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Good morning, and welcome to KeyCorp's First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, 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 2025 earnings conference call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer; and Clark Khayat, our Chief Financial 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 17, 2025, and will not be updated. With that, I will turn it over to Chris.
Thank you, Brian, and good morning. This morning, we reported very strong first quarter results. Both revenues and expenses were favorable to expectations. Revenues were up 16% from a year ago, while expenses were essentially flat.
Our pre-provision net revenue increased more than $90 million from the fourth quarter on an operating basis. Concurrently, credit costs, NPAs and criticized loans are all trending in a positive direction, with NPAs declining by nearly 10% sequentially. Clark will walk you through the details of the quarter shortly, but first, I want to spend some time addressing what I'm sure is top of mind given everything that's going on, namely what are we seeing, what are we hearing from clients and how are we thinking about our go-forward strategy. Recent events are clearly having an impact on markets and client sentiment as the outlook for the economy is becoming more uncertain.
At the same time, inflation remains sticky, potentially limiting some of the response actions the Fed could take. And finally, the geopolitical environment remains both uncertain and complex. While the market backdrop is dynamic and some of the recent announcements provide incremental stability so far in the second quarter, that is since the tariff announcements, we have seen our clients pause transactional activity waiting to see how things play out. At Key, we are successfully navigating the current macro uncertainty.
In the normal course of business, we use broad range-based forecasting to manage our company, we are currently managing Key to an even broader range of potential scenarios. I am fully confident we are prepared to deal with whatever comes. We are here for our clients with our balance sheet and through our strategic advice as we have made and by the way, continue to make investments that make Key relevant to our clients and prospects in times like these. We are using this as an opportunity to be out in front of consumer and commercial clients and prospects.
We are also here for our communities. We continue to invest in the communities we so proudly serve. We took the opportunity to increase our charitable foundation contribution this quarter. Additionally, our teammates continue to volunteer their valuable time.
Last year, Key teammates volunteered more than 68,000 hours in their communities and served on almost 1,000 non-profit boards. We are fortunate to enter this environment from a position of strength. In retrospect, the Scotiabank strategic minority investment that we closed at the end of last year was well timed. It enabled us to reposition our business for the future, accelerating our capital and earnings trajectory while increasing our strategic agility to successfully navigate exactly the type of environment we are currently experiencing.
We ended the quarter with a CET1 ratio of 11.8% and a marked CET1 ratio of approximately 10%, both at the high end of our peer group. Having excess capital is a luxury, not a burden. It enables us to support existing and prospective clients and enables us to take advantage of the inevitable dislocations that develop from time to time in the marketplace. We have ample liquidity as well, ending the quarter with over 30% of our balance sheet in cash and cash equivalents.
Our low to moderate risk profile also protects us, relatively speaking, from tail risk events. We feel very good about the quality and profile of our loan book. With respect to tariffs, we are currently performing a name-by-name review of our largest clients to refine on a bottoms-up basis our potential exposure to the rapidly evolving landscape. Based on our top-down view of our industry concentrations, we believe this direct exposure will prove to be limited.
We also entered this period of uncertainty with strong momentum and clearly defined tailwinds, some of which are hardwired in nature, particularly as it pertains to net interest income. Our leading indicators are pointing in the right direction. Loans are up sequentially on a spot basis with commercial loans up $1.2 billion. Our pipelines remain elevated and are not meaningfully reliant on M&A activity.
We are confident that project loans, which are characterized by long lead times and complex governmental approvals will continue to fund as we move throughout the year. We continue to drive strong deposit growth and beta dynamics. On a year-over-year basis, deposits were up mid-single-digits. Household relationships were up 2%, and our commercial payments business continued to experience strong momentum while being very disciplined with respect to rate management.
For the second consecutive year, our first quarter investment banking fees were a record. Despite the pull-through, our pipelines remain at historically elevated levels and were roughly flat compared to year-end. We remain cautiously optimistic that this business will ultimately grow mid to high single-digits in '25. But of course, risk to this level of performance are rising. As mentioned earlier, asset quality indicators are trending in the right direction.
Overall credit migration improved for a fifth consecutive quarter. While normally, this would have driven a reserve release, we elected to make an adjustment in excess of $100 million to reflect potential economic weakness that could develop later this year. Lastly, in March, we announced a $1 billion share repurchase authorization by our Board of Directors, which we currently expect to commence in the second half of the year. Pace and magnitude of any share buybacks will depend on a number of factors, most notably how the rapidly developing macro environment evolves.
To wrap up, as an industry, once again, we find ourselves operating in a turbulent environment. Having said that, we feel Key is well positioned for a wide range of outcomes. We entered this period from a position of strength, from a capital, from a liquidity and from a reserves perspective. We enjoy strong earnings and business momentum, and a clearly defined structural net interest income tailwind.
We have a durable, well-positioned balance sheet. Given these unique benefits and, of course, subject to market conditions not deteriorating further, I feel confident in our ability to deliver on the 2025 financial commitments, which we have previously communicated. With that, I'd like to turn it over to Clark. Clark?
Thanks, Chris. Starting on Slide 4. We reported first quarter earnings per share of $0.33. Revenue was up 16% year-over-year, while expenses were up 1%, excluding last year's FDIC special assessment. Tax equivalent net interest income was $1.1 billion or up 4% sequentially and up 25% year-over-year. Non-interest income increased 3% year-over-year, reflecting continued momentum across commercial mortgage servicing, investment banking, wealth and commercial payments.
On an adjusted basis, we achieved about 170 basis points of fee-based operating leverage on a year-over-year basis. Provision for credit losses of $118 million included $110 million of net charge-offs and an $8 million reserve build. The net build was a result of improved credit migration trends offset by our decision to add reserves to account for the current macro uncertainty. Our CET1 ratio was 11.8% and tangible book value per share increased roughly 26% year-over-year.
Moving to the balance sheet on Slide 5. Average loans were down slightly sequentially, but we're up about $0.5 billion to $105 billion on a period-end basis. On a spot basis, C&I loans grew $1.5 billion or 3%, offset by intentional runoff of low yielding consumer loans, namely residential mortgages, and some net paydown activity in CRE. Within C&I, the growth was broad-based across industries and regions and primarily investment grade with both new and existing clients. As we've mentioned before, our business model provides clients with the best execution capabilities, whether it's on or off our balance sheet.
This quarter, we raised roughly $25 billion of capital for our clients, retaining 17% on our balance sheet while distributing the remainder through our Capital Markets platform. Looking forward, if current market uncertainty persists or worsens, we have the flexibility and capacity to use our balance sheet to support clients who may have less attractive options in the capital markets. On Slide 6. Average deposits declined by less than 1% from last quarter toward the better end of our typical first quarter seasonality. Total deposits and client deposits both increased 4% year-over-year, reflecting growth in both consumer and commercial balances.
On a reported basis, noninterest-bearing deposits were stable at about 19% of total deposits. Similarly, when adjusted for the noninterest bearing deposits in our hybrid accounts, that percentage remained stable at approximately 23%. Interest-bearing deposit costs decreased by 18 basis points during the quarter, while total deposit cost decreased by 12 basis points. Deposit betas continue to come in stronger than expected, reaching 46% through the first quarter and closer to 50% through the month of March.
We also continue to steadily reduce our reliance on market funds. Wholesale borrowings and brokered CDs were 10% of earning assets in the first quarter, down from 11% in the fourth quarter and 15% a year ago. As a result, overall funding cost declined by 23 basis points this quarter. Slide 7 provides drivers of net interest income in NIM this quarter.
Tax equivalent net interest income was up 4% and net interest margin increased 17 basis points from the prior quarter to 2.58%. The increase was largely driven by last quarter's securities repositioning and related Scotiabank investment as well as fixed rate assets and swap repricing, impact of our loans, remixing from low-yielding consumer into C&I and proactive deposit beta management, which more than offset the impact of seasonally lower deposits and two fewer days in the quarter. Turning to Slide 8. Noninterest income was $668 million, up 3% year-over-year. Excluding the impact from operating lease income, which reflects a prior change in accounting treatment, fee growth was closer to 6%.
Commercial mortgage servicing fees were a record and grew approximately 36% year-over-year. As of March 31, we are the named primary or special servicer on approximately $710 billion of CRE loans, of which about $250 billion is special services. Active special servicing assets reached an all-time high of $12 billion. As a reminder, this is an [off-US] (ph) countercyclical business with a meaningful amount of special servicing situations expected to be resolved this year.
This is an excellent example of our targeted scale strategy, and we expect this business to continue to perform well in the coming quarters. Investment banking and debt placement fees were $175 million, a record for our first quarter, exceeding last year's previous first quarter record by 3%. Syndication and debt capital markets activity drove the growth while M&A remained healthy. As Chris mentioned, pipelines remain at historically elevated levels and roughly flat to year-end.
The ultimate yield on those pipelines, of course, are subject to overall market conditions. Elsewhere, service charges increased roughly 10%, largely driven by continued momentum in commercial payments, which saw fee equivalent revenue growth in the low teens year-over-year. Wealth management fees were up 2% and assets under management held relatively steady sequentially at $61 billion. On Slide 9, first quarter noninterest expenses of $1.13 billion, decreased 8% from the prior quarter and increased 1% year-over-year on an adjusted basis.
The slight expense growth year-over-year was driven by higher personnel expense related to the fee growth as well as higher technology-related investments. Compared to the fourth quarter, personnel expenses declined due to lower incentive compensation, benefits expenses and fewer days in the quarter. Business services and professional fees, marketing and other expenses declined primarily due to seasonality and some unusually elevated expenses last quarter that we expected would not recur. While we continue to manage expenses diligently, we do expect expenses to increase throughout the year, consistent with previous guidance.
These increases reflect an anticipated pickup in investment spend, salary increases, which for Key become effective in March, other personnel costs and seasonality impacts. As shown on Slide 10, credit quality is stable to improving. On a linked-quarter basis, net charge-offs were $110 million, down 4% or an annualized 43 basis points on average loans. Nonperforming loans were down 9%.
The NPL ratio decreased 8 basis points to 65 basis points. Criticized loans were down roughly 1%, driven by commercial real estate. Turning to Slide 11. Our CET1 ratio was 11.8% as of March 31, and our marked CET ratio, which includes unrealized AFS and pension losses, came in at 9.9%, both of which we believe are at or near the top of our peer group. As Chris mentioned, having this excess capital is a luxury during these times of elevated uncertainty.
Moving to Slide 12. Our 2025 guidance remains unchanged from January despite a more uncertain backdrop. This guidance incorporates a range of potential rate scenarios, anywhere from zero to four cuts as we move through the year. We continue to expect to deliver 20% net interest income growth this year. This reflects both our built-in structural tailwinds as well as our strong loan and deposit performance to start the year.
As we shared previously, a significant portion of this growth comes from actions we took in 2024 connected to the Scotiabank strategic minority investment and related portfolio restructuring and as such, is largely in place. Our balance sheet is roughly rate neutral, allowing us the ability to manage moves in either direction. We also continue to feel very good about our ability to deliver on our fourth quarter exit rate NII of up 10% or more compared to the fourth quarter of 2024 and for NIM to be 2.7% or better. As we think about the bridge from first to fourth quarter, we have a number of tailwinds coming from approximately $11 billion of low-yielding fixed rate investment securities, consumer loans and swaps expected to mature at an average rate of 2.7%, day count, and our strong business momentum across both consumer and commercial.
Beyond NII, our base case expectation is that the US avoids a recession in 2025. Of course, uncertainty has increased and business conditions are subject to change based on the environment. Assuming our macro view holds, we continue to believe adjusted fees will grow 5% or better this year, underpinned by mid to high single-digit growth across investment banking, wealth and commercial payments. If conditions worsen or deal activity remains on pause into the second half of 2025, we believe under most scenarios that we would have sufficient flexibility on expenses to still deliver fee-based operating leverage this year.
On asset quality, year-to-date indicators are all trending in the right direction, but of course, future charge-offs will depend on the path of the economy. With that, I will now turn the call back to the operator to provide instructions for the Q&A portion of our call. Operator?
[Operator Instructions] The first question is from the line of Mike Mayo with Wells Fargo. You may proceed.
Hey, Chris.
Hey, good morning.
Good morning. Kind of trying to reconcile your comments at the start about all the macro issues from markets to client uncertainty to geopolitical risks and all the stuff that we all know about. And I know you said you think we'll avoid a recession this year, but reconciling that with your guide, so the world is a lot more risky and worse and you've lost $7 trillion of stock market wealth out there. But at the same time, the curve isn't as good, and you're still reiterating 20% NII guide.
GDP doesn't seem so good, but you're not building reserves. Markets are choppy, but you still expect 5% growth and inflation is sticky in your own words and costs are still guiding kind of the same ballpark. So how do I reconcile a world that seems so much more problematic with your guide that isn't changing?
Sure. Well, let me kick it off and then I'll have Clark walk you through some of the details of our guide. I think the short answer, Mike, is that we -- the economy is in a period of great uncertainty. We're 15 days into these tariffs.
The reality is our credit book is in good shape. Our clients are in good shape. Our backlogs are in good shape. Our business is doing well.
But clearly, as you point out, there's a lot of uncertainty out there. Our base case is not that we will go into a recession. But I can tell you we run a whole bunch of scenarios including stagflation scenarios, which is probably the worst case for a bank. And in each instance, we're holding up well.
So that's kind of the macro. And there's just -- there's so much uncertainty out there. I personally think as I talk to our clients, they remain cautiously optimistic. These companies are agile.
A lot of them have pulled in their supply chains. And I think to the extent we can -- we, the United States can...
What does that mean, pulled in supply chain?
Well, I mean, so during the pandemic, for example, Mike, a lot of our middle market companies that had been having a lot of things manufactured, for example, in Southeast Asia, frankly, have moved them in many instances to Mexico, by the way, and in many instances, back to capacity they had here. So, my point there is those companies are probably less impacted if, in fact, the trade war goes on as long as it could. So, I'm just making the point that as I'm not talking to our clients, they're not as concerned as some of the markets would indicate. Does that make sense?
Yeah. Thank you. I interrupted your flow, but that was an important point. Thank you.
No, no. Thank you for your question. Clark, why don't you step Mike and the rest of the listeners through kind of the details of our guidance because we've spent -- trust me, we spend a lot of time looking at this.
Yeah. So I mean, short story in NII, we remain confident on the 20% up year-over-year. I can talk through the details of that. But a lot of that, as we mentioned, is sort of in from actions we took last year.
On fees, as Chris mentioned, the pipelines remain robust and dialogue with clients is very active. We think the recent uncertainty here has created a pause and our view right now is it is a pause. So, if things resolve quickly and constructively, I think you'll see kind of a rubber-band like snapback, think activity will pick up again, and our clients are watching and they're waiting, frankly, for signs to reengage. If the pause persists, obviously, that impacts Q2. And there's probably already a little bit of softness in Q2, just even though we're 15 or so days into it.
If it comes back relatively quickly in a positive way, I think you'll see really good activity come back in. And I think you'll see that a robust second half. And maybe that pushes the 5% plus down to 5% just based on timing, but we see and expect that fee base to come back. If it continues and persists longer, then you will see deals drop, you'll see clients head of the sideline and wait.
But again, over our base case right now is that it's a pause. And while the duration is as of yet unknown, we don't expect a recession. We're not trying to be pollyannish here. We just think it's more likely to find a relatively constructive landing spot in the near term than not.
Now, if that's not the case, right, if we see a more sustained downturn or recession, then obviously, investment banking will be impacted, wealth will be impacted. And if lower rates come with that downturn, you could see things like syndications, other debt options like commercial mortgage benefit of debt, but it would depend on what's driving rates down. We do view our fee base generally as fairly diversified beyond banking and wealth. CRE servicing would strengthen, I think, in a downturn.
And in a lower rate environment, you could see hard dollar fees translate in payments. If we do see a lot of fee pressure based on a downturn, as we've said, we think we do have natural offsets in the expense base, and we'd be focused on delivering positive fee-based operating leverage in the year. We won't do that at the expense of long-term or midterm opportunities to build the franchise, but we think we have a lot of natural flex in the expense base overall. So, the last point, which, again, it’s too early to call, and that's one of the reasons why we're taking the stance we are.
But if we do see a recession, the actions we took last year, I think have positioned the balance sheet and the business very well to weather that. And frankly, we think it may provide some dislocation opportunities with clients and markets that we can take advantage of.
Just one follow-up there would be the tariffs, you're going name by name. I assume you have not finished that. You've done a top-down review of reserving, but not your name by name. And I was interested.
I guess pandemic is kind of a dress rehearsal for some of that, but you still have to go through the whole portfolio and do you know when that will be done and is that a risk to your reserving where you are today?
We have gone through the first cut, but one, the tariffs continue to move around. That's point one. Point two, there's the first order effect, which is the direct tariff, Mike. And then there is the second and third order effect.
We have not yet really scoped that out, although we've estimated what we think it is. And then lastly, what's not knowable is what a response is going to be from one of our trading partners. So, it's early days, but I think it's important for you and everybody else to know we have all the analysis up and running, and it's a dynamic process.
And maybe, Mike, let me just add, on the reserve, on a net basis, we added $8 million. So, it doesn't look like a particularly large build. But for the recent uncertainty, we would have seen a pretty material release. So, we did now, from a reserving standpoint, incorporate a pretty severe downturn at about a 20% probability, and that's what the reserve reflects.
So, as we move through time, if things don't improve, you'll see the probability of that increase, and we'll reserve appropriately for that. But at this point, we are incorporating, at least on the reserve side, a qualitative build that reflects a pretty meaningful percentage or pretty meaningful recession, albeit it's still, kind of 20th -- 20ish-percent probability.
Great, thank you.
The next question is from the line of Manan Gosalia with Morgan Stanley. You may proceed.
Hi, good morning. Chris, given what you said at the start of the call on some of this uncertainty impacting client sentiment, how are you thinking about C&I loan growth from here? So, utilization rates were up in the first quarter. Can you talk about what drove that?
And can you talk about the interplay between debt capital markets and loan growth? Are you seeing some refis out of loan growth in the first quarter and how do you expect that to be here for the rest of the year?
Sure. So, later in the quarter, we did in fact experience pretty strong C&I loan growth and it was really broad-based. It was broad-based from a region perspective. We put some new teams on the ground in places like Chicago and Southern California where we have traction.
We also had traction in things like affordable housing and renewables. Those are project-based deals. And those are, once they're locked in, we've got pretty good visibility on those. You did mention something important, and that is we finally saw an uptick in utilization.
I think it was about 92 basis points, And I had personally thought that we would see that a lot earlier. I thought people would be forward buying the tariffs. So, we saw just a little tick-up there. I would anticipate, given this 90-day reprieve, that we'll continue to see probably a little bit of an increase in utilization.
And then to the second part of your question, which is really, really important as you think about our business model, I think everything was flashing green at the end of last year. I think we were putting 15% or 16% of the capital we raised on our balance sheet. This time, this quarter, it went up to 17%. What you'll see is as you get dislocations in markets, and obviously the credit markets, if you go back to a week ago Wednesday, we're clearly in dislocation.
That's when you'll see us have the opportunity to really opportunistically grow our balance sheet. So, I think to the extent we see this choppiness continue, you'll see us put more on our balance sheet in an opportunistic way. Thanks for the question.
Got it. Very, very helpful. And then maybe just to follow up to the prior line of questioning, can you just talk about some of the puts and takes in that 20% NII guide? So, if the belly of the curve starts to come back down, maybe if you see weaker C&I loan growth just as sentiment weakens, what other flexibility do you have in that guide to still hit that 20% number?
Yeah, thanks, Manan, it's Clark. So, look, a fair amount of the 20% as we've talked about is reflected on the restructurings we did last year. And we were trying to be opportunistic at the time. It turns out, I think, we did -- doing those restructurings when we did, getting the deal closed late in the fourth quarter, I think, has all benefited us for the year, both from a timing and a market reinvestment level.
So, I think that provides a little bit of tailwind that is not insignificant. I think we've seen good loan growth to start. I think we've seen good deposit performance to start. So, all of that would trend us to high degree of confidence.
The things that would have to happen for us to not hit the 20% at this point are pretty significant. You'd have to see a fairly, and there's a combination of things, right, but a fairly big pullback in the C&I loan book. Again, we don't necessarily see that happening. We started the quarter off up $1.5 billion, so that would have to reverse and actually go down to the extent the economy weakens and you see inflation continue, retail checking, dropping, obviously, could put some pressure there.
And then as you said, just the shape and level of the curve. So, a lower, flatter curve obviously becomes a little bit more challenging, but it would have to be a fair bit lower and a fair bit flatter and it would have to be moving pretty rapidly. So, as we talked about a month or so ago, the kind of tail parts of the curve, up or down 100 in very quick succession, I think, are the places where we would have a tougher time reacting. But, the balance sheet is fairly neutral at this point.
And to the extent loan growth doesn't come in, we've got some opportunity again to optimize funding, as we did last quarter. And just to remind you, even in cases, as Chris said, where we're building the C&I book, we are often trading out of the consumer loan. So, it's not like we're building a bigger funding need. We're just changing out the profile of the loan book.
So again, there are some scenarios where the 20% doesn't happen. We think it's a little bit of some tail things coming together, and we think we've got some offsets to manage that if necessary, but at this moment, we still feel pretty good about it.
That's very helpful. Thanks, Clark.
Sure.
Thank you. The next question is from the line of Ebrahim Poonawala with Bank of America. You may proceed.
Hey, good morning.
Hey, good morning.
I guess maybe just one to follow up, Chris. I think in your prepared remarks, and then you answered some of this in -- to Mike's question, but you mentioned project loans will continue to fund throughout the year. I guess part of the concern is there's just so much uncertainty. CapEx projects are on the sidelines.
Some of these tariff negotiations may take months, if not longer. Do you think when you talk to these customers who want to make CapEx decisions, like what's your sense of the amount of clarity they need on this front before they can pull the trigger?
Well, so there's kind of two things. One is if they have a CapEx project that's in flight, full speed ahead. The last 90 days haven't changed a thing because those are planned and committed long before they start. I will say, over the last 90 days, most everybody is pausing until they have better visibility going forward.
So, existing things that are in the pipeline, I don't see them being impacted. In terms of new projects being launched, until there's more clarity, I think obviously the current environment hinders that.
Understood. And on the buyback authorization, so $1 billion, pretty meaningful. Remind us what you're targeting on the CET1. How much of a ramp-up should we expect and think about when we are forecasting earnings as far as the piece of buyback is concerned, starting, I guess, with third quarter?
Sure. So, first, let me kind of just, in terms of kind of a target, we're targeting 9.5% to 10% on a marked basis, marked CET1. And obviously, we're there right now. And we've got great trajectory. We'll continue to build capital.
So that's kind of, put that aside for a second. And then what we've always talked about in terms sort of our order of operations with respect to our capital is first and foremost to support our clients. And as we -- it's murky out there right now, but we're seeing a lot of activity. And our goal is to use our capital to support both our clients and our prospects.
That's the first thing. Second thing, of course, is to invest in the business. As you know, we've continued to invest in the business, which in our business is really technology and hiring people. We'll continue to do that.
We'll continue to look at kind of niche acquisitions. I think we have a pretty good track record of successfully integrating entrepreneurial groups into Key. We'll continue to do that. And then lastly, obviously there's a couple different levers we can pull with capital.
One is we can tweak our balance sheet as we've restructured significantly last year. We can do that. And also the lever of being able to repurchase our shares. And so, where this will -- it’ll probably be a combination of all the above, but I think we need clarity on a couple of things.
One, we need clarity as we've been talking on this call, exactly where we all think the economy is going. That's the first thing. Second thing we need clarity on is, where does the Basel III endgame end? And I think, I don't frankly think that's going to be that material in our instance, but I think it's important to see that.
And after we get some clarity on those two things, we'll probably commence, as I mentioned in my prepared remarks, in the second half of the year. And there's enough moving pieces that I want to remain flexible as to both the pace and the timing of that.
That's good color. Thanks, Chris.
Thank you.
The next question is from the line of Peter Winter with D.A. Davidson & Co. You may proceed.
Thanks. Clark, last quarter, you talked about the margin hitting 3% plus at some point next year. What are the main drivers to get there versus 2.58% currently? And what are some of the potential risks we should watch out for, so the margin may be falling short of that medium-term target?
Yeah. Thanks, Peter. So, on the one hand, I think it's continued over time, continued strong commercial loan growth, right? That obviously comes in at strong margins and in some sides.
So, to the extent we see that return over time, we start to build -- continue to build the commercial book as we did here in the first quarter. I think the tradeoff there is the continued rundown of some of these lower yielding consumer mortgages. Over time, recall that those are coming off at kind of a 3.3% yield, so quite materially lower than where we're trading into C&I. And then obviously the shape of the yield curve and the reinvestment rate on the investment portfolio.
So, to the extent we get steepening, that obviously helps all of us in that process. If we're kind of lower and flatter, it becomes a little more challenging, although obviously we'd have an offset there on deposit pricing. So, it's a little bit of put and take on growth of the economy, our ability to continue to sort of change out into C&I where we have real strength, and then manage the deposit base appropriately. I do think one of the benefits, as I mentioned earlier, in this kind of remixing of the loan portfolio is that it doesn't require a lot more liquidity to do that.
So, we don't have to be aggressive on deposit pricing as much subject to other things happening in the market. We are just redeploying it to a different loan type with a much better yield. So, I do think that that benefits us. The risk is that there isn't low growth or the risk is that we have a very flat or inverted yield curve over some period of time because the economy is reflecting softness.
So, hard to predict that, but I do think, again, the actions we took last year put us in a good position to get at or near that level over the course of the next 18 months or so.
Got it. Thanks. And then, Chris, if I could follow up on your comment with capital management, you talked about maybe tweaking the balance sheet. I'm just curious, why not reposition some of the securities portfolio now and pull forward some of that benefit and lock it in?
Well, as you can imagine, Peter, we're always looking at everything. And we obviously are looking at the numbers all the time. We're looking at our capital. Right now, before we would do that or repurchase our shares, as I mentioned, I'd want greater clarity on the trajectory of the economy.
And I'd also like greater trajectory on how much capital we actually need to carry. So we're looking at it as we've mentioned on other calls. We also have looked at a variety of kind of transactions around the balance sheet. But obviously right now, I like how we're positioned.
I like the two-step that we did last year where we repositioned about $10 billion worth of our bonds and picked up about 300 basis points. So, I feel good about the trajectory of the balance sheet.
And maybe one, just add one level deeper there, Peter, I think to Chris' point, we need clarity on the economy first and foremost. So I don't think you want to go move around capital until we have a sense of where that's going. And then just in the prioritization, right, the first thing we're going to want to do is continue to support our clients. As we did that in the first quarter, remember C&I loans have 100% plus risk weighting.
The consumer loans are running off are more like 50%. So we are using dollar for dollar a little bit more capital. When we do that, we think it's the right thing to do and has the appropriate returns. So we'd have to be in a place where we feel like the economy is stable and we're not seeing as much loan growth as we'd like to really dig into something like another restructuring.
Now, it doesn't mean we might not do things on the margin or in smaller chunks, and we will do that opportunistically, but to do something more significant, we'd have to see the sort of the ordered pair of moderate to strong economy and not a lot of loan growth. And as of right now, we just don't see that pairing showing up.
Got it. Thanks, Clark.
Yep.
Thank you. The next question is from the line of Nathan Stein with Deutsche Bank. You may proceed.
Hey guys, good morning. Thanks for taking the question. You talked about how dislocation in the markets gives you opportunities to maybe gain share. Can you just elaborate more on what kinds of markets and customers you're targeting and how would you gain share during periods of volatility when people are pushing back new CapEx plans like you said?
Well, there's a variety of -- for example, I'll use real estate. We have, I think, one of the best real estate platforms in the country. To the extent someone wants to go to the CMBS market and the CMBS market is backed up or it's volatile or it's choppy or it's not even available and these are good clients that we finance time after time, those are transactions that we could bridge and then take it out to the CMBS market. That would be an example of what I'm talking about.
Great, thanks. And then separately, could you talk briefly about the commercial real estate gross charge-offs, which were a little elevated in the first quarter? Can you just talk about the drivers of that?
We'll have to get back to you on the specifics of that. We definitely had some movement in that book, largely positive around paydowns. And actually, our crit number overall came down largely based on CRE. But I'll come back to you on details of that charge-off number.
Thanks.
Thank you.
Sorry. Actually, I will just give you, it's really two names that came off in the quarter. So, I wouldn't say broad-based across the portfolio. In fact, we think the health of the portfolio generally is improving, but in any quarter a name or two that resolves will potentially make that ratio look a little worse.
Thank you. There are currently no questions registered at this time. I’d like to pass the call back over to Chris Gorman for any final further remarks.
Well, I just want to close by saying thank you. We appreciate your interest in Key. This concludes our first quarter earnings conference call. If you have any further questions, please reach out to our IR team directly. Thank you. Goodbye.
Thank you all. That concludes today's conference call. Once again, we appreciate you all's participation. We hope you all have a wonderful day, and you may now disconnect your lines.