KEYCORP /NEW/ Q4 2025 earnings call

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's Fourth Quarter 2025 earnings conference call. I am here with Chris Gorman, our Chairman and Chief Executive Officer, Clark Khayat, our Chief Financial Officer, and Mo Ramani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. In the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call. Actual results may differ materially from forward-looking statements, and those statements speak only as of today, January 20th, 2026, and will not be updated. With that, I will turn it over to Chris.

Thank you, Brian, and good morning, everyone. Our fourth quarter and full-year results demonstrate the continued progress we are making with respect to our organic path to achieving consistently higher returns on capital. We reported fourth quarter earnings of $0.43 per share. Revenue exceeded $2 billion, growing 12% year-over-year on an adjusted basis, while expenses grew 2%. Both fourth quarter NIM and net interest income were above our previously communicated targets. Asset quality metrics continued to trend in a positive direction, with net charge-offs, NPAs, criticized loans, and delinquencies all declining sequentially. We have also committed to a more meaningful return of capital to our shareholders, which commenced in the fourth quarter. We repurchased $200 million of common stock, two times the original commitment we made in October at an average price of $18 per share. In spite of stepped-up share repurchases, we continue to maintain peer-leading capital ratios.

We ended the quarter with a 10.3% marked CET1 ratio. We intend to manage this ratio down to the higher end of our targeted capital range of 9.5%-10% by the end of 2026. Combined with our business momentum and meaningful ongoing capital generation, this puts us in a position to accelerate our repurchase activity further in 2026. We plan to buy back at least $300 million of stock in the first quarter and anticipate repurchasing similar amounts in subsequent quarters throughout 2026. Fourth quarter puts an exclamation point on what was a substantial year of progress for Key and positions us to achieve even greater success going forward. We met or exceeded all of the financial targets that we communicated at the beginning of the year.

We delivered full-year record revenue, which increased 16% compared to the prior year, with both net interest income and fee revenue growing greater than projected. Expenses grew 4.6%. As a result, we generated approximately 1,200 basis points of operating leverage and PP&R growth of about 44%. Loan growth outperformed, particularly C&I loans, which grew at 9%, and the recycling of lower-yielding consumer loans into commercial loans enabled us to manage our funding costs more proactively. Deposit dynamics were favorable, with client deposits up 2%, while we remained disciplined with respect to pricing. Fee income growth was 7.5% as all of our priority fee-based businesses grew at a high single or low double-digit rate. Expenses were within our targeted range, even as we made meaningful investments in our franchise throughout the year and compensated bankers for our strong fee performance.

We added nearly 10% to our frontline banker staff across wealth management, commercial payments, middle market, and investment banking. We invested an additional $100 million in technology, focused on customer-facing capabilities that make it easier for our clients to bank at Key. Lastly, we continued to maintain our strong risk discipline. Full-year net charge-offs were 41 basis points. Additionally, all leading indicators, non-performing assets, criticized loans, and delinquencies all moved in the right direction. These results would not have been possible without the talented team we have in place driving our strong momentum. Together, we delivered record revenue, strengthened our balance sheet, and met every commitment we set at the beginning of the year. Our team continues to demonstrate focus, resilience, and dedication, navigating a dynamic environment and delivering value to the stakeholders we serve: our shareholders, our clients, and our communities.

I want to thank each of our teammates for their contributions to our performance. As we turn the page to 2026, Clark will go through our financial guidance shortly, but I am confident we will deliver another year of outsized revenue and earnings growth and make substantial progress toward our commitment to achieve a 15%-plus return on tangible common equity by year-end 2027. The current environment plays well to our strengths. We expect to continue to grow our priority fee-based businesses at a mid to high single-digit pace as we capitalize on our strong pipelines and momentum. Additionally, we expect to see returns from our recent hires as they ramp up and further utilize our platforms, which we believe are under-leveraged. Coming off the second-best year ever in investment banking, we continue to feel good about the trajectory of this business. Our pipelines remain at historically elevated levels.

We raised nearly $140 billion of capital on behalf of our clients in 2025, retaining 20% on our balance sheet. The market environment remains favorable for continued new issuance in 2026. We anticipate middle market M&A activity to improve in 2026 after being muted for much of the past three years. We also expect financial sponsors who stayed largely on the sidelines with respect to middle market transactions last year but typically generate a meaningful percentage of our fees to be more active this year. In wealth, assets under management reached a record $70 billion. We achieved a third consecutive year of record sales production in our mass affluent segment. Since we launched this business in 2023, we have added 54,000 new households, nearly $4 billion of AUM, and $7 billion of total client assets to Key.

In commercial payments, fee-equivalent revenue grew 11% in 2025 as the investments we made in bankers, new geographies, and scaling embedded banking capabilities continued to build momentum. With respect to NII, we continue to have substantial tailwinds from fixed-rate asset repricing, as $17 billion of low-yielding swaps, securities, and consumer mortgages are expected to mature or prepay this year. Our loan pipelines remain healthy. Our outstandings in 2026 should benefit from the 9% commercial commitment growth we generated in 2025. We remain well-positioned for a variety of forward-rate curve scenarios. As a result, I am highly confident we will grow revenues at a high single-digit rate this year, with expenses growing approximately half that rate, indicating substantial operating leverage again this year. In summary, Key is very well-positioned as we enter 2026. Our trajectory has never been better.

Current macro conditions and client sentiment play to our strengths, given our differentiated business model and platforms. We anticipate that in 2026, we will successfully increase both our return on capital and our return of capital. And lastly, we will deliver another outsized year of revenue growth, earnings growth, and tangible book value growth. Before I turn it over to Clark, I want to cover some changes to our board that we announced just this morning. These changes reaffirm our board's commitment to strong corporate governance and long-term shareholder value. First, the board will nominate Tony DeSpirito and Chris Henson for election as directors at KeyCorp's 2026 Annual Meeting of Shareholders. Both candidates have impressive backgrounds in the financial services industry and bring capabilities that are directly aligned with Key's priorities. Tony DeSpirito most recently served as Global Chief Investment Officer for Fundamental Equities at BlackRock.

Tony has portfolio manager experience spanning over 30 years. He brings deep expertise in public markets, capital allocation, and long-term value creation. Chris Henson is a former senior banking executive with extensive experience leading large financial institutions. He most recently served as head of banking and insurance at Truist, and prior to that was president, chief operating officer, and chief financial officer at BB&T. We believe these additions will enhance an already highly engaged and very capable board as we drive the next phase of value creation for Key. Following the additions of Mr. DeSpirito and Mr. Henson, the board will have added eight new directors during my tenure as CEO. We also announced that the lead independent director role has transitioned from Sandy Cutler to Todd Vassos. Todd, who currently serves as the CEO of Dollar General, has served as director of Key since 2020.

Todd has been an excellent contributor to our board, and I look forward to working even more closely with Todd in his new role. Sandy Cutler will continue serving as an independent director to ensure a smooth transition to Todd. I would like to thank Sandy for his exemplary service, dedication, and significant contributions to Key as our lead independent director. Sandy has been a steady and principled presence in the boardroom, providing independent oversight as Key transformed and navigated periods of significant industry change. Additionally, Carlton Highsmith and Ruth Ann Gillis have informed us of their plans to retire from the board effective at the annual meeting. As we announced last week, David Wilson has retired from the board effective immediately due to health considerations.

We are deeply grateful to David, Carlton, and Ruth Ann for their meaningful contributions and dedicated service to Key during their time on the board. With that, I'd like to turn it over to Clark. Clark?

Thanks, Chris. Starting on slide five, our fourth quarter results demonstrated continued strong momentum across the franchise. As a reminder, the 2024 fourth quarter results were impacted by securities portfolio repositioning, and all comparable periods included FDIC special assessment impact. As such, all year-over-year comparisons are on an adjusted basis. Fourth quarter earnings per share were $0.43 or $0.41 when adjusted. Fourth quarter revenue was up 12% year-over-year, while expenses increased by 2%. Tax-equivalent net interest income was up 15% year-over-year. Non-interest income increased 8% year-over-year, reflecting broad-based growth across our high-priority fee-based businesses.

Loan loss provision of $108 million included net charge-offs of $104 million and a very modest $4 million build. The build was largely a result of increased commitments, partially offset by reductions in NPAs and criticized loans. The fourth quarter net charge-off ratio was 39 basis points. Tangible book value per share increased 3% sequentially and 18% year-over-year. Turning to slide six, Chris touched on our full-year earnings performance earlier, but just to add a little more context, both net interest income and fees outperformed our guidance this past year. Net interest income increased by 23% versus our original expectation for 20% growth as commercial loan growth was stronger and deposits were better from both a balance and beta perspective.

Fees grew 7.5% versus our original expectation for 5%-plus as investment banking fees were up 13%, even without the benefit of expected levels of M&A activity for much of the year. Wealth, commercial payments, and commercial mortgage servicing all grew at high single-digit to low double-digit rates this past year. Expenses grew roughly 4.6%, primarily due to the hiring of frontline producers and the strong fee momentum. We achieved nearly 1,200 basis points of total operating leverage and 280 basis points of fee-based operating leverage in 2025, both better than we had expected coming into the year. Moving to the balance sheet on slide seven, average loans were relatively flat sequentially, reflecting a $1 billion increase in C&I loans, offset by the intentional runoff of $550 million of low-yielding consumer loans, as well as some net paydown activity in CRE.

On a spot basis, commercial loans grew by about $1.2 billion, with growth in both C&I and CRE. Growth was primarily from the power and utility sector and from broad-based middle market growth across all of our regions. C&I line utilization decreased by approximately 1% sequentially to 30%, driven by an increase in commitments. C&I loan balances outstanding increased by $900 million. Turning to slide eight, average deposits increased by approximately $300 million sequentially, with $2 billion of commercial client deposit growth, partially offset by a decline of $1.3 billion of higher-cost brokered CDs. Brokered CDs averaged $2.5 billion in the fourth quarter. Average non-interest-bearing deposits grew 1% sequentially and remained stable at 19% of total deposits, or 24% when adjusted for our hybrid accounts. Total deposit costs declined by 16 basis points to 1.81%.

Our cumulative interest-bearing deposit beta declined modestly, as expected, to 51% through the fourth quarter, reflecting some impact from the recent Fed cuts that we would expect to pull through more fully in the coming months. We've taken proactive actions in repricing deposits this past year by entering the year with a low loan-to-deposit ratio, limiting our incremental funding needs by remixing loans from consumer to commercial, and by gathering lower-cost commercial deposits, particularly in payments, while managing deposit costs and consumer as we actively rotated maturing CDs into money market deposits. Overall, interest-bearing funding costs declined by 22 basis points, resulting in a cumulative interest-bearing funding beta of 67%. Slide nine provides drivers of NII and NIM this quarter. Tax-equivalent NII was up 3% sequentially, driven by client deposit growth and continued balance sheet optimization efforts.

We grew relationship commercial loans at relatively stable spreads to the existing book while running off lower-yielding consumer loans. On the funding side, the commercial client deposit growth enabled us to allow the maturity of approximately $2.4 billion of higher-cost brokered CDs, long-term debt, and other short-term borrowings. We exited the year with a net interest margin of 2.82%, an increase of 7 basis points sequentially, and above our previously indicated target of 2.75%-2.8%. Our balance sheet remains positioned to be fairly neutral to additional Fed funds cuts as we move through 2026. Turning to slide 10, adjusted non-interest income increased 8% year-over-year. Investment banking and debt placement fees were $243 million, an increase of 10% year-over-year. Growth was driven by debt capital markets and commercial mortgage debt placement activity.

Sequentially, M&A activity also picked up after industry middle market volumes had been tepid for the first nine months of the year. We're encouraged by our M&A pipelines and at this point feel good about our ability to deliver investment banking fee growth in the first quarter off of what had been a record first quarter in 2025. Trust and investment services income grew 10% year-over-year, reflecting record positive net flows and higher market values. Assets under management reached a new record high of $70 billion. Service charges on deposit accounts and corporate service fees increased by 20% and 17% year-over-year, respectively. The increase in service charges was driven by momentum in commercial payments, which grew fee-equivalent revenue at 12%, while corporate services income was driven by higher loan commitment fees and client FX and derivatives activity.

Commercial mortgage servicing fees were $68 million, flat year-over-year and down $6 million from the third quarter, reflecting the impact of lower rates on fees for lower interest-earning advances and successful resolutions within our special servicing book. Beginning this quarter, certain of our clients have elected to collectively hold a little over $1 billion of escrow deposit balances with us in lieu of paying fees. This will have a de minimis impact on total revenue, but will benefit net interest income and NIM with an offsetting impact to fees of approximately $40 million annually. We expect commercial mortgage servicing fees to run at about $50-$60 million per quarter in 2026. On slide 11, fourth quarter non-interest expenses were $1.3 billion, up 7% sequentially and 2% year-over-year.

There were roughly $30 million of unusually elevated expenses in the fourth quarter and therefore would not use this quarter as a run rate moving forward. Versus the year-ago quarter, growth was primarily driven by higher personnel expense related to frontline banker hires, higher employee benefits costs, and higher incentive compensation related to the strong revenue performance. Sequentially, expense growth was driven by investments in technology and talent, higher incentive compensation, seasonality in areas such as employee benefits costs, contractor and professional services spend, and marketing, as well as certain elevated expenses in the quarter. As shown on slide 12, credit quality is broadly improving. Net charge-offs were $104 million, down 9% sequentially, and were an annualized 39 basis points of average loans. Full-year net charge-offs of 41 basis points were toward the better end of our full-year target range of 40 to 45 basis points.

Non-performing assets declined by 6% sequentially, and the NPA ratio improved by 4 basis points to 59 basis points. Criticized loans declined by $500 million, or 8% sequentially, with broad-based improvements across C&I and commercial real estate. Turning to slide 13, our CET1 ratio was 11.7% at quarter end as net earnings generation was offset by RWA growth associated with loan mix and commitments growth and capital return from share buybacks and dividends. Our marked CET1 ratio, which includes unrealized AFS and pension losses, was flat sequentially at 10.3%. As Chris mentioned earlier, we plan to repurchase at least $300 million worth of shares in the first quarter and at least $1.2 billion for the full year 2026. Slide 14 provides our 2026 guidance relative to 2025 and reiteration of our medium and long-term targets.

We expect revenue to be up about 7%, driven by net interest income growth of 8%-10% and non-interest income growth of 3%-4%. Adjusting for recent business decisions that net net will have no impact on earnings, we expect non-interest income to grow 5%-6%. Within that, we expect investment banking fees to grow about 5%, wealth fees to grow in the high single digits, and commercial payments fees to grow in the low double digits. We expect expenses to be up 3%-4% this year, or half the rate of revenue growth, which implies substantial positive operating leverage of approximately 300-400 basis points in 2026. We expect average loans to grow 1%-2%, with commercial loans growing at about 5% as we continue to remix the runoff of consumer loans into higher-yielding relationship-based commercial loans.

We expect full-year net charge-off ratio to remain stable at 40-45 basis points. Finally, we expect the tax rate to be approximately 22% or 23% on a taxable equivalent basis. 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 will now turn the call back to the operator to provide.