, and where the underlying properties are geographically diversified. We expect to syndicate about 25% of these loans in the second quarter. Second, $400 million of this growth is fairly evenly split between insurance and other high-quality finance companies. And third, our specialty finance business loans grew about $400 million, primarily from AAA-rated CLOs. While we will, of course, continue to disclose NDFI under the regulatory rules, this is not the way we think about these loans. There are a reflection of 4 distinct businesses that are collectively 90% investment-grade, institutional real estate lending, specialty finance lending, insurance and finance companies and our unitranche funds. Each business is relationship based and has its own set of credit concentration limits and risk parameters with de minimis NPLs and much lower criticized loan rates than our other commercial loans. As it pertains to private credit, as the waterfall shows, we estimate approximately $10.9 billion of outstandings as of March 31, with roughly 70% through our specialty finance lending business, which are asset-backed loans made largely through bankruptcy remote SPE vehicles. SFL loans are 98% investment-grade, diversified by industry and geography with thousands of underlying obligors. We typically underwrite to the counterparty and their underwriting policies and have a long list of collateral eligibility criteria that they must adhere to. First loss cushions typically range from 30% to 50% and we're very disciplined when it comes to ongoing collateral and liquidity monitoring with structural protections if performance deteriorates. Through the first quarter, all of our facilities are performing as structured and required. In short, we think these are great businesses. They are relationship based with excellent credit profiles and require the focus and expertise that make them excellent examples of our targeted scale strategy. Turning to Slide 7. Average deposits decreased by 2% sequentially, reflecting typical seasonal patterns and the intentional runoff of $1.6 billion in higher-cost brokered CDs. We expect the deposits to trough in early May and grow from there through year-end. Reported average noninterest-bearing deposits decreased 5.5% sequentially but remained stable at 24% of total deposits when adjusted for our hybrid accounts. Total deposit costs declined by 16 basis points to 1.65%. Our cumulative interest-bearing deposit beta increased to 56%. We continue to take proactive actions in repricing deposits through limiting our incremental funding needs by remixing loans from consumer to commercial, gathering low-cost commercial deposits, particularly in payments while allowing certain rate-sensitive excess commercial deposits to leave and by actively rotating maturing CDs in the money market deposits in consumer. Overall, interest-bearing funding costs decreased by 21 basis points, bringing our cumulative funding beta to 68%. Slide 8 provides drivers of NII and NIM this quarter. Taxable equivalent NII was up 1% and net interest margin increased 5 basis points from the prior quarter to 2.87%. The increase was driven by remixing lower-yielding consumer loans into higher-yielding commercial loans, swap repricing and proactive deposit beta management, which more than offset the impact of seasonally lower deposits and 2 fewer days in the quarter. Our balance sheet position continues to be fairly neutral to changes in interest rates as we move through 2026. We would see some modest benefit from reductions in the short end of the curve as well as from increases in 3- and 5-year reinvestment rates. On Slide 9, noninterest income increased 8% year-over-year. Investment banking and debt placement fees were $197 million, an increase of 13% year-over-year and a new first quarter record. Growth was driven by M&A, equity issuance activity and commercial mortgage debt placement activity. Our pipelines remain elevated and were up about 5% from year-end. M&A pipelines were at record levels. Still, as Chris mentioned, given uncertain market conditions, we're planning for second quarter investment banking fees to be in the $175 million to $180 million range with upside if geopolitical and other macro risks subside. We continue to feel very comfortable that investment banking fees will grow mid-single digits in 2026. Trust and investment services income also grew 13% year-over-year, reflecting positive net flows and higher market values. Assets under management remained stable at $70 billion. Service charges on deposit accounts and corporate service fees increased by 12% and 9% year-over-year, respectively. The increase in service charge was driven by growth in commercial payments which grew fee equivalent revenue at 11%, while corporate services income was driven by higher loan commitment fees and client FX activity. Commercial mortgage servicing fees were $62 million, down $14 million year-over-year, largely driven by lower deposit placement fees as well as resolutions in special servicing. At quarter end, we were named primary or special servicer on approximately $720 billion of CRE loans, of which about $265 billion is special servicing. Active special servicing third-party assets were $10 billion, about half in [ orders ]. This is down from $12 billion a year ago as the commercial real estate industry continues to recover. 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 10, first quarter noninterest expenses of $1.2 billion improved 6% sequentially when excluding the prior quarter's FDIC special assessment and increased 4% year-over-year. Compared to the year ago quarter, the increase was driven by higher personnel expenses related to our frontline banker hiring, incentive compensation associated with the strong fee performance and higher benefits costs. Sequentially, expenses declined due to lower incentive compensation, seasonally lower professional fees and marketing expenses and fewer days in the quarter. Expenses are expected to increase through the balance of the year, reflecting our ongoing investments in people and technology incentive compensation associated with expected continued revenue momentum and other seasonal impacts. We continue to feel very comfortable with our full year expense growth guide of 3% to 4%. Turning to the next slide. Credit quality remains solid. Net charge-offs were $101 million, down 3% sequentially and were an annualized 38 basis points of average loans. Nonperforming assets increased by $65 million sequentially back to third quarter 2025 levels and remain below historical levels at 63 basis points. The increase was driven by 2 credits in utilities and multifamily real estate industries, respectively. We're confident we will resolve these credits in the coming quarters, and we are well reserved against them today. Lastly, criticized loans declined by $3 million sequentially. Moving to Slide 12. Our CET1 ratio was 11.4% and our marked CET1 ratio was 10% at quarter end. Our preliminary assessment of the updated Basel III Endgame proposal is that our risk-weighted assets would decline by approximately 9% under the revised standardized approach resulting in a 100 basis point plus improvement to our marked CET1 ratio. RWA relief would come primarily from lower risk weights associated with off-balance sheet commercial loan commitments, residential mortgages and corporate loans. As we wait for rules to be finalized, we'll continue to manage our marked CET1 ratio in the 9.5% to 10% range under current RWA methodology. We expect to repurchase at least $300 million of our shares per quarter for the balance of the year which implies at least $1.3 billion for the full year. We remain focused on supporting our clients and growing our business. And as Chris mentioned, delivering a return of capital and a return on capital for our shareholders. Moving to Slide 13. We're positively revising our 2026 guidance given the strong start to the year. We now expect full year net interest income growth of 9% to 10% compared to our prior guide of 8% to 10%. We now also expect to exit the year with a net interest margin of approximately 3.05% on a stable earning asset base relative to the first quarter. This guidance holds under a fairly broad range of interest rate scenarios. As of today, our base case assumes no cuts this year. We also improved our loan guidance. Average loans are expected to increase 2% to 4% compared to our previous guidance of 1% to 2% and average commercial loans are now expected to grow 6% to 8% this year. All of our other guidance remains unchanged, although as you would expect, we continue to monitor macro conditions closely. In summary, subject to the usual macro caveats, we're confident that we will deliver another year of outsized organic revenue and earnings growth for our shareholders. With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Operator?

[Operator Instructions] Our first question will go to the line of Erika Najarian with UBS.

The first one is for you, Chris. Given the strength that you showed this quarter on both lending and fees, maybe talk a little bit about client sentiment and how they're balancing sort of the geopolitical volatility with some of the positive on the ground big beautiful bill stimulus and everything else that's happening domestically. And additionally, thank you so much for the NDFI break down. I'm wondering what you're seeing in terms of sponsor activity, what you're seeing in terms of your private credit clients? And one of your peers, David Solomon mentioned actually in the private credit space widening spreads. I'm wondering if KeyCorp is seeing something similar.

Well, sure. Erika, let me start, if I could, with the consumer because that's a little less complicated. The consumer is in great shape. If you look at all of our credit metrics, if you look at the fact that these tax refunds from the big beautiful bill will exceed what they did last year, if you look at spending, spending is up kind of mid-single digits year-over-year. Online spending is up maybe double digits. The other thing that's interesting with our client base is the wealth effect. And I think this is something that's been underreported. So we're talking -- when we talk about mass affluent, we're talking about our customers with between $250,000 and $2 million to invest. 18 months ago, we thought that universe was 1 million of our 3.5 million customers. We went back and redid it based on market activity. We now believe it to be 1.15 million, so up 15%. So on the consumer side, the consumer -- actually, our consumer is in good shape. Now on the commercial side, there's obviously some puts and takes. You saw for the first time, as Clark detailed, our utilization went up, which is a good thing. We're starting to see people actually invest more in CapEx with some of the benefits from the big beautiful bill that you pointed out. And then, of course, the flip side of it is, is just the macro uncertainty. And so what we did see in the quarter is some people pulled some deals forward. So think about if you were going to go to the investment-grade credit markets and the activity started, you probably pulled that forward. Conversely, on M&A deals, what's happening is they're not going away, but people are kind of slow playing it, doing a lot of due diligence because there's so much volatility kind of day-to-day, week-to-week. And so we saw -- sort of saw both sides of that. Having said that, as we said earlier, our pipelines remain very, very strong. So I'm very optimistic about kind of where we are from our commercial businesses. But obviously, it's not without impact from the near-term volatility. Second part of your question as it relates to NDFIs a very great question because this is kind of a developing area. And so we've seen a steady march down in terms of spreads for a long time because there's just been too much capacity in the market with respect to commercial loans. What we're seeing just as of late is a firming there. And part of the firming of that is that some of the private credit players, obviously, in light of redemptions are not in the market the way they have been. And I actually think, as you look forward, there's a lot of discussion around private credit. I personally don't think there's a credit problem, but these redemptions are real. And that if you have a bunch of redemption requests, the first thing you do is stop shoveling it out the front door, which I think will give the banks in some instances, an opportunity to reintermediate some of those activities. So that's kind of a -- that's my perspective. Anything else on that, Erika? Operator, we will take the next question.

Yes, of course. Next question will go to the line of Ken Usdin with Autonomous.

I appreciate it. I want to ask a question on deposits. I know the first quarter is seasonal and it had a decline in brokered CDs. Just wondering how you think that deposits will trend from here? And if you think you're getting close to the bottom of that NIB mix, which I know was part of that seasonality in the first quarter?

Yes. Ken, it's Clark. Thanks for the question. So you hit on the -- I think, the bigger drivers broker deposits coming out at about $1.6 billion seasonal decline. So first, I would say, as we did decline, we are actually slightly better in the first quarter than we would have planned. So I think just consistent with our expectations. On NIB, you did see that come down on a reported basis. I think if you put our hybrids in there, we're stable. So those continue to be a very good vehicle to work with commercial clients and maintain those high-quality operating deposits. And I think, as usual, we would expect to trough kind of mid-May and then build up through the quarter. So I'd say first quarter to second quarter average balances will be stable to maybe slightly up, but I'd expect ending balances June 30 to be higher and those to continue to rise through the course of the year. So we feel very good about the liquidity we have if loan growth continues or picks up. We have low loan-to-deposit ratio on a relative basis. We brought our market funds down. So we have a lot of third-party capacity if we need it. And then we have great access to client, excess deposits and new operating deposits. So if we need to fund more loan growth, that's a high-class problem that we feel very confident about.

Yes. And as a follow-up, on the cost side, you put in the slides about the cumulative down base has been great at 56%. With rates presumably on hold for a while, can you just talk about deposit competition? How much room do you have, if any, to continue to bring down deposit costs and just the environment out there across the businesses for deposit taking?

Yes, sure. So look, I think you hit it. With no cuts, and that is our base case, we'd expect deposit pricing in general to sort of stabilize. Now if loan growth really kicked in, some of the dynamics Chris talked about if banks really step back in, we would expect some intensification of that deposit pricing. Right now, our view is that those will be fairly stable. Our deposit price will be fairly stable at this point. And as I just outlined, we will get back some balances on things like NIB and others. So I think we have some puts and takes. We will continue to drive down broker deposits through the first half. But if we needed more funding, and we had to dip into that market to not hit more painful pricing across the book, we can do that. So I think we continue to have a lot of avenues at our disposal. I think if there were cuts, our deposit betas will probably drop a little bit in year just given the timing component of that. Again, our base case is stable, and I think we can hold serve in the mid-50s as we move forward. But that's all premised on the loan growth we're guiding to. So if that came in stronger, we might see a little bit of a dip there, but I think we'd make that trade-off as long as it's good quality relationship growth.

Our next question will go to the line of John Pancari with Evercore ISI.

I guess just -- similarly, on the competitive front on the lending side, and one of two of your peers have cited a bit more aggressiveness out there on the lending front, particularly on structure for the most part, also to a degree on pricing. Are you seeing this showing up in your markets? And maybe if you can talk about how it's influenced loan spreads that you're seeing as you're pricing new originations?

Yes, John. So the phenomenon you're talking about has definitely been a prevailing phenomenon for some time. What I was describing in my answer to Erika is sort of real-time some adjustment that we're seeing. But there's no question there's been excess capacity for some time, and I've talked about this at length that a properly graded commercial loan can't return its cost of capital. And there's been just a constant pressure on spreads and on structure. I think we may be, and I emphasize the word may be at an inflection point on that trend.

And just from a risk management perspective, again, we have not adjusted any of our credit boxes or underwriting standards. We are still maintaining, again, the same standards that we've always had.

Yes. No, I think that's a good point. I mean, we never give on structure. Obviously, it's a market out there, and we price where we need to price. The advantage we have, John, is we can do a lot of other things for these clients, whether it's payments, whether it's strategic advice, hedging, et cetera, that's how we run our business.

And frankly, if the capital markets have a better deal, we'll place it.

Yes, as we did 80% of the time this last quarter.

Got it. Okay. Very helpful. And then you gave some pretty good color here on the capital front in terms of buyback expectations. I guess just if you could just remind us of your allocation priorities there? And if anything, could impact that pace of buyback? And how do you think about any potential inorganic opportunities?

So I mean, obviously, what could impact it more than anything is if we had a severe macroeconomic downturn and started having credit losses. We do not see that. We feel really good about our credit book. Our capital priorities remain unchanged. It's first to support the growth of our clients, which we were pleased to see that we got in this last quarter. The next thing is to invest in our business. And we always talk about -- when we talk about investing in our business, it's really people and it's technology. And so we'll continue to invest heavily in our business. We also, as I mentioned in my remarks, will continue to hire a lot of individual bankers, we'll hire groups of bankers. And opportunistically, we would look at small acquisitions of kind of boutique type operations, which are really just an extension of hiring a group of people. The next priority, of course, is to pay our dividend, which we don't talk about a lot, but it's $0.25 a share, which is not inconsequential as you look at the yield. And then lastly, purchase -- repurchase our shares. And we said earlier in our comments, John, we plan to repurchase $1.3 billion worth of stock in the year.

The next question will go to the line of Ryan Nash with Goldman Sachs.

So Chris, if I look at the high end of the loan growth guidance, it doesn't imply that much growth from the 1Q end-of-period levels. Now I know you mentioned some moving pieces and one of your other answers, some syndications that could be coming in 2Q. But curious on the drivers of loan growth from here. What will drive the slowdown? And can there be some upside from current expectations?

Well, thanks for the question. I'll start with, I guess, what the premise of your question is the loan guide conservative and that if we didn't book a whole bunch of more loans will basically grow at 6% for the year. And I'd say there probably is some appropriate conservatism in the number, given the macro uncertainty out there. But let me kind of give you the pieces and parts. Utilization actually for the first time in a long time spiked up. I wouldn't necessarily imagine that, that will continue to spike up. We waited a long time for it to start moving. We do have broad-based growth across all geographies and industries, which should play forward. I mentioned in my remarks that we have a 20% increase in our backlog from year-end. Obviously, we would expect some of that to in fact, pull through. Utilities and Power continue to be an area of huge opportunity when you think about both renewables and the massive build-out that's required for GenAI. And then there's two other areas where we're starting to see some traction. One is healthcare. We're starting to see consolidation, which is necessary, by the way, in the healthcare industry. And then lastly, for the first time in a long time, we're starting to see this backlog of commercial real estate transactional activity. We've been refinancing a lot of commercial real estate. But what we're starting to see is people are starting to trade as the bid and the ask comes in and everybody sort of gets comfortable that we're going to be in this kind of an interest rate range for a while. So that's kind of the -- that's the puts -- and then also, I just would remind you, we're going to continue to run off $0.5 billion to $600 million of commercial -- residential mortgages per quarter. So that's kind of the puts and takes, Ryan.

Got you. No, super helpful, Chris. And maybe as a follow-up to something that was talked about before. Within the Investment Banking business, if I look at the mid-single-digit guidance implies low single-digit growth for the remainder of the year. And I feel like coming into the year, you are upbeat on the potential return of M&A to drive upside. Historically, it's been a bigger part of your business. So it sounds like from your comments earlier that M&A hasn't been as robust as you would have expected. But are there other parts of the business that are trailing and what would we need to see for some of those -- some parts of the business to begin to outperform expectations?

Sure. So with respect to M&A, what's interesting about M&A, Ryan, is there's been a lot of headline numbers. And as you well know, the G-SIBs have reported some incredible numbers with respect to advisory. I think deal volumes in total are up like 46%. Transaction volumes, however, are down 26%. And so all -- you put all that together, and we're still waiting for this huge surge of middle market M&A activity to come through. And so that is something that we're keeping a close eye on. That's -- those transactions are binary. What we're guiding to right now is 5% to 6% growth year-over-year. So we did about $780 million last year. So at the middle of the range, that would be something like $825 million off of a record year last year. So I feel really good about the business. But admittedly, some of the -- while we have record backlogs we're not seeing as much come out of the pipeline right now as we would hope. I think when some of the geopolitical things are resolved, I think it will be a little better environment for that. Thanks for your question, Ryan.

Our next question will go to the line of Scott Siefers with Piper Sandler.

I wanted to return for a moment to the capital discussion. It seems like there really should be good capital management runway for a while, especially if you elect to put to work some of the additional excess you'd have should the Fed NPRs pass as proposed. I guess I'm curious to hear how you would decide when and how aggressively to deploy that additional excess if those proposals in particular, do advance? And what other considerations are there, whether it's ratings agencies, investor expectations, et cetera, just as you think about the appropriate capital levels to sort of land on?

Scott, it's Clark. Thanks for the question. So one, we guided on the fourth quarter call that we try to get to 10% marked by the end of the year. We actually arrived there a few quarters early in this quarter. So we feel very comfortable there and would feel comfortable over the course of the year dipping into that 9.5% to 10%, and that's under the current regime. So again, no issues there. To the extent the NPR passes as proposed, we expect, as we said, 100-plus basis points of additional marked capital there. So I think that gives us more room to continue to both invest in growing client activities, but also to continue our share repurchase. So on the one hand, we're guiding to $1.3 billion for the year. Short of some more extreme situations, I would expect that to be more like the floor for buybacks for the year. I don't know how much more we'll go over that. We'll play that by ear. But we certainly believe, over time, as you know, we've got more capacity to lean into capital return. The other point that I would just make is I don't think anybody should expect one big swing at this. I think you should expect from us thoughtful, orderly kind of methodical capital management over time, where we are sharing as much visibility as we have given conditions and kind of marching down to that range over some meaningful and manageable period of time, but we're not going to do anything dramatic in any quarter or two.

Got you. Okay. Perfect. And then maybe switching gears for a second. I appreciate the refresh and the color you guys have given on the full year Investment Banking expectations. Clark, I was hoping maybe you could kind of provide some thoughts on how you see some of the other key areas, whether it's wealth payments, some of those other focus areas projecting through the year?

Sure. So one, as Chris noted, we continue to get gains in our wealth business. So to the extent the market cooperates, we'd expect to see Investment management fees continue to grow, and I think that's a mid- to high single-digit number for the year. So that's tracking pretty well even despite a little bit of volatility in the first quarter. Our payments business, particularly on a fee equivalent revenue, which, as you know, Scott, is the gross fees continues to be very strong. If you unpacked for example, what happened in the quarter on deposit service charges, those numbers would have been mid-teens year-over-year. So we continue to get really good activity from our payments team, either selling additional services into existing clients or anchoring with new clients as they come in. No reason to think that, that's going to stop. We continue to add new capabilities in payments whether it's in our portal, our information reporting or things like embedded banking, I think all of those are on very good trajectories and we continue to expect to see those grow. So that's, again, on a gross number, kind of low single digits on a net number high -- sorry, low double digits on a net number, high single digits, sorry, for that confusion there. Then corporate services, which is really FX and derivatives and other hedging, so the oil volatility has created some tailwinds there. If that settles in, derivatives tends to follow with loan growth. So that's been very positive and we've seen some good traction in FX as well. So I think all of those categories continue to look up and have been consistently strong. The one place that we called out in the fourth quarter call and will continue to be year-over-year down but that is not a reflection of the quality of the business, is our commercial real estate servicing business. And again, that's a function of advance rates coming down, clients paying us with deposits versus fees and some recovery in the industry that causes special servicing and other resolutions to likely be down year-over-year. So again, nothing negative to say about that business. That's just the market trends that are affecting you right now. So in summary, expenses and fees, we expect to be relatively close. We'd like to be a little bit better on fees, but we're really looking at reported fees to be, again, pretty consistent with expense growth over the course of the year and then adjusted fees being in that mid-single-digit range and priority fee bases high single digit.

Our next question will go to the line of Mike Mayo with Wells Fargo.

Chris, you have already answered part of the question about your investment banking and debt placement business. And I know you've built that business, big organic grower, but when you said you're looking for mid-single-digit growth this year, like that's not so exciting, right? Like waiting this [Technical Difficulty] markets to come back. I know it's been skewed towards the large mergers. And you're saying it's not really back yet. And so I guess that mid-single-digit guide, is that just like what it is or that what it is given your thoughts that activity will be delayed maybe until next year?

Well, first of all, that's what it is based on where we are right now in the market. I do take a lot of comfort in that our first quarter was a record. It was a record after last first quarter was a record. Last year was our second best. Our pipelines are at record levels. If we could get some stability out there in terms of rates and in terms of people's perspective going forward, I think there's a huge opportunity here. But right now, as we look at it, what we're comfortable with is guiding 5% to 6%, understanding that the business has a lot of momentum.

What do you think the difference is for the very large mergers and what we heard from the biggest banks is that de-reg and pent-up demand and still very high stock prices and liquidity, that's all transcending the conflict and you're seeing these pipelines get replenished and all that. With more of your middle market companies, the activity is still subdued.

Yes. So I think it's a couple of things. One, those are transactions that obviously require a lot of regulatory approval, and there's no question that regulatory approval has improved geometrically. So that's the first thing. Second thing is many of those deals are stock-for-stock are a huge component of stock and therefore, don't require nearly as much financing. And then the third thing is, typically, I've always noticed as you come out of this -- of a rut and we have been in a rut in M&A., the first deals to start coming out are really large, high-quality deals. And I think that's what you've seen. And I think it will matriculate to the entire market.

Mike, one other just element we're seeing more consistently also, sorry, on the middle market end, which, as you know, is heavily sponsored back. We're seeing more continuation vehicles as an option versus outright sales, and those obviously don't always translate to the same level of activity.

That all makes sense. Would you say that some of the same factors, though, that could drive more loan demand due to CapEx could also drive merger? In other words, to the extent that middle market CEOs become more comfortable, then they're more likely to spend for CapEx and maybe, therefore, they're more likely to mergers. So what's the demand for CapEx-driven financing?

Well, I don't think there's any question. I think as people get comfortable with the forward view and get comfortable kind of where they think rates are going to be, I think that will be an impetus to transact. And I think having gone through a bunch of market disruptions, I think once people see that sort of the coast is clear, I think there's probably a lot of people that are gearing up to go and we have many in our backlog.

Our next question will go to the line of Manan Gosalia with Morgan Stanley.

Chris, Clark, since you gave the ROTCE guide, NII and loan growth are trending better. You noted a 100 basis points or so of benefit from Basel Endgame, that's fairly sizable. I'm assuming you should be able to use some of it. Would that, I guess, all be upside as we think about the 15% or so exit ROTCE for 2027?

Well, clearly, I think as the rules get finalized, we will have greater flexibility. We mentioned to the tune of, if you just look at the standard approach, 100 basis points or so. So we'll have -- we'll have more to say about that after we -- after the final rules come out and we make final decisions with respect to standard approach or ERBA.

Got it. Okay. Great. And then you noted that, I guess, the balance sheet stay fairly flat in 2026, which would mean that the LDR moves a little bit higher. How should we think about that going into 2027? Is there still more room to take the LDR up? And as we think about deposits and maybe some of the higher cost deposits, at what point does it make sense from a relationship perspective and a franchise perspective to keep and pay out for them rather than [indiscernible]?

Yes. Manan, it's Clark. So I think you hit that right. I mean, on a general basis, that last point is probably the most important here, which is, as we've talked about before, I'll just talk to commercial for the benefit of this answer. 80% of those deposits are operating accounts and 95%, 96% of the deposits come from clients with operating deposits. Meaning, these are strong relationships. We know where the dollars are, and we're making often name-by-name decisions month-by-month about where the bid is on those excess deposits and whether we want to fund with those or not. So in the first quarter, we let some of those go. We did that last year in the first half and then brought them back in the second half. I would not be surprised if that happened again this year. And as we go forward past 2026, and we start to see some balance sheet growth, we will have the opportunity to make those calls as we do today. And my guess is if we're starting to grow the balance sheet, we will look to fund with client deposits wherever we can as long as it makes sense on the margin. The nice thing about those commercial deposits is they are at some level, individual decisions, and we're not sort of repricing the whole book across the board. But this is why, as I mentioned, with the hybrid accounts earlier that we've gotten real benefit out of that because we get advantageous rates there, and we get deeper client relationships as we provide them with more and more payment services.

And just to add to that, Manan, we wouldn't let these excess deposits go if we thought it put our relationship at risk. These are excess deposits with people that are very good customers of ours. As Clark said, 81% of our commercial deposits are core accounts, core operating. This goes back to our focus on primacy going back a decade. So we really have the flexibility to move those in and out as we need to.

And I'd say there's one last point just worth making because we talked about in commercial mortgage servicing some clients paying us with deposits instead of hard fees. So we took deposits back on balance sheet in the first quarter. We also then just to manage the deposit base took some deposits off balance sheet. And those can be brought back if we needed additional funding. So we have a fair bit of levers to fund as it grows. We're not sitting here overly concerned to Chris' point about the marginal dollar funding if a quality loan is available.

Our next question will go through the line of Ebrahim Poonawala with Bank of America.

I guess just two sort of macro level questions, but Chris, you should have a great perspective on this. When we think about the AI data center loans that are being made right now, is it your understanding that most of that is being distributed in the capital markets? Or when we think about loan growth at the banks, is some of that being syndicated to banks, and it's coming on bank balance sheets and who knows how to think about AI 2 years from now in these investments, but is there risk tied to this data center spending that is being put on bank balance sheets at Key and just broadly across the industry?

So it's a great question. The answer is the funding for these data center buildouts are in the capital markets and also at some of the banks. And we've been funding -- we've been in the Power business for a long time. And as a consequence, I think we do it pretty well. There's all kinds of nuances in these deals. Who pays for the cost overruns for example, et cetera, et cetera, who has the right to do what under a bunch of circumstances? We feel very good about the loans that we have, but these loans are both in the capital markets and in the banking system.

Yes. And Chris, I just might add that our data center exposure is fairly de minimis. We've also looked at what we call AI adjacent type exposure and kind of worked with our Board on that as well. And again, very, very well controlled and monitored. We're really not chasing a lot again these larger projects or hyperscalers. And so again, it's very well managed.

Got it. And just one quick follow-up, Chris. I think you talked about this. When we think about investment cycles are far longer than political cycles, are you actually seeing some element of manufacturing reshoring showing up in your footprint or across your businesses that's leading to longer-term domestic CapEx, which creates loan growth opportunities, not just this year, but as we think about the next 2 to 5 years?

So we're starting to see that. I could give you some specific examples of people that are -- and typically, it plays out like this. It's people expanding existing facilities in lieu of having contract manufacturers that are overseas. The other thing that we are seeing is people relocating from the Far East to Mexico and really shortening their supply lines and taking control that way. So we're starting to see it, but I wouldn't say it's the biggest driver at all of, say, loan growth. It's very early days on that front.

Our next question will go to the line of David Chiaverini with Jefferies.

I wanted to ask about credit quality. You mentioned about the NPL increase was driven by 2 credits utilities and multifamily. Are you able to point to any emerging trends by sector or geography that you're watching more closely?

Well, we're always looking at certain sectors. As it relates to those two, when you have it kind of bumping along the bottom, there'll always be one deal or two. Neither of those do we look at as systemic in any way. We're watching a few areas as we always are, things like agriculture, things like transportation, but there's nothing that each of those are idiosyncratic in their nature.

And again, just to remind you, that slight uptick was not private credit related. But again, just again, to Chris's point, just idiosyncratic.

And then shifting over to when thinking about expenses, and you mentioned about the hiring of frontline bankers. Curious, is there more to come there? And how is the pipeline looking?

So last year, we talked a lot about the fact that we hired -- we grew our sales forces by 10% collectively in our investment banking, in our wealth business and our payments business. We continue to hire people in all of those businesses. Those are our targeted fee businesses where you'll see in our report out today, we grew about 12% in the aggregate. We track all of this very, very closely, and we're pleased with the trajectory of the people we've been able to hire and as a consequence, we'll continue to do that.

Our next question will go to the line of Gerard Cassidy with RBC.

Chris, can we circle back to -- you pointed out about the emerging affluent, how it grew 15%, I think, you said to 1.15 million of total customer base of 3.5 million. How can you guys embrace AI to penetrate that client base and make it even more profitable because you're using AI?

That's a great question, and it's very timely because I spoke to our big producers in this business as recently as Tuesday morning at their sales conference. I think there's a huge opportunity to use AI. We're already investing heavily in our wealth platforms and I think as you think about serving that many customers, I think there's a huge opportunity for AI. We'll have more to say on that in the future, but that is a perfect application. Many of these customers are rather homogeneous in their needs. And I think just we are armed with perfect information, obviously, because it's all running through the bank. And I think harvesting more detailed information so we can do a better job of serving these customers that are -- already know and trust Key but have their money on some other platform where, as you can imagine, they're not getting incredible service just because it used to be that if you had $5 million, you got incredible service everywhere. Now, as you know, the number is a lot higher. And so this is a huge opportunity for us.

And then to put Clark on the spot. But following up with this AI, do you think we'll ever get to the point where outsiders like folks on this call could actually measure for your dollar of spending in AI, it actually incrementally led to a 50 basis point of ROTCE improvement? Will we get to that kind of metric at some point in the future?

Well, we would have to get to that first and then share it because as you know, Gerard, these are pretty hard to measure. I'd say where we and I think others are seeing benefits is in efficiency and capacity, but it's really showing up more in avoidance of future investments. And so that -- it's hard for me to come and say, "Hey, Gerard, I didn't spend these dollars I may have otherwise spent". So the way I think we really need to demonstrate that is to scale some of these platforms, which has been a theme of Chris' now for, I don't know, as long as I've known him. If we can do that, then you start to see the scale of the platform and the benefit of that cost avoidance in a real way. And then we can come back and say, we spent these dollars. We created these improved processes and they drove this level of margin expansion.

Great. And then just as a follow-up question, Chris, obviously, Key is well positioned as a commercial lender, and it looks like commercial lending for the industry and for you specifically is picking up. You obviously have your industry verticals that are national that drives this commercial product along with, as you pointed out, it's not just a loan, but it's the multiple of products. Outside of those 7 verticals, is there much opportunity for commercial lending in the Pacific Northwest or the Midwest or New England? How do you look at that kind of commercial lending or do you really don't do it and it's just in those 7 verticals?

No, we do both. Our 7 verticals obviously give us what we think is a unique competitive advantage because our middle market bankers call who are also our payments representatives they call with our investment bankers, and that's something that others can't do. So in those 7 verticals, we have a huge advantage. But we also are out there looking for great payments and commercial banking customers just like everybody else. And yes, there are significant opportunities outside of our 7 industry verticals, and we compete effectively there as well.

And Gerard, just as a reminder, over the last couple of quarters, we've seen not just great industry vertical growth, but we've seen very consistent broad-based geographic middle market growth. So it's been a combination of both. We've been adding bankers in verticals and markets. And as we've talked about before, whether it's Chicago, Southern California, recently Atlanta or this family office business, we're adding bankers in new geographies with new capabilities in the middle market because we see exactly what you're referencing, which is really good opportunity to grow in specific geographies.

And our uniqueness isn't limited to just the investment banking area. In our payments area, which Clark at one point ran by the way, and now Ken Gaverty runs both our commercial business and our payments business, we feel like we have a competitive advantage there as well, Gerard.

And speaking of payments and here's a layup maybe for Clark and you used to run payments. We all know about the risk and credit, and you guys have been very clear how you manage your credit risk, and it's quite good. What's the risk in payments? And as you grow new commercial customers, is it an increasing fraud risk we got to watch out for? I mean, which is totally out of the risk questions that we normally ask, but what do you guys think about that part of the equation that as payments -- and not just for you folks because every commercial bank seems to be telling us the whole relationship includes a payments part of it. Do we have a risk here that none of us are really focusing in on yet?

Yes. I mean there is a little bit of credit risk and things like ACH and merchant, but those are very manageable and I think well understood. To your point, I think you see probably two versions of risk. The biggest pool is going to be operational. This is a technology business. So whether it's fraud or security, and often the easiest doors in are through clients who aren't necessarily educated enough to manage the risk. So we do a lot of proactive client outreach on how to better secure their own platforms. But it is clearly a technology and software business, and that's why you need to be very dialed in on that level of risk. And then the other one is just reputational, right? You're getting into clients, you're offering services. I used to joke, but I think it's true that when we make a loan to a client, they sign the paperwork to get the money. We talk to them in a couple of weeks or months. When you sign a payments contract with the client, the work begins because you pop open the hood and you start wiring the enterprise. So that comes with a lot of potential client friction. You have to manage that onboarding and servicing relationship very carefully and very thoughtfully, and -- it's a bit of an offensive linemen game where they expect things to work and when they don't is when you hear from them. So there's a lot of very important proactive communication and management of that process. And so I really think about it in the obvious operational risk you raise, which we spend an enormous amount of time thinking about and managing and then the reputational piece because as we say Key, our payments business is about helping clients run their business better every day because they use it every day, which means there's an opportunity for something to go wrong every day, and we have to manage that.

Our last question will go to the line of Christopher McGratty with KBW.

This is [indiscernible] Connell filling in for Chris. I just wanted to circle back to the margin discussion. And just given the overall shift in the rate environment this past quarter towards higher for longer environment. What impact do you think that might have on the margin improvement story?

Yes. So as we noted, our base case would be no cuts. So that's incorporated in this, and we did improve the margin guidance a bit. So what I would say, maybe alternatively, is we feel very good about managing to those -- to that guidance under a variety of circumstances. We'd likely feel a little stress if there were highs, and we've got some upside potentially if there were cuts assuming those cuts as we would expect, at least at this point, come with a little bit of steepening of the curve. So right now reflected a slight improvement in that margin guidance incorporates a flat no cut scenario. So hopefully, that's responsive to your question, Chris.

Okay. Great. And then you guys provided a ton of color on private credit and the specifics, both in the discussion and the deck and overall credit quality, relatively stable for the quarter. But just wondering if you could kind of stack rank or update us on you all worry on maybe more hot button credit pockets. And then where private credit either as a whole or kind of within the parts that you disclosed and discussed kind of falls within that stack ranking, I guess, in particular, with context of your view versus the overall markets?

Sure. So I'd be happy to address that, Chris. So I wouldn't put private credit in my basket of things that we're really focused on right now. A few areas that we spend time thinking about. First is the oil and gas producers, depending on how they're hedged, they actually could be making more money in this environment, particularly if they're unhedged. We have a couple of billion dollars of exposure there. We have another $2.5 billion or so exposure in transportation. And to the extent people don't have escalators with their customers, obviously, fuel costs are a significant issue. There's no issue yet with respect to consumer discretionary but if we remain in an inflationary environment, and people are spending a lot more for gas, it goes to -- the theory is, is that they'll have less money to spend on discretionary consumer, which I agree. On the other side of it, we've seen some interesting recovery, and we've been worried a bit about healthcare. Healthcare is firming up nicely. So we feel good about that. We also were really focused on some materials and construction products. Those areas have also firmed up nicely. So that's kind of where we're worried -- where we look. Any time I focus on areas of concern, it's where there's leverage. And we, frankly, have very little. If you look at our leverage book, it's about $2 billion and it's been $2 billion for as long as I can remember. So I'm not too worried about that. So that's kind of around the horn on our portfolios.

With no additional questions waiting in queue. I would now like to pass the conference over to our CEO, Christopher Gorman, for any closing remarks.

Well, thank you, Megan, and thank you all for joining our call today. We appreciate your continued interest in Key. If you have additional questions, please do not hesitate to reach out directly to Brian or others on the Investor Relations team. Thank you, and have a great day. Operator, this concludes today's call. You may now disconnect.