KeyCorp ($KEY) Q2 2026 Earnings Call

Good morning and welcome to KeyCorp's second quarter 2026 earnings conference call. My name is Megan and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during that time, simply press star one on your telephone keypad. As a reminder, this conference is being recorded and I would now like to turn the conference over to Troy Gates, 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 second quarter 2026 earnings conference call. I'm here with Chris Gorman, our chairman and chief executive officer, Clark Kay, our chief financial officer, and Mo Romani, 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, July 21st, 2026, and will not be updated. With that, I will turn it over to Chris.

Thanks, Chris. Starting on slide four, we recorded second quarter earnings per share of 44 cents. Revenue was up 7% year-over-year while expenses increased by 5%. Tax equivalent net interest income increased 9% year-over-year and 2% sequentially, primarily driven by commercial loan growth and portfolio repricing. Non-interest income increased 2% year-over-year. Loan loss provision of $92 million included $115 million or 42 basis points of net charge offs and a reserve release of $23 million. The net release was driven by improvement in Moody's economic scenarios and a continued remix to higher credit quality relationships partially offset by a qualitative build to account for increased economic uncertainty. We grew tangible book value per share 6% year-over-year. Moving to the balance sheet on slide five, average loans were up $2.3 billion sequentially. Period end loans increased by $1.2 billion driven by CNI growth of $2.1 billion or 3% partly offset by the ongoing planned runoff of low yielding consumer loans. Growth was largely from new relationships and broad-based across industries and regions. The largest industry contributors were utilities, power and renewables, real estate, and technology. The CNI line utilization decreased 50 basis points sequentially to 31% driven by higher commitments.

Turning to slide six, average deposit balances were relatively flat sequentially and year-over-year, consistent with historical seasonal trends. Average non-interest bearing deposits increased 2.3% sequentially, representing 19% of total deposits or 24% when adjusted for our hybrid accounts. As expected, the average deposits for the quarter were consistent with Q1, and we saw end of period deposits up versus prior quarter after dropping in May. At the end of June, deposit balances, which closed the quarter at $153 billion, were temporarily elevated by about $4 billion due to the timing of transaction activity among our relationship clients. Total deposit cost declined two basis points sequentially to 1.63%. Our cumulative interest-bearing deposit beta held steady at 56%. To support our continued strong commercial loan growth, we supplemented funding with short-term borrowings. Given our expectations that client deposits will grow in the second half, we used wholesale funds in the second quarter rather than repricing existing deposit relationships. As a result, total funding costs increased by one basis point. We continue to pay close attention to deposit dynamics and will take proactive and strategic actions to manage funding effectively to achieve our goals. We expect to increase average client deposits by more than 2% through year end. Slide seven provides drivers of NII and NIM. This quarter taxable equivalent NII was up 2% and net interest margin increased two basis points from the prior quarter to 2.89%. The increase was driven by commercial loan growth, fixed rate asset repricing, and an additional day in the quarter. We continue to manage our balance sheet to a fairly neutral interest rate risk position as we move through the remainder of 2026.

On slide eight, non-interest income increased 2% year-over-year. Investment banking and debt placement fees were $169 million for the quarter. In the first half of 2026, investment banking fees were $366 million, an increase of 4% compared to the same year ago period. As Chris mentioned, our pipelines are at historically elevated levels. Compared to the prior quarter, overall pipelines are up 9% and M&A pipelines are up 7% to a new record. We expect third quarter investment banking fees to be up 20% plus quarter over quarter and remain confident in delivering mid single-digit investment banking fee growth for the year. Trust and investment services income grew 9% year-over-year, reflecting higher market values, and assets under management reached a new record high of $74 billion. Service charges on deposit accounts and corporate services fees each increased by 5% year-over-year. The increase in service charges were driven by growth in commercial payments, while corporate services income was driven by higher loan commitment fees. Commercial mortgage servicing fees were $49 million, down $21 million year-over-year, largely driven by lower deposit placement fees and special servicing fees. At quarter end, we were named primary special servicer on approximately $735 billion of commercial real estate loans, of which about $270 billion is special servicing. Active special servicing third-party assets were flat sequentially at $10 billion, about half of which is office. We continue to expect commercial mortgage servicing fees to run about $50 to $60 million per quarter the remainder of the year. On slide nine, second quarter non-interest expenses were $1.2 billion, an increase of 3% sequentially and 5% compared to the year ago quarter. The increase was driven by higher personnel expenses related to the investments in frontline bankers, impact of Key's higher stock price on incentive compensation, as well as higher benefits cost. Sequentially, expenses increased due to higher incentive compensation, professional fees, and marketing expenses, as well as an additional day in the quarter. Expenses are expected to modestly pick up through the second half of the year, reflecting our ongoing investments in people and technology and incentive compensation associated with expected seasonally higher fees. We continue to expect to be within our full year expense growth guide of 3 to 4%.

Turning to credit, net charge offs were $115 million or an annualized 42 basis points of average loans. Criticized loans were relatively stable at an annualized 4.9%. Non-performing assets increased by $126 million sequentially to an annualized 74 basis points of loans. The increase was largely driven by three credits in the real estate, consumer goods, and agriculture industries. Based on our current assessment, we do not expect these credits to result in meaningful incremental losses and they do not alter our outlook for net charge offs. Moving forward, we expect several sizable non-performing loans to resolve through the rest of the year. Overall, our portfolio remains healthy. Fundamental performance of our borrowers remains resilient and is tracking in line with expectations. Moving to slide 11, our CET1 ratio was 11.2% and our marked CET1 ratio was 9.8% at quarter end. As Chris mentioned, we continue to expect to repurchase at least $1.3 billion of our shares for the year. Moving to slide 12, we're increasing our 2026 guidance to reflect our loan growth outperformance. We now expect revenue to grow 7 to 8% compared to approximately 7% that was previously communicated. We also now expect full year net interest income to increase 9 to 11% compared to the prior guide of 9 to 10%. This guidance holds under a fairly broad range of interest rate scenarios, including a Fed hike scenario. We now expect to exit the year with a net interest margin in the range of 3 to 3.05% with average earning assets increasing between 1 to 2 billion from the second quarter. This outlook assumes continued loan growth and a stable competitive deposit environment. While incremental balance sheet growth may be modestly margin dilutive, we are willing to trade NIM to a degree to add quality relationship clients with a strong return profile. Additionally, we continue to expect the benefits of over $9 billion of low yielding fixed asset repricing through year end and disciplined deposit management to more than offset that impact. We now expect average loans to increase 4 to 5% compared to our previous guidance of 2 to 4% and average commercial loans are now expected to increase 8 to 10% this year. The higher outlook reflects strong loan growth through the first half of the year, continued success in adding and expanding client relationships, and healthy commercial loan pipelines that continue to support growth in the second half of 2026. All other guidance remains unchanged. In summary, subject to the usual macro caveats and a constructive environment that remains broadly consistent with today, we expect to maintain our strong momentum through the second half of the year and deliver a solid return on and return of capital to shareholders. With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Operator

Thank you. We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove your question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speaker phone, please remember to pick up your handset before asking your question.

The first question will go to the line of Ryan Nash with Goldman Sachs. Ryan, your line is open.

Hey, good morning guys.

Clark, maybe to start on the net interest margin.

Can you hear me now, Chris?

Sorry about that.

Sorry about that. So, I was saying what drove the main pieces that drove the NIM miss. I know you talked about the decision to use some wholesale funding and some lower loan yields, and then maybe just talk about what's embedded in reaching the three to 305 including deposit costs, fixed rate asset repricing and any other impacts you think we could see that happened this quarter that may not repeat. Thank you. And I have a follow-up.

Sure, thanks for the question, Ryan. So maybe first just to remind everyone, NIM was up in the quarter, just not up maybe as much as we would have expected, but maybe just a couple factors in Q2. So stronger loan growth than we expected through the quarter. We obviously covered that. I think the loans we put on came in at a higher credit quality and therefore a little bit tighter spread. So bigger balance sheet, a little bit tighter spread. And then overnight SOFR was down about four basis points in the quarter. So put all those together, again a little bit bigger balance sheet, a little thinner margin. We had a known seasonal low in deposits. So as we told you, dropping in late May, that happened sort of as expected, but with the timing of that loan growth created a little bit larger funding need in the period and we chose to fill that with wholesale funds rather than reprice the client deposit base because the expectation is we're going to see some good deposit growth here in the second half. So as you transition then, what gets us confident that we'll go from where we are to 3%? And you hit most of the elements there, Ryan, but about $9 billion of fixed asset repricing coming in the back half with a pickup of about one and a quarter percent. As I mentioned, solid client deposit growth, about 2% or $3 billion in the second half, largely from core operating deposits. So should be very solid growth with good relative pricing. And because that's coming, that's why we chose to bridge with short-term wholesale funds. And then while we do expect loan growth, we would expect it to moderate off the first half pace. And some of that is just not that client activity will be down, but it'll be a mix between the balance sheet and the market. So put all those together and I think what we see is a path to 3% plus with what we think is relatively low execution risk based on what's in front of us today. The last piece I'd say just on deposit cost is if rates are stable, we would expect deposit costs through the period to be pretty stable. If we see a hike, as is sort of becoming more probable from the market standpoint, we would see deposit costs start to drift up a little bit, but we'll get the offset in loan yields. And frankly don't think that'll be really impactful in the back half of 26.

Got it. And then maybe as my follow up, Chris, seems that results on investment banking fell a little bit shy of expectations. We're obviously seeing strong results across the industry. I know 1Q was a record, but maybe just talk about what drove the miss and then when you look at pipelines, you mentioned you expect to be up 20% in 3Q. Maybe just talk about expectations that are embedded for the back half of the year. Thank you.

Thanks for the call, Chris.

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

Hey, good morning.

I guess maybe on this whole NIM versus NI debate, Chris and Clark, you said something willing to trade NIM to add clients with a strong return profile. Maybe unpack that for us. If loan growth is stronger, my read is there's pressure on incrementally pressure on the NIM, but as a management team, how do you think about that in the framework of the 16 to 18% ROTCE that you want to hit over the medium term? Just contextualize how long does it take to make up for that NIM that you give up to drive growth on the fee side or how we should think about the timeline there. Thanks.

Got it. And I guess maybe just to follow up, you mentioned the 2% deposit growth in the back half. Looks like you have a pretty decent line of sight in terms of what's coming through. How should we then think about, one, if there's any more color on that deposit growth drivers of that, and then just, Chris, to your point about the 15% ROC by fourth quarter 27, do we still feel good about the margin being the 325 plus that you've talked about in the past? Thank you.

Yeah, so Ibrahim, it's Clark. Thanks for the question. So we do have very good visibility on that deposit growth. It will be largely commercial in nature and connected to relationship clients with whom we have very tight interaction. As we see that there is a seasonal build in the commercial book, I think that's pretty broadly known. And again, we have very good line of sight on what we think is a rich pool of operating deposits coming through, and again appropriately priced. We think some of that won't all be non-interest bearing, for example. Some of that will be interest bearing. Some of that will be in our hybrid accounts, etc. But we sort of like the profile of that for sure. As it relates to the 15% return on tangible common equity in fourth quarter 27 and the related NIM target, what I'd say is, just to reiterate Chris's point, at the end of the day, returns really are the most important thing we're looking at over time and making them sustainable. That is not to say NIM is not an important factor and something we keep track of. And at this point, there's nothing that would tell us we have concerns about hitting either of those targets in Q4 27.

Very good. Thank you.

Thank you, Ibrahim. Our next question will go to the line of Chris McGrady with KVW. Chris, your line is open.

Oh, great. Good morning, everybody. Clark or Chris, the operating leverage comment obviously it's very wide this year. I'm interested in sustainability and again what's factored into the medium term in terms of operating leverage. Can you continue to generate operating leverage into next year?

Yeah, hey Chris, it's Clark. Assuming a constructive macro environment, we feel very good about that. I think we have demonstrated over time we can manage expenses very effectively. And as Chris has noted a few times here, we like the pipelines, the current status of the business, and the momentum going forward. So if you put those two together, we do feel comfortable that we can drive operating leverage going forward. We have talked before about long-term expense growth, and we think we were a little bit higher last year. We're still going to be kind of above that long-term target, but gliding to that over time. And that's a combination of continuous improvement efforts and finding opportunities to reinvest in the business, understanding that you have to cover inflation and people and some of the other costs. So there's nothing in our crystal ball, as good or bad as it may be, that tells us we're concerned about not being able to deliver that sustainably. By the way, that's while we're investing significantly in the business, whether it's hiring or the billion dollars we're going to spend this year on technology.

Got it. Okay. Wonderful. And then, Chris, on the buyback, you reiterated the billion three at least this year. Obviously, we have the Basel proposals that'll be a tailwind, but I'm interested in just your views of the toggle between what appears to be strengthening growth and returning capital. I know you had a comment in the release about return on and return of capital. Thanks.

The only thing I'd add there is, as you noted, Chris, on track for the 1.3, we're a little bit ahead of schedule. I would just sort of assume about $300 million a quarter in the back half, which gets us just north of that number. But I think the takeaway there is less about the number and more about a methodical, thoughtful, quarter by quarter approach, which may not get us exactly to the place we want to be quickly but gives us maximum flexibility to support clients as that evolves and obviously to absorb any macro deterioration that might happen. And the other thing I would add is we have reaffirmed the target of nine and a half to 10 on a marked basis. We think that's the right amount of capital. Having said that, we wouldn't be adverse to going below that from time to time if we needed to because we're generating a lot of capital.

Perfect. Thank you.

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

Hi, good morning. My first question is for you, Clark. Clearly, the stock is opening lower, and I'm wondering if it's just a lower exit rate as we think about that path to 325. And obviously, we hear everybody loud and clear that client growth is way more important than just NIM. How much of the path from, let's call it 302 in Q4 of 26 to 325 is baked in relative to the balance sheet dynamics that you see? So I guess what the market is trying to figure out in terms of the initial reaction is how safe is consensus EPS for 27 relative to the NIM outlook?

Yeah, great question, Erica. I'm not being flip at all. I think the difference between 305 and 3 to 305 isn't significant enough to get people concerned about full year 27. And obviously we haven't provided full guidance for 27, which we'll do as we get through the year. But to your question, just starting broadly on the structural piece between now and 12/31 of 27, we're looking at about $30 billion of fixed rate asset repricing across the swap book, securities, and consumer mortgages. So that's pretty well baked, as you can imagine, and assuming the rate environment is what it is today, the returns on that are pretty solid. We continue starting in the second half here to see good paths to operating deposit growth, which obviously helps on the funding optimization side going forward. We'll see where loan growth goes from here, but obviously it has been strong and we will continue to play in that as it makes sense. So I think just all around, we feel very good about that path. Our view is that rates are probably relatively flat in the back half here, but certainly if there are hikes, we are prepared to manage those as well and think that the 325 will remain intact.

Thanks, and I'll follow up offline to unpack that a little bit more. Chris, my second question is, so where are we in the middle market investment banking cycle? So I think there has been hope that this capital markets renaissance which is starting with large cap and strategics is going to be multi-year, and I guess as we think about middle market activity, how much is Key tied to sponsors versus how much is just tied to maybe sort of a...

lag in sentiment and proactiveness in terms of middle market activity. It's

Thank you for that, guys.

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

Hi, good morning. You, Clark, you made the point that lower loan spreads are coming from pivoting to higher quality clients. You know, I guess a number of banks have made that comment this quarter. The question is what do you see that is driving that? You know, is it more demand related to capex and AI related investment spend from larger clients or is it something else?

Yeah, I mean it's a great question, man. I think it is consistent with the industries we're in and the clients we target and frankly our book historically has been a little bit more investment grade just given our capital markets platform because those are the clients that tend to need those capabilities. So I don't know if it's a broad or sustained trend, but at least for us, those are the deals that we saw in the quarter that were very consistent with our targeted approach. And we're happy to serve those clients more broadly than just the lending obviously, and it helps the credit profile turnover as well. For example, a lot of the credit that's being provided is for the buildout of the electrical infrastructure in this country. One of the things that AI has made abundantly clear is that there's a massive shortage both of power generation and distribution, and as you can well imagine, we are a significant player in that, and specifically the people that are market leaders in that are very significant companies. And I guess maybe the other element I might raise is we had some growth in our RE portfolio which was almost entirely investment grade in nature. So again, it is tied to Chris's point and the rep point to pockets of real targeted scale for us.

Got it. And maybe as a related question, Chris, in your response to Ibrahim's question, you spoke about it taking some time for the fees and other higher returning businesses coming through from some of the new clients. What's your level of conviction that you can bring in that business over the next year or so? I guess the reason I'm asking that question is, a couple of years ago, we just went through a round across the industry for running off some of the low returning lending only relationships. So maybe if you can unpack on why you have more conviction on bringing in those fee-based businesses this time around.

Got it. Thank you.

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

Morning.

Hey, good morning.

On the back to the loan growth that towards higher quality but lower yielding again. To the answer to Manan's question, is there at all an intentional shift on your part focusing on these borrowers or is it more of a market shift where you're seeing this? And related to that, are you avoiding any pockets of lending whether it be NDFI related or areas like that just given the backdrop? And then maybe can you just talk about loan pricing competition? Is there outright intensification around new loan yields that you're seeing impact this? Thanks.

Yeah, so first of all, where we focus, it's easier to talk about where we focus and where we don't focus because we're really focused on seven industry verticals. And so within those verticals, we feel like we understand who the winners are, who the losers are, who's gaining share, who's losing share, etc. So we're very focused on those industry verticals. As those companies grow, a greater percentage of them become investment grade companies, and we continue to serve them. So that's really all about our industry focus which is a bit unique to us. With respect to a similarly graded credit, if you look at spreads over SOFR from a year ago to present, there's some degradation, but it's not that significant, John. Candidly, it still goes back to my basic premise that if you're going to provide capital, you better be able to do a lot of other things because you're never going to get your returns based on the spreads today or last year. And maybe just two additions, John. One on NDFI. We noted we're up about 600 million in the quarter. We don't really avoid that. We don't actually think about it as a thing other than when we report it and answer questions on it. We did grow our REIT business in the quarter that is in the NDFI category. We grew our specialty finance lending business a little bit, call it 100 million or so. So not hugely significant. We're not shying away from those for the purposes of avoiding the NDFI designation. We are not doing deals that don't make sense for us. So specialty finance lending in particular over the past few years, we have walked away from a handful of things that just didn't make sense to us. So it's not a function of the categorization at all. We're just trying to make good thoughtful underwriting decisions in those cases.

Got it. Okay. Thanks for that. And then separately back to the margin. Just want to get a little bit more color around your – I mean you cited the confidence in that 4Q exit rate. You cited that you see low execution risk. Just what about the second quarter margin performance that surprised you negatively is now less likely to surprise you again? Is it the type of growth that you saw or the spreads or the rate backdrop? Maybe if you could just talk to us like why should we not worry about that as you cited the low execution risk on that exit? Thanks.

Yeah, so fair question. I think it's really the mismatch in timing between the asset growth and the deposit levels in the quarter. So we troughed in mid-May and again we troughed sort of at the time and at the levels we expected, we just had larger client balances on the loan side at that time. So to the extent loan growth does slow a bit – and again just to be clear, I don't mean client activity is slowing, just loan growth we think will be a little lighter as the capital markets activity picks up. But given that we believe we can fill the funding stack with quality deposits here, that's really the biggest difference. And if the loan growth that we expect to see for the year had come in uniformly, I think you would see a smoother kind of movement in them.

Okay. Appreciate that, Clark. Thanks.

Yep.

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

Good morning. I was hoping you guys could elaborate on the small deal that you did within the investment bank in terms of what product or what exactly it's adding.

And then maybe more broadly speaking, I mean everyone's kind of leaning into the capital markets set of businesses. And is there an argument that you want to be a little more diversified? You've got obviously the strength in the middle market, which as you alluded to earlier, has not been as strong as some of the bigger transactions out there. Just thoughts on if you need to branch out a little bit from your current expertise.

Okay. Thank you.

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

Um, so I'm not sure if your forecast will be correct. First, that you'll have 2% deposit growth with flat deposit rates. So that's the first point where I guess I'm questioning if we'll be on the third quarter earnings call or the fourth quarter earnings call and well, it didn't quite play out the way we thought. And the other thing I'm not sure is if that 40% of fees driven by private equity is actually going to translate to something in investment banking. We've been hearing that for three years from you and everybody else. And the big banks had investment banking go up 50% year-over-year. Yours is down 5%. So I do think, like you said, that's kind of important. I did hear you that it should be up 20% plus in the third quarter. But two push backs: deposit growth 2% and then private equity investment banking fees coming back. Thank you.

Yeah, so Mike, fair push back I would say as it relates to the operating deposit growth. Some of that we know is coming from new clients we've added in the year and that those operating deposits will come on. They don't come on necessarily on day one. So we see the process of them coming on. The second is just the visibility we have into standard client flows over the course of the year and there is some seasonality to that. We've got, to Chris's point, years of data that would support that. So we feel good about it. But we can have this rematch on the third quarter call when we're ready. To be clear on the pricing though because I just want to make sure we're all saying the same thing. That assumes relatively stable deposit pricing for us assumes no hikes. If there are hikes, we're obviously going to feel that in the deposit cost base. So we're not trying to say we're going to keep deposit prices flat if there is a hike. My point was that that will be relatively neutral from an impact standpoint on NI and NIM in the back half of the year. So we think we can insulate ourselves through Q4 if there is a hike or two. If there isn't or if there aren't any, we would expect deposit pricing to be relatively stable. So just wanted to be clear on that.

Okay. And one follow-up on the investment banking and Chris, I know you built that business and once again, the 40% of fees from private equity and again, it's you and everybody else who've talked about sponsors coming back for at least the last three years and we're just waiting. And one big competitor said, 'Hey, they're starting to see momentum.' And I don't know. Do you really think it's going to come back at some point or do you have any evidence that it's picking up a little bit and do you really need it to come back for a greater acceleration? And for your CNI loan growth, I think what you've said is the new normal is that your clients are used to the geopolitical uncertainties. They're pursuing their capital expenditures and building their plants and they're getting their equipment and all that. So why wouldn't that new normal also apply at a middle market M&A? Thank you.

All right. Thank you.

Thank you, Mike. Our next question will go to the line of Gerard Cassidy with RBC. Oh, my apologies. The next question is actually from Ken Usman from Autonomous. Ken, your line is open.

Okay, great. Thank you. Would never take the place of Gerard. Two quick follow-ups. One on the deposit side, just I know you've given us some color now about expected growth and there was the transactional stuff in the second quarter, but can you just talk about non-interest bearing mix? Should we be thinking more about the second quarter average as a growth point? And then related, just on the consumer deposit side, can you just talk about ins and outs with regards to either maturing CDs and underlying account growth? Thanks.

Yeah. So, thanks for the question, Ken. If I look at interest-bearing, non-interest-bearing in the second quarter, I would think about that as kind of flattish through the back half. So as we have talked about before and I referenced a little bit earlier, some of those operating deposits come on as interest bearing albeit at relatively low rates or they're in the hybrid accounts which we do try to adjust for, but I would expect non-interest bearing as a percentage again to be relatively flat in the back half, but the quality of the operating deposits coming on are quite strong. On the consumer side, we talked about 3% household growth in the second quarter. We continue to see some positive growth there. That's core checking accounts coming on in thousands of dollars at a time. So that takes time to build. And then I do think we'll see a little bit of pickup in CD and MMDA production here in the second half. So we have gone out in a few select markets with a little bit higher rates than we've had over the last four or five quarters. And so we would expect a little bit of pickup, but I wouldn't expect that to be the lion's share of the deposit growth.

Got it. Great. And just one other question on credit. You in your prepared remarks, you put a fine point on the potential resolution of some of the bigger NPAs in the back half. I just wondering if you could just give us a little bit more granularity. You had talked about this in conference season about how you were watching a couple of things. So just want to understand, obviously the reserve went down. You mentioned that the underlying still feels really strong, and so just any points you can further on giving us the confidence that the loss content is quite low and that the direction of travel on NPA should be positive. Thanks.

Yeah. So let me maybe just make a broad comment about the reserve and then Mo can hit some of the more fine points here. So one, we released despite the NPA being up because generally the overall health of the portfolio is improving. Some of that is the higher credit quality we talked about. Some of that is other charge-offs and resolutions that have happened throughout the year and some of that is just economic continued sort of constructive economic profile. So when we look at that, our quantitative measures would have actually called for a significantly larger release just given some of the geopolitical uncertainty we still feel out there and some of the lack of clarity on path forward caused us to overlay some qualitative build there and just reduce the size of that. So if it were purely quantitative here, we would have released quite a bit more. We just didn't feel like that was appropriate given the broad environment, but we generally again feel quite good about the strength of the overall balance sheet.

Yeah, thanks Clark. And just to continue that theme relative to credit again, I think as you all know, we have a very proactive risk culture in terms of risk identification. We did see an uptick in crit class and NPL but really based on a few factors. First of all, none of the migration was private credit related. And so we don't think that this is a harbinger of anything from a macro perspective that we are overly concerned about. But we had some names in the multifamily space, consumer goods, and then our agriculture book that just from a timing perspective happened to land this quarter. Again, as we mentioned, when we see signs of migration, we act quickly because we also think that helps us from a resolution perspective. We do have specific reserves against our NPLs, which again is why we feel relatively confident that from an NCO guide perspective, we're still on track for our 40 to 45 basis points for the year. And again, just some other little tidbits, the multifamily space, again, very strong. We've got sponsors with equity in those deals. We expect quick resolutions. So again not a lot of loss content there. Consumer just sort of episodic with a couple names. And then agriculture just given some of the fuel and fertilizer and labor dynamics there as well. But overall we don't feel like a lot of loss content relative to this move.

Thanks for all that.

Yep.

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

Hi, Chris and Clark.

Yeah, Ken. Ken's smarter. That was good to have him go first. The question, Chris, is just a bigger picture question. Obviously the AI industry in this country is on fire. It's doing phenomenally well. It's growing by leaps and bounds and everybody is benefiting from it seems like. So my question is I'm always looking at the second derivative or third derivative of a strong industry because eventually the industry will slow down the rate of growth, that second derivative is certainly going to slow down. And so have you guys been able to start preparing for credits that are not directly – I know you're not building data centers with construction loans – but what are the second derivative customers that aside from the HVAC guys and plumbers that you may see have actually exposure to AI and when it slows down may lead to some issues with them down the road? Have you guys tried to map that out or how will you map it out?

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

Thanks Mo.

I appreciate that. Yeah, real quick just coming back to Mo for a second. I know you mentioned the multifamily credit, but in those other – and you guys have strong credits, so I'm not terribly concerned about that today, but I'm curious those two other credits, was it because the customers were overlevered or did they lose a big customer of theirs that hit their cash flow? I'm just curious what happened in those idiosyncratic issues that you guys have identified. Thank you.

Yeah, I know. Great question, Gerard. One was just a consumer name that was being impacted by tariffs. Multi-bank deal. And so again, we actually expect a probably formal resolution later this year, but it was a company that filed for bankruptcy. So again, we sort of view that as it was tariff related, but sort of idiosyncratic relative to that space. And I do think again consumer probably is going to be still a choppy area as we think about not only the K-shaped economy, but certain types of businesses as well. So we're again increasingly selective there relative to the portfolio, but that was really the driver.

And then you might just talk about the egg deal. The egg deal was really – we have some egg exposure that is in western Washington and the biggest challenge there, obviously people talk about fuel, they talk about fertilizer, the biggest challenge is workers. There are just not enough workers to properly do the farming.

I think the march for consumer market at this point, Gerard, is Amazon, COVID, and tariffs like back to back to back. So the guys who are hanging in there are resilient and durable and that's a lot to ask for any industry.

I agree with you, Clark. Absolutely. Thank you.

Thank you, Gerard. Our next question will go to the line of David Chia Varini with Jeff. David, your line is open.

Hi, thanks for taking the questions on fee income. Good momentum in payments and wealth up 8% collectively year-over-year. Could you talk about the outlook there and drivers of that growth?

Yeah, so let's start with payments. We've been investing in payments for a long time. Places like embedded banking, that's been a double-digit grower for us for each of the last few years, and we project it to be a double-digit grower for us as we go forward. So we've got a lot of traction there. With respect to our wealth business, that's a strong business. We're at $74 billion of AUM. We show that is up 9% year-over-year. But if you really looked at the fees related to wealth management, those are growing at about 14%. So that's a business we feel good about. And we've been very focused as I mentioned since 2023 on this mass affluent space which we think is an unmet need out there in the marketplace.

Thanks for that. And then on deposit pricing, it sounds like it's very rate dependent, but how would you characterize the competitive environment in your markets? More intense or about the same versus say three to six months ago?

It's a good question. So when we talk about our markets, it's a little challenging to have one answer because we really view ourselves as being in three different geographic markets between the Northeast, the Midwest, and the Pacific Northwest or the West. They do operate a little bit differently. They do have a slightly different competitive set. I would say there are certain places where it has been much more intense from the beginning of the year. I think that's owing to some unique circumstances of the competitive set, but I think given the loan growth and the rate environment combination, we are definitely seeing again throughout the year a little bit more deposit intensity in general, but the rate sensitivity comment again just to be clear is really just the betas that are going to follow from any Fed moves. So we're not necessarily thinking about the rates in a flat environment moving meaningfully from where they are today.

Very helpful. Thank you.

Sure.

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

That concludes today's conference call. Thank you for your participation and enjoy the rest of your day.