Good morning, and welcome to KeyCorp's second quarter 2023 earnings conference call. As a reminder, this conference is being recorded. I would now like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead. Thank you for joining us for KeyCorp's second quarter 2023 earnings conference call. Joining me on the call today are Clark Khayat, our Chief Financial Officer, and Mark Midkiff, our Chief Risk Officer. On slide two, you will find our statement on forward-looking disclosure in certain financial measures, including non-GAAP measures. These statements cover our presentation materials and comments, as well as the question and answer segment of our call. I am now moving to slide three. Before Clark covers our quarterly earnings results, I want to discuss our strategic priorities and cover the fundamental strengths of our businesses, which continue to perform well despite the challenging operating environment. In our consumer bank, we are growing relationship households at an annualized rate of 5%, consistent with our Investor Day target. Our strongest growth continues to be in the West, driven by younger clients. We have also experienced strong growth in wealth management, with double-digit year-over-year growth in asset management sales. In our commercial business, we continue to add and expand relationships through our integrated commercial and investment bank. Our ability to distribute risk serves us well, and importantly, serves our clients well through all market conditions. This quarter, we raised $25 billion of capital for our clients, placing 18% of the capital raised on our balance sheet. This is down significantly from the 30% we placed on our balance sheet last quarter. Capital markets remain challenged, our pipelines are solid. On a year-to-date basis, our M&A revenue is up from the first half of 2022. We expect investment banking fees to be up in the H2 of the year. One common theme across our franchise is our long-standing strategic commitment to primacy, having our client's primary operating account, whether it's an individual or a business. Our focus on primacy is reflected in the quality and diversity of our deposit base. Nearly 60% of our deposits are from retail, small business, wealth, and escrow accounts. 80% of our commercial balances are core operating accounts. Further, 97% of our total commercial deposits are from our relationship clients. Importantly, these are long-standing relationships. On average, our retail clients have been clients of Key for over 20 years, and on average, our commercial clients for over 15 years. This quarter, our period-end deposits increased by $1 billion. Additionally, we've seen continued growth in the month of July. In the appendix of our presentation, you can find additional detail regarding the quality and diversity of our deposit base. We continue to proactively manage through volatility as it relates to the macroeconomic environment, the interest rate cycle, and potential regulatory changes impacting our industry. Going forward, Key will benefit from a well-defined net interest income opportunity over the next 18 months. As our short-term swaps and treasuries reprice, we will see a net interest income benefit that will reach approximately $900 million on an annual basis by the first quarter of 2025. We also continue to be proactive from both a balance sheet optimization and capital allocation perspective. We are well positioned to build capital and reduce risk-weighted assets. We will continue to prioritize full relationships and exit non-relationship business and non-strategic assets. In the second quarter, our period-end loan balances declined by $1 billion. We will continue to benefit from our strong fee-based businesses, which make up over 40% of our revenue. As capital markets normalize, we will utilize our differentiated platform, driving fee income and naturally reducing our balance sheet. On the capital front, we will benefit as over 44% of our AOCI will roll down over the next 18 months. The next area I would like to discuss is our exposure to credit in the current environment. Credit losses remain relatively low across the industry, but as we move through the business cycle, asset quality will matter. Today, more than half of our C&I loans are investment grade, and over 70% of our consumer originations have a FICO score of 760 or greater. These measures reflect the de-risking of our portfolio over the past decade in concert with our underwrite to distribute model. We have limited exposure to leverage lending, office loans, and other high-risk categories. B and C class office exposure in central business districts total $121 million. Two-thirds of our commercial real estate exposure is in multifamily, including affordable housing, which continues to be a significant unmet need in this country. We also continue to benefit from insights gained from our third-party commercial real estate servicing business as we service over $630 billion of off-us real estate exposure. Finally, we will continue to focus on improving productivity and efficiency. Our results this quarter reflect the successful completion earlier this year of a company-wide effort to improve efficiency. Actions completed in the first quarter represented over 4% of our expense base and $200 million in annualized benefit. These efforts remain ongoing as we will identify new opportunities to improve both productivity and efficiency. Before turning the call over to Clark, I want to take a step back. This quarter, we strategically built capital, we managed the size of our balance sheet, and for the third consecutive quarter, built our allowance for credit losses. As I covered earlier, we will continue to take steps to manage our level of risk-weighted assets in consideration of anticipated regulatory changes. I will close by affirming my confidence in the long-term outlook for our business. We have a durable, relationship-based business model that will continue to serve our clients, our prospects, and deliver value to our shareholders. With that, I'll turn it over to Clark to provide more details on the results for the quarter. Clark? Thanks, Chris. I'm now on slide 5. For the second quarter, net income from continuing operations was $0.27 per common share, down $0.03 from the prior quarter and down $0.27 from last year, driven in part by 2 notable items. Our results included $87 million of additional post-tax provision expense in excess of net charge-offs, or $0.09 per share, as we continue to build our reserves. We also incurred $21 million of notable post-tax expenses, or $0.02 per share. This includes severance costs, refunds on fees and related claims, and a Visa Class B fair value adjustment. Turning to slide 6. Average loans for the quarter were $120.7 billion, up 11% from the year-ago period and up less than 1% from the prior quarter as we continue to support relationship clients. Commercial loans increased 12% from the year ago quarter. Relative to the same period, consumer loans increased 7%. Compared with the first quarter of 2023, commercial loans grew 1%, while consumer loans remained relatively stable. Total loans ended the period at $119 billion, down $1 billion from the prior quarter. Continuing on to slide 7. Key's longstanding commitment to primacy continues to support a stable, diverse base of core deposits for funding. Our total cost of deposits was 149 basis points in Q2, and our cumulative deposit beta was 39% since the Fed began raising interest rates in March 2022. We remain focused on balance sheet management with an eye toward minimizing the total cost of funds. Average deposits totaled $142.9 billion for the second quarter of 2023, down 3% from the year-ago period, were relatively stable across the quarter, down approximately $500 million on average. Year-over-year, we saw declines in retail deposits driven by elevated spend due to inflation, normalization from elevated pandemic levels, and changing client behavior due to higher rates. The decrease in average deposit balances from the prior quarter reflects a continuation of the same trends. Regular seasonal outflows that we saw in April were more than offset in May and June. Deposits ended the period at $145.1 billion, up $1 billion from the prior quarter. Turning to slide 8. Taxable equivalent net interest income was $986 million for the second quarter, compared with $1.1 billion in the year ago and prior quarters, down approximately 11% against both periods. Our net interest margin was 2.12% for the second quarter, compared to 2.61% for the same period last year and 2.47% for the prior quarter. Year-over-year net interest income and the net interest margin were impacted by higher interest-bearing deposit costs, a shift in funding mix to higher cost deposits, and growth in wholesale borrowings, which in part supported elevated cash levels. The decline in net interest income was partially offset by higher yields on loans and investments. Relative to the first quarter, our net interest margin was negatively impacted by 28 basis points related to higher interest-bearing deposit costs and 17 basis points from a change in funding mix and liquidity, partly offset by 10 basis points related to higher earning asset yields and earning asset growth. Our swap portfolio and short-dated Treasuries reduced net interest income by $340 million and lowered our net interest margin by 73 basis points this quarter. Turning to slide nine. As previously mentioned, Key has begun to benefit from the maturity of our short-dated swap book and expects to begin to benefit more significantly from increasing swap and Treasury maturities as we move forward. Based on the forward curve, we continue to expect a meaningful benefit, currently estimated at $900 million annualized in the first quarter of 2025. We have continued to take a measured but opportunistic approach to lock in this potential benefit, this analysis includes the addition of hedging activity undertaken beginning in 4Q 2022 and since. We have not and do not plan to replace the swaps rolling off in 2023, instead allowing the natural asset sensitivity of the loan book to come through and benefit from higher short-term rates. Moving to slide 10. Non-interest income was $609 million for the second quarter of 2023, compared to $688 million for the year-ago period and $608 million in the first quarter. The decline in non-interest income from the year-ago period reflects a $29 million decline in investment banking and debt placement fees, reflecting lower advisory and syndication fees. Additionally, service charges on deposit accounts declined $27 million, reflecting previously announced and implemented changes in our NSF-OD fee structure. Lower account analysis fees related to higher interest rates. The decline in non-interest income from the first quarter reflects a $25 million decline in investment banking and debt placement, driven by lower advisory and syndication fees, partially offset by a $10 million increase in corporate services income, reflecting an increase in customer derivatives activity. I'm now on slide 11. Total non-interest expense for the quarter was $1.076 billion, down $2 million from the year-ago period and down $100 million from last quarter. Compared with the year-ago quarter, net occupancy expense decreased $13 million, reflecting a downsizing of corporate facilities, and business service and professional fees decreased $11 million. These decreases were partially offset by a $17 million increase in technology expense and a $15 million increase in personnel expense, reflecting merit increases and higher benefit costs. Compared to the prior quarter, personnel expense decreased $79 million, reflecting lower incentive, stock-based compensation, and severance. Other expense decreased $24 million in the second quarter, as the first quarter included restructuring charges related to expense actions. Moving now to slide 12. Overall credit quality remains solid. For the second quarter, net charge-offs were $52 million, or 17 basis points of average loans. The delinquencies across portfolio sales remain relatively stable. Our provision credit losses was $167 million for the second quarter, which, as we have pointed out, exceeded net charge-offs by $115 million, or $87 million after tax. The excess provision increases our allowance for credit losses to 1.49% of period end loans. Despite the increase in the allowance, our outlook for net charge-offs remains well below our through the cycle targeted level of 40 to 60 basis points. Now on to slide 13. We ended the second quarter with a Common Equity Tier 1 ratio of 9.2%, up from the prior quarter and within our targeted range of 9% to 9.5%. This provides us with sufficient capacity to continue to support our relationship customers and their needs. We did not complete any open market share repurchases in the second quarter beyond those related to employee compensation, nor do we expect to engage in material share repurchases in the near term. We will continue to focus our capital on supporting relationship client activity and paying dividends. On the right side of this slide is the expected reduction in our AOCI mark. The AOCI mark declines by approximately 44% by the end of 2024, and 55% by the end of 2025. In alignment with recent public remarks from regulators, we expect that any changes will be implemented with an appropriate comment and phase-in period. Given that, our view is that for any new requirements, our reduction in AOCI marks, and more significantly, our future earnings and balance sheet management, would allow us to organically accrete capital to the required levels over the necessary period. Slide 14 provides an outlook for the third and fourth quarter of 2023. Third and fourth quarter guidance is given relative to each prior quarter respectively. Similar to our approach in the third quarter of last year, we have shifted our guidance to focus on quarterly results. This provides the clearest view of trends heading into year-end, using the forward curve as of July 1st. Balance sheet trends are tracking mostly as anticipated. We expect average loans to be down 1%-3% in both the third and fourth quarter versus the prior quarter, as we continue to actively manage our balance sheet and recycle capital to support relationship clients. We expect average deposits to be relatively stable in both the third and fourth quarter versus prior periods. Our outlook assumes a cumulative deposit beta approaching 50 by year-end. On a linked quarter basis, net interest income is expected to decline 4%-6% in the third quarter and be flat to down 2% in the fourth quarter. As we derive more benefit from the repricing of our swaps and treasuries in 2024, we expect growth in both our net interest income and net interest margin. Our guidance assumes a fed funds rate reaching 5.5% in the third quarter and remaining flat through year-end. These interest rate assumptions, along with our expectations for customer behavior and the competitive pricing environment, are very fluid and will continue to impact our outlook prospectively. Non-interest income is estimated to be up 2%-4% in the third quarter and up 4%-6% in the fourth quarter versus prior periods, reflecting a gradual improvement in capital markets. Non-interest expense is expected to remain relatively stable in both the third and fourth quarters. We assume credit quality remains solid and net charge-offs to average loans to be in the range of 20-25 basis points in the 3rd quarter and 25-35 basis points in the 4th quarter, both below our expected over the cycle targeted range of 40-60 basis points. Our guidance for the 3rd and 4th quarter GAAP tax rate is 18%-19%. Using our quarterly guidance, our full year outlook for 2023 versus the prior year would be the following: Net interest income down 12%-14%, fees down 7%-9%, expenses relatively stable, net charge-offs of 25-30 basis points for the year, and a GAAP tax rate of 18%-19%. We feel confident in the foundation of our business, in our diverse, high-quality deposit base, the durability of our balanced franchise, and our improved risk profile. Despite near-term headwinds, we continue to be focused on execution in 2023 and positioning the company to benefit from the strong long-term core earnings power of our businesses. With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator? Thank you. Ladies and gentlemen, if you wish to ask a question, please press 1 and then 0 on your touchtone phone. You will hear an acknowledgment that you've been placed into queue, and you may remove yourself from queue at any time by repeating the 1-0 command. If you're on a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, please press 1 and then 0 at this time. 1 moment, please, for the first question. That will come from the line of Scott Siefers with Piper Sandler. Morning, guys. Thank you. Good morning. Hey, Clark, wanted to talk about the NII outlook. You know, the pace of NII degradation looks like should slow considerably in the second half, the fourth quarter, especially. Maybe a little more color on the main factors you see that would allow that to happen. I know you sort of rationalized the beta expectation, and of course, you've got the Treasuries and swaps, but just curious to hear from your view, the sort of main factors in that outlook. Sure. Thanks, Scott. I think this will be a topic worth spending a little time on. First, let me just remind you that the 212 NIM would have been 285 without the swaps and Treasuries, which were about $340 million in the quarter. Just to give you kind of a level set. If we go back to the most recent guidance, we would have guided you to the second quarter being at or near the bottom. To your point, Scott, it's a little bit of continued decline. What I'd say is the fundamentals of our business are very consistent with that comment. What's changed is the rate expectation in the back half of the year. At that time, we were expecting 2 cuts in the fourth quarter. As I stated in the prepared remarks, we're now going to see kind of a one hike and it flat through the end of the year. I think the implication of that is the betas will drift a little higher through the back half of the year and the swaps and the Treasuries will be a little bit bigger drag than we previously expected. That said, we do think that both of those factors are moderating, so we're seeing deposit balances stabilize, and we're seeing the slope of that beta increase flatten. We're, you know, continuing to see swaps mature, and the Treasury portfolio will begin to mature now in the third quarter. We'll see, you know, opportunity as those as those two books come off. What we're seeing then is that flattening of the NII and NIM trajectory as we go into fourth quarter, and we wanted to reflect that by providing guidance for each individual quarter. As we go beyond that into 2024, I think we'll start to see a pickup. Slide nine isolates the swap and Treasury portfolio, so consistent with what we did last quarter. As I stated a few minutes ago, a $340 million drag in Q2 or 73 basis points. The way I think about it, just in its simplest terms, is $9 billion of U.S. Treasuries that start maturing in this quarter with a basically an average yield think of 45 basis points and $10.3 billion of swaps between now and the end of 2024, with a received fixed rate between 40 and 50 basis points. Put those together, you're looking at close to $20 billion with an almost 5% yield pickup by the end of 2024, and that's what gets you to the $900 million or $220 per quarter, $230, sorry, per quarter, that we have on slide 9 in the deck as of Q1 2025. Again, in that case, we're trying to isolate just the U.S. Treasuries and swaps and provide as much transparency as we can there on these specific headwinds. What I would say that doesn't include is the relative betas or funding costs that go with that. I just want to touch on that because, again, I think it's important to understand. If you look at the $720 million, which is equivalent to the $900 million that we quote this quarter, that was consistent with a different rate environment, where rates were coming down at the end of the quarter or the end of the year, and we would have had, you know, a muted, slightly muted impact on the NII pickup. As I just said, rates we think are going to be higher now. The betas will be higher, commensurately, the pickup in those swaps and U.S. Treasuries has gone from $720 million to $900 million. Those are going to move in sync. Slide nine is intended to be, again, isolated to the Treasuries and swaps, just to make sure we're giving you as much disclosure on those as we can. Okay. That's an extraordinarily helpful color, so I appreciate that. I don't want to put words in your mouth, in the aggregate, would your expectation be that NII ends up sort of bottoming around, you know, end of this year, maybe early next year, then does see a more visible inflection back up as sort of the pricing dynamics wane on funding costs, you then start to get a more material and visible benefit from the swap and Treasury maturities? Is that the best way to think about it? Yeah, I think that was very well stated. Okay. All right, perfect. Thank you very much. I appreciate it. Yeah. Thanks, Scott. We'll go next to the line of Ebrahim Poonawala with Bank of America. Hey, good morning. Hey, good morning, Ebrahim. I guess, good morning, Chris. Just wanted to follow up, I think, on the same line of questioning that Scott around NII. Appreciate the lift from swaps and Treasuries. I think the concern when you talk to investors has been the value before we get to that point has kept getting deeper throughout the year. When we look at this guidance for the back half, I think, Clark, you mentioned implies -12% year-over-year. Give us a sense of just, level of confidence in that guidance that this is it, absent any big change in the interest rate backdrop. How, how good do you feel and the level of visibility that you have? I appreciate it's been tough for the entire industry to handicap this, but any color you can provide would be helpful. Sure. Look, I think the biggest changes we've gone through the year has been the rate, the rate level. You know, given your commentary on sort of relatively stable rates, I think we feel very good about the trajectory we're sharing here. I would say, you know, overall, our deposit betas, I feel like are very much in line with the peer group. We did some catching up because we, you know, we outperformed last year, but I feel like that's very consistent with what's happening in the industry, and we just happen to have these specific headwinds right now on swaps and treasuries. Again, as those come off, we think we're prepared to get the benefit of that. I would say that, you know, in the expected rate environment, our confidence would be good. Got it. Second question, I think Chris talked about two things. One is focus on expenses. I see the guidance for flat expenses for the back half. Give us a sense if there's a bigger opportunity here on flexing expense leverage as we move into back half and as at least the street thinks about 2024 EPS, and also around any proactive RWA actions. I think you mentioned getting rid of or exiting non-strategic relationships. How impactful could that be for character capital? Sure. That's a great question, and as you put them together, they are closely related. If you just step back, here's how we see the future as all the regs unfold. What's not going to change for us, Abraham, is we're going to remain focused on our relationship model. We're going to stay focused on targeted scale. I think there's going to be incredible and intense scrutiny around the duration, the granularity, the composition of the deposit base, and that's one of the reasons that Clark talked about that we pivoted and made sure we protected our deposits, whereas we were kind of leading in terms of not having a lot of beta. Next gets to, I think this gets to directly your question. I think there's going to be a significant change in loan to deposit ratios. As you kind of run all this through your models, and we run it through our models, I think, loan to deposit ratios for Category IV banks, if they're mid-80s now, they're going to be significantly less, and we are very focused on this. Keep in mind, last year, we grew our loans kind of high, double digits. I mean, like around 19%, I should say, high teens. We were on a path to grow 6%-9%, but that all happened in the first quarter before the events of March. We not only stopped that growth, but actually pushed it back $1 billion by the end of this quarter, which I think is really, really important. Right now, what we're doing is we are scrutinizing every portfolio we have in the bank. I've always said that on a risk-adjusted basis, most standalone loans don't return their cost to capital. If you think about having to carry more capital, and you think about the capital that you have being a lot more expensive, then you can rest assured there'll be a lot of credit-only relationships that won't be strategic to us. We'll preserve our capital for those relationships. As you know, we can do a lot with them, but we will be continuing to push down our assets. You know, you see in the guidance that Clark gave you, we're looking at average loans being down 1% to 3% in the third quarter and down 1% to 3% in the fourth quarter. We will hit that. The second part of your question, which is also related, as we shrink the balance sheet, we're going to have to make sure that our expense base is right-sized for the future asset base of our company. Rest assured, we're looking at that as well. Chris, if I may, squeeze one in. Just give us a sense of the dividend. There's been a lot of focus, the 7% dividend yield. As the chairman of the board, I know it's evaluated every quarter, but how confident are you in terms of dividend sustainability as we kind of plug through the back half into 2024? Sure. Well, the headline there is I am confident, as a board member, we spend a lot of time talking about strategy and talking about dividend policy. We manage this company for the long term, the dividend policy is no exception. Our capital priorities, as I just mentioned, are unchanged. It's to support our clients, our prospects, and to pay dividends. To your point, last week, our board did approve a twenty-and-a-half cent third quarter dividend. Keep in mind, over our history, we have paid out 80% very often. It's just been in the form of both buybacks and a cash dividend. We're obviously paying close attention to that. I feel good about it. Let me talk a little bit about capital because it's so related. You know, in spite of some of the challenges Clark mentioned, this quarter, we grew capital, we paid a $0.205 dividend, we built reserves. As we think about taking this long-term perspective, when you look at our normalized, the normalized earnings power of our company, and that is the reversal of the NII headwind into a tailwind, and also having a reasonable expectation around investment banking fees, you know, the earnings power of the company is strong. We can build capital there. Clark mentioned the AOCI burn down 44% by 12/31/2024, 55% by 12/31/2025. As I just mentioned, this game plan that we have around risk-weighted assets will be important. The last thing that I think is really important... It's gonna be important, I think, as this cycle continues to play out, is we have a well-positioned credit book, and there's nothing that destroys capital faster and in bigger and bigger hunks than having a bunch of credit losses. I put all those things together. We take a long-term perspective on the dividend. We feel good about it. All very helpful, Cullen. Thank you so much. Sure. Thank you, Ibrahim. We'll go next to the line of Ken Usdin with Jefferies. Hey, guys. just a couple follow-ups on the loan side. you know, and obviously, you said that you're retaining a little bit, you know, back to kind of that upper teens point of your investment banking originations. I'm just wondering, you know, does that have any throughput in terms of the ability to generate business in the investment bank? I guess, connected just then, your confidence in the second half improvement in the investment bank, is that because you're starting to see things get back out the door as opposed to, you know, keep on the balance sheet like you had been doing for the last couple of years? First of all, thank you for your question, Ken. It's complicated by the fact that, as usual, mix has a lot to do with it. We actually distributed a lot of debt in the second quarter. The reality is, a lot of it was investment grade. In terms of investment banking fees, not so great. In terms of keeping the velocity of our balance sheet, very, very important. The premise of your question, as we look to shrink our balance sheet, the ability to distribute paper to a lot of different places, will be, you know, will in fact be important. That'll be an important part of the mix. In terms of what I'm seeing, here's kind of what I'm seeing. One, our M&A backlog year-over-year is up. Our total backlog is down kind of mid-single digits, which is really not a big deal. What I'm most encouraged by is not that I'm seeing things coming out of the pipeline. Obviously, in the equity market, we're starting to see that. You're seeing that for sure. But what I'm really pleased with is I talk to our clients all the time. In fact, as recently as yesterday, I talked to one of our large clients who is proceeding with a transaction that's been sort of percolating for some time as people kind of go through the price discovery. It's really more a gut feel on my part, having been around this business just for so long. Got it. Just one more, Laurel Road, you know, some cross factors there, too, obviously, with the debt moratorium and what happens there. Just as far as also being, you know, scrutinizing every incremental loan that you're making, just can you talk about the Laurel Road specifically, but how you're also thinking through that in terms of the other consumer portfolios? Sure. I'll start, then I'm going to flip it over to Clark. It's a, it's a great question, and it's one, as we sort of have gone through our reset, we've spent a lot of time talking about these capabilities that we need to make sure we have. Before we bought Laurel Road, they securitized and distributed 100% of their loans. Going forward, we're going to be securitizing and distributing their loans. We have the people, and we have the ability to do it. It's a really good question. While I'm on the point of Laurel Road, the other thing we've done on Laurel Road is we've really made two pivots in what's been going on with the federal student loan payment holiday. One, we turned it into a complete digital platform whereby we can have, loans, deposits, importantly, checking account, card, mortgage, et cetera. The other thing that we did is when we bought GradFin, and we're in the early days of this, Ken, but GradFin is a market leader in advising people around not only Public Service Loan Forgiveness, but the whole income-based debt repayment, which the government is really opening up the aperture for. It's falsely complex, and you need someone to sort of help you through it, which is a good thing, but that's another pivot that we've made there. Getting back to your question about sort of our asset-light model, Clark, why don't you talk about, speak to that, particularly around mortgage as well? I think, you know, largely, we're going to look to continue to distribute. I mean, we do have capabilities now where we distribute a lot of debt. We're going to expand that more consistently, I think, to the consumer side. The point, I think, on Laurel Road that Chris made, that I just want to reiterate, is we never acquired it to be a student loan-only generator. That was kind of the headline. It was intended to be a full-service banking platform. We continue to build toward that, and we think it's got some really unique and differentiated capability around this income-driven repayment and Public Service Loan Forgiveness. You may have seen some commentary out of the government in the past week around the IDR specifically and some of the complexities of that, which I think will accrue to our benefit over time. Got it. If I can wrap that together, is it fair to say that the trade-off of less NII, less loan growth over time, getting the LDR down, you'll sacrifice some NII help on the capital side and then move towards more of a fee-generating model? you know, Yeah in term. Yep. You know, I think that's the right idea. I think we're also demonstrating more deposit growing capability there. Again, we're still relatively new in having those capabilities, but I think that's the right way to think about it. More of a fee, advice, and core banking generator than a loan than a loan shop. Okay, got it. Thank you. Yep. We'll go next to the line of John Pancari with Evercore. Please go ahead. Morning. Good morning, John. Just going back to the $900 million on slide 9 of the NII pickup from treasury and swap maturities. You know, let me just ask it this way: aside from a change in the rate backdrop and your interest rate outlook, what could prevent you from realizing that? I know there's a fair amount of investor skepticism around the ability of that $900 million to find its way into the numbers. From your perspective, how do you size up the risks? What are the risks that you do not realize that? What gets in the way? Is it more on the deposit side, or is it an asset side of the picture that could prevent that from being realized? Yeah. I think, I mean, the rate available when the treasuries and swaps mature is sort of the single biggest factor, and that would be, it would have been reflected in, you know, the 720 moving to 900. And again, that's isolating kind of the income portion of that. I do think there's a couple variables, so think about the treasuries, whether or not we reinvest them in the market, use them as replacement funding, or hold them in cash. Today, those are relatively neutral. Over time, if there's a disparity between those 3, you might see a little bit of pickup or drop, depending on which decision we make. Today, it's kind of a push across all 3 of those. Your other point was right, which is, you know, the funding side of this. I tried to reflect that as well in my comments of, you know, lower beta expectations at the end of Q1 when we showed you a 720 opportunity, higher beta expectations here today, but that opportunity has gone up kind of in a related way. I don't know, and I don't want to pretend those are kind of one-to-one tied, but I would think about those moving at least in a fairly correlated direction. Got it. Okay. All right. Thank you. Then, separately, as you continue to exit or as you're evaluating the non-strategic businesses and other optimization, just to confirm, any progress you make incrementally on that front, that would be in addition, like, to the guidance of a decline of 1%-3% on the loan front? Anything on the incremental optimization that would provide, or that would lead to potential incremental downside to these numbers. I think if there were something, more significant than what Chris referred to, which is maybe a very active management of the business, that would be incremental. I think what we've built into this guidance is how we're running the business right now. Okay. All right. Thank you. We'll go next to the line of Matt O'Connor with Deutsche Bank. Good morning. I want to follow up on the kind of capital line of questions. I guess the first thing is, you know, a lot of your peers seem to be targeting 10%+ on the CET1, and you know, obviously, there's, there are capital proposals coming out. I guess, first question is, what are your thoughts in terms of that 9%-9.5% target, you know, moving closer to 10%-10.5%, like some of your peers? Matt, we think 9%-9.5% is the right number for us, given our business mix. If you think about 50% of our C&I book being investment grade, if you think about the fact that we don't have really any credit card business to speak of, if you think about the fact that at funding, we have FICO scores in our consumer business of 760 or so. We think it's the right number, and obviously, at 9.2 and having grown it from 9.1 this quarter, we're right in the strike zone. Having said all of that, we, like everybody else, will wait and digest anything that comes out in the not too distant future and reevaluate it at that point. For our business, right now, we feel that's the right number. Okay. Then in terms of the RWA optimization, is it possible to size that or give a range and the timing of when you'll get the benefit of that? We're looking at a lot of different things. Right now, I'm most comfortable just directing you to the guidance that we gave around loans. As I mentioned, we're looking at other things as well. I'll leave it at that. Okay. Thank you. Thank you, Matt. We'll go next to the line of Manan Gosalia with Morgan Stanley. Hi, good morning. I wanted to clarify your comments earlier on the call, that you believe that the LDRs for the industry and Category IV banks in particular, will have to move lower. Does that mean that you have some room to optimize some of your non-deposit funding, like longer-term debt, or is that unlikely given the potential for TLAC rules to also apply for Category IV banks? I think that we do have that, and you would have seen us do a little bit of that even here in the second quarter. I think your follow-on question around TLAC or long-term debt is the right one as well, and we'll wait, as Chris just mentioned, for the proposed and final rules. We do think that reduction in loan to deposit over time gives us an opportunity to reduce reliance on wholesale funding. Got it. Okay. Maybe on the credit side, given the ACL was up this quarter, Was that entirely model driven? I guess how much of a buildup is there more of a buildup to do? What sort of an environment do you have baked into that current reserve ratio? Sure. Just from a CECL perspective, obviously it's very forward-looking. In terms of what% is model driven, what% is kind of portfolio driven, I think you can assume it's kind of, sort of half and half. My assumption is that, just to step back for a second, my assumption is that we will have I think the Fed is going to successfully engineer a soft landing. I think it'll probably happen in 2024. Having said that, what I don't think is yet in the market is the impact of all the rate increases and also, the impact of banks, tightening down on credit. I think both of those will have an impact on the economy. As such, we're pretty conservative in terms of how we look at things. The first thing we always do is look at anything that, you know, is leveraged and anything, you know, where the cash flows could be in any way impacted by a slowing economy. That's kind of the lens that we looked at it. There is nothing specific. There's nothing that we're particularly worried about. We kind of looked across all the portfolios. is we, you know, if we do move towards a soft landing, would that imply that you don't need the ACL ratios to really move higher? Right now, I feel like we have reserved what we need to reserve, for sure. Got it. Thank you. Thank you. We'll go next to the line of Mike Mayo with Wells Fargo Securities. Hi, can you hear me? Mike, we can. Good morning. Good morning. You're guiding NII down 4%-6% in the third quarter and another 0%-2% in the fourth quarter. What does that mean for your NIM, even in broad terms? I guess it was 2.12% in the second quarter. Yeah, we would expect it to be relatively flat in the third quarter and then start to trend up. My question is, look, that's the lowest core margin possibly ever, at least since the global financial crisis. I mean, that is such a slim margin here. You know, I guess, why such a low margin? Even after the increase, I guess I get to around NII of about $1.15 billion per quarter, which is where you were in the second quarter of 2022, which is before the Fed rate hikes. You can correct the math, you're using the midpoint, your NII of $986 goes down to $937 next quarter, then $927 million in the fourth quarter. I guess you're saying it goes up by about one fourth from there by the end of the year, right? Like, $927 plus one fourth of that $900 million annualized gets you around, you know, $1,150 NII. I'm throwing a lot of numbers around here, but in the end, you wind up with a NIM, you wind up with NII, that's at a level before the Fed rate hikes. Even with the potential improvement next year, which would be an incremental positive, you're still not getting credit for any of the Fed rate hikes that took place. What happened with the structural positioning of the balance sheet that leads to such a low NIM and NII? I mean, where I'd start there, Mike, is that if you look at the composition of our loan book in general, it is, in our view, higher credit quality, but higher credit quality comes generally with lower yields. We have, you know, over 50% of our C&I book is investment grade. We have super prime consumer books, so those are not going to carry the same rates broadly as something like credit card, which we have very little exposure to, or personal consumer loans, which we have very little exposure to. In that, in that regard, you know, we're starting probably structurally from a little bit lower NII, but the counter to that is what we think is a higher credit quality book. I'll have to go back through the specific math you have there, but I'm happy to do that and talk about it offline, but I think that's at least a starting point. We think over time, you know, a NIM that starts with a 3 is not an unreasonable place for us to be. Is that right? Next year, you're guiding basically from the fourth quarter level, where it stabilizes, at least the NII should go up by about one fourth by the end of the year. In other words, you're guiding basically close to $900 million for the fourth quarter or a little above, and then you're saying you're gaining $900 million annualized by the end of next year. That would imply NII would go one fourth higher from that fourth quarter level, all else equal. Is that correct, the logic? Not exactly. The $900 million is annualized as of the first quarter of 2025. Okay. Just a little bit later. Got it. Yeah. Eventually, the NII goes up by one fourth. Correct. I said the words all else equal. What would not be equal? What could help the NII and what could help that NIM go back from 2% to 3%? What is that dynamic? Logic missing? Well, I think it's, I mean, the obvious one right there is the 73 basis points that comes from swaps and Treasuries. That's what we're talking about. You know, beta is, I think, getting or general rates and beta is getting kind of more in line with historical averages or overall funding costs. As we just talked about, we have some opportunity to reduce some wholesale funding, which is obviously expensive, and we've still yet to see pull through on loan spreads. I think there's a variety of factors that could improve that, many of which we are either not experienced at the moment or haven't seen, kind of broadly in the industry. Last one. Chris, you started off saying you expect investment banking to be stronger in the second half of the year. It's been some drought, for the industry. You know, what gives you confidence either for the industry, for Key or for both? You know, Mike, it I mentioned this earlier in the conversation. It is based on my experience being around this business as long as I have. People will defer transactions for so long. Eventually, sort of the logjam starts to break. I think we're starting to see it a little bit in the new issue equity business. I've just been out talking to clients. I think people that have put deals on hold now for 12 months, either these deals are going to start to happen or they're going to move on and do something else. It's based on, one, just looking and scrutinizing the backlog. Secondly, just more instinctive as I'm out talking to people. So Fisher Cup date time? Yeah, for sure. Okay. Thank you. Thank you, Mike. We'll go next to the line of Erika Najarian with UBS. Hi. Hi, Erika. First question for what was your adjusted CET1 in the quarter, including AOCI? I presume that 9.5 CET1 target would be like your fully loaded target, even after we get an NPR that would be inclusive of AOCI and CET1. Yeah. Whatever that, whatever that ultimate target is, Erika, will reflect the appropriate rule. If the AOCI opt out is eliminated, then, yes, I think you stated that correctly. $630, that level for AOCI, AFS is about $630. Got it. My second question is for you, Chris, and I apologize if this sounds challenging, but this is sort of the big conversation that I'm having with long-term shareholders. You know, clearly, you know, the stock price performance today is trying to price out some of the, you know, dividend fears that were in the market, given where your yield is. I think the big discussion I'm having with your investors is that 80% payout, right, that you mentioned, and, you know, that happened for this quarter. It feels like, 3 years ago, sort of in the pandemic, you were getting the same questions about the sustainability of your dividend. It feels like at the, you know, at the end of the day, it's really the denominator that has been challenged. Whether it's been expenses previously or, you know, having the balance sheet set up to have these received fixed rates that essentially implied a zero rate environment forever, you know, it just feels like your efficiency ratio isn't just quite right and doesn't really reflect the potential of the business. As you think about, you know, the next 3 years, you know, how are you know, what discussion are you going to have with your board to have that earning, the potential of your franchise really be reflected in your earnings power? I mean, the NIM is the NIM. I get the swap. Like, you know, I feel like that comp, the Key gets wrapped up in the dividend conversation the entire time, not necessarily because the dividend is an albatross. It feels like that your earnings power is so sensitive to vagaries of the macro. First of all, I appreciate the question. I agree with the premise of it. Our business, the challenging thing for us, I was with my board last week, we were talking at length about this. Our challenge is, our business is performing well. We clearly are under-earning, we're under-earning based on how we have our balance sheet positioned. That's why I mentioned one of the things that gives me confidence, Erika, is when we get the normalized earnings power of the company. We just talked about investment banking fees. That's driven by something else. What we really need is the position that we have, which is liability sensitive, at a time when you wouldn't want to be liability sensitive. We need for that to burn off, the passage of time will do a lot on that. Unfortunately, it is the passage of time, but as I mentioned, the burn down is 44% between now and 12/31/2024 and 55%, this is as it relates to AOCI, by 12/31/2025. That is the issue, and I think we are, said differently, we are under-earning right now, and we will be over-earning as the position unwinds and rolls down. Got it. Okay. Thank you. Thank you. We'll go next to the line of Gerard Cassidy with RBC. Hey, Chris. Hi, Clark. Good morning. Chris, you touched on in your opening remarks about this commercial mortgage servicing portfolio. I think you said it's $630 billion. Can you share with us the special servicing segment within that business? Obviously, with the challenges in the commercial real estate market, particularly in the CMBS market, I suspect your special servicing business has picked up, and maybe some color there. Sure. Well, thanks for the question. It's a great business. It's a great business because it generates a bunch of deposits through escrows, which are more important today than they ever have been in my career. It's also important because it's countercyclical. For those of you that aren't as familiar with the business, we are the named special servicer when a large, complex debt financing is put together. When you're the named special servicer, you get sort of what I would think of as sort of a ticking fee. If in fact, it goes into default, and this is all office real estate, we are the workout agent. To Gerard's point, we just set for the second quarter in a row, a record in terms of special servicing fees. I think that will continue, this won't surprise you, Gerard, more than two-thirds of what is in active special servicing is office. I think that's gonna continue, I think office is gonna be. It's not gonna be a challenge for Key because it's not an asset class we focus on, but I think office is gonna continue to be a significant challenge. Chris, based on your experience with this, these fees, you know, stay with you for a while, since the workout phase takes quite a bit of time. Oh, yeah. These are very large. Think of kind of very large advisory fees that take a lot of people. These are very complex capital structures. It's not unusual for these fees on a single deal to, you know, be $5 million, $6 million, $7 million. Great. Then sticking with this, can you share with us, just on the commercial loans, not commercial real estate necessarily, just what you guys are doing to get out in front of, you know, any potential challenges we could see if the economy, I know you said soft landing is what you're thinking, but if the economy does lead to more delinquencies and defaults, what are you guys doing now to get in front of that? Well, this is an area where we spend a lot of time. We are, as it relates to the C&I book, particularly focused on anything that has floating rate debt that's leveraged. For us, our leveraged book literally is the same than it was a decade ago. It's under 2% of our loans, and it's focused on our industry verticals. There's a lot of us, and Mark Midkiff is in the room with me, who's our Chief Risk Officer. He and I and others are laying eyes on this. We feel really good about where the portfolio is, but anytime you go into an environment where you have declining EBITDA and a business with a lot of leverage and the cost of capital going up, you got to pay close attention, and that's where we pay very close attention. We feel really good about all of our portfolios. That's where I spend some of my time, because that's what's most vulnerable. Thank you. Thank you, Gerard. We'll go next to Steven Alexopoulos with JPMorgan. Hi, good morning, everyone. Good morning, Steven Alexopoulos. I wanted to first, follow up on your answer, Chris, to Ibrahim's question. Are you signaling that the door is not open at all in terms of potentially rightsizing the dividend? I wouldn't say it's not open at all. The reason I would put that caveat is I've yet to see the new capital rules. What I'm saying is I'm very comfortable with our dividend payout and the trajectory of our business under the current construct. Got it. Okay. That's helpful. On the fee income guide, I heard the messaging around, you know, green shoots and capital markets, but are those really needed to get us to this range, right? Sorry, up 2%-4%, and then 4%-6%. Are there other factors which give us some cushion if the IB fees don't come back, that you could still deliver on the fee income guide? There's other areas where we have cushion, but, I mean, investment banking fees are a big component of that. You know, we need to have more trajectory in the back half of the year on investment banking fees than we did in the front half of the year in order to hit these numbers. Got it. Okay. Finally, just for big picture view, obviously, a lot of questions on the NIM. I'm just as surprised as Mike, seeing 2.12%. You know, for Clark, how do you think about managing the balance sheet and interest rate risk differently, so you don't get in this situation again, where the NIM is as low, dividend payout ratio is as high, you're missing on the NII guidance, which is really all tied to what we're seeing on the swaps? How do you think about big picture, so once you do get into a 3% NIM range, that you know, sort of hang around there? Thanks. Yeah. It's a great question. I think, it probably requires a longer answer, but short story, Steve, I think you just have to be probably considering a variety of additional scenarios and being a little bit more dynamic in, you know, the direction and pace of rate movements. I think if rates had moved in an orderly fashion, this would be much less of an issue. They did not, as you know, and I think we just have to be more dynamic in our thinking about putting on certain positions. Got it. Okay. Thanks for taking my questions. Yeah. Thank you. 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