KeyCorp ($KEY) Q1 2026 Earnings Call

Welcome to KeyCorp's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. 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. I would now like to turn the conference over to Brian Monty, KeyCorp, director of investor relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's first quarter 2026 earnings conference call. I am here with Chris Gorman, our chairman and chief executive officer, Clark Khayat, 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, April 16th, 2026, and will not be updated. With that, I will turn it over to Chris.

Thanks, Chris. Starting on slide four, we reported first quarter earnings per share of 44 cents. Revenue is 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 two fewer days in the quarter and seasonally lower deposits. Non-interest income increased 8% year-over-year as our priority fee-based businesses collectively grew by 12%. Loan 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 five, average loans were up $1.4 billion sequentially and increased $2.6 billion on a period end basis. Average CNI 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, CNI 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. DNI line utilization increased 1% sequentially to 31.5% as loan growth outpaced commitments. Turning to slide six. With the attention that NDFI and private credit have been getting lately, we provided some additional disclosures with respect to our portfolio and 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 third 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 non-owner 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. They're a reflection of four 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 seven, average deposits decreased by 2% sequentially, reflecting typical seasonal patterns and the intentional runoff of $1.6 billion in higher-cost brokerage CDs. We expect the deposits to trough in early May and grow from there. Reported average non-interest bearing deposits decreased 5.5% sequentially, but remained stable at 24% of total deposits when adjusted for our hybrid accounts. Total deposit cost 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 into money market deposits and consumer. Overall interest-bearing funding costs decreased by 21 basis points, bringing our cumulative funding beta to 68%. Slide eight provides drivers of NII and NIM. This quarter taxable equivalent NII was up 1% and net interest margin increased five 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 two fewer days of 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 three and five-year reinvestment rates. On slide nine, non-interest 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 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 remain 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 office. 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 to $60 million per quarter for the remainder of the year. On slide 10, first quarter non-interest 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. Non-performing 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 two 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 3 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.

Thank you. 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 or your question has been answered, please press star followed by two. If you are streaming today's call and would like to ask a question, please dial in and enter star one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to register. Our first question will go to the line of Erica Najarian with UBS. Erica, your line is open.

Thank you and good morning. 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, you know, 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 and quotes breakdown. 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.

Operator will take the next question. Yes, of course. Thank you, Erica. The next question will go to the line of Ken Usdin with Autonomous. Ken, your line is open.

Thanks a lot. I appreciate it. I want to ask a question on deposits. I know the first quarter is seasonal and you 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. Thanks.

Yeah. Hey 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, you know, we feel very good about the liquidity we have if loan growth continues or picks up. You know, we have low loan-to-deposit ratio on a relative basis. We've brought our wholesale 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.

Yeah. And as a follow-up on the cost side, you put in the slides about the cumulative down beta has been great at 56. With rate cuts 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? Thank you.

Yeah, 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 stepped back in, we would expect some intensification of that deposit pricing. Right now, our view is that those will be fairly stable. Our deposit pricing 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. You know, I think if there were cuts, our deposit basis will probably drop a little bit in the near term 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.

Okay, thanks Clark.

Thank you.

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

Good morning.

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.

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

Got it. Okay. Very helpful. Thank you. 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? Thanks.

Great. Thank you Chris. Appreciate it.

Thank you, John. The next question will go to the line of Ryan Nash with Goldman Sachs. Ryan, your line is open.

Hey, good morning everyone.

So, Chris, if I look at the high end of the loan growth guidance, you know, it doesn't imply that much growth from, you know, the 1Q end of period levels. Now, I know you mentioned some moving pieces in 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? Thank you.

Gotcha. 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 guided implies low single digit growth for the remainder of the year. And I feel like coming into the year you were upbeat on the potential return of M&A to drive upside as 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 parts of the business to begin to outperform expectations? Thank you.

Well, thank you.

Thank you, Ryan. Our next question will go to the line of Scott Seaffers with Piper Sandler. Scott, your line is open.

Morning, guys. Thanks for taking the question. 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's NPR is passed 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, etc., just as you think about the appropriate capital levels to sort of land on.

Hey 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 got 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 note, 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.

Gotcha. Okay, perfect. Thank you. And then maybe switching gears for just a second. Appreciate the refresh and the color you guys have given on the full year investment banking expectations. Clark, 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'd continue to expect to see those growth. So that's again on a gross number kind of low single digits, on a net number high single digits, sorry for that confusion there. And 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 it 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.

Excellent. All right. Good. Thank you very much.

Sure.

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

Hi. Perhaps you've already answered part of the question about your investment banking and debt placement business and I know you built that business a big organic grower but when you said you're looking for mid-single digit growth this year, that's not so exciting, right? Waiting this long for capital markets come back and I know it's been skewed toward 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 what it is or that what it is given your thoughts that activity will be delayed maybe until next year. Thank you.

And what do you think the difference is for the very large mergers and what we heard from the biggest banks is that dereg 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 where the activity is still subdued.

Hey Mike, one other just element we're seeing more consistently also 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 do mergers. So, what's the demand for capex driven financing?

All right. Thank you.

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

Hey, good morning. So Chris, Clark, since you gave the ROC guide, NII and loan growth are trending better. You noted 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 ROCE say 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 more to say about that 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 should 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 up for them rather than let them leave?

Yeah. Hey Manan. 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 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 could be brought back if we needed additional funding. So we have a fair bit of levers to fund as it grows. And we're not sitting here overly concerned to Chris's point about the marginal dollar funding if a quality loan is available.

Got it. Thank you.

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

Thank you. Good morning. 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 two 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.

Yeah. And Chris, I just might add that our data center exposure is fairly diminimus. We've also looked at what we've called 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 of 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 everything about the next two to five years.

Got it. Thank you.

Thank you, Ibrahim. Our next question will go to the line of David Chiaverini with Jefferies. David, your line is open.

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

Thanks for that. 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?

Very helpful. Thank you.

Thank you, David. Our next question will go to the line of Gerard Cassidy with RBC. Gerard, your line is open.

Hi, Chris.

Chris, can we circle back to you pointed out about the emerging of Fluent, how it grew 15% I think you said to 1.15 million out 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?

And not 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 ROCE improvement. Will we ever 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 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's 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 as just as the 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 point out it's not just a loan but it's the multiple of products. Outside of those seven 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 seven verticals.

And Gerard, just as a reminder, over the last couple 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 speaking of payments, and here's a layup maybe for Clark since he used to run payments. We all know about the risk in 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? What 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?

Yeah, I mean there is a little bit of credit risk in 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 pull 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, they get the money, we talk to them in a couple weeks or months. When you sign a payments contract with a client, the work begins because you pop open the hood and you start rewiring 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 lineman 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 at 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.

Thank you. Very insightful, Clark. And good luck with the new responsibilities.

Thank you.

Thanks.

Thank you, Gerard. Our last question will go to the line of Christopher McGratty with KBW. Christopher, your line is open.

Hey, good morning. This is Chris O'Connell filling in for Chris. Just wanted to circle back to the margin discussion and just given the overall shift in the rate environment this past quarter towards a higher for longer environment, what impact you think that might have on the margin improvement story.

Yeah. 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 that guidance under a variety of circumstances. We'd likely feel a little stress if there were hikes 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 the reflected slight improvement in that margin guidance incorporates a flat no cut scenario. So hopefully that's responsive to your question there.

Okay, great. And then you guys provided a ton of color on private credit and in the specifics both in the discussion, 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 your wall of worry on maybe more hot button credit pockets and then where private credit either as a whole or 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.

Perfect. Appreciate all the color. Thank you for taking my questions.

Thank you, Christopher. 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.