Starting now with the next fireside chat, which is with KeyCorp. Clark Khayat, as many of you know, is the Chief Financial Officer. Clark became the CFO in a very timely period of last March, if I recall.
Correct.
So he's had a very interesting 12 months as a CFO. Everyone knows that, KeyCorp is obviously based out of the Midwest. The company is our 16th largest commercial bank in the United States, with about $188 billion in assets. The company has a strong CET1 ratio of 10% as of the fourth quarter. I'd be remiss without acknowledging a retirement, Vernon Patterson, who's up here. Vernon, why don't you stand up, please? Because Vernon's retiring March 1st, and let's give him a round of applause.
Well, I should say, retired since this past March 1st, but Vernon has been at that position for 30 years with KeyCorp, and we'll be seeing him driving around. I think it is an F-250, pulling his Airstream behind, and please send me a postcard from some great places. But congratulations, Vernon. Maybe, Clark, we could start off. We were together visiting investors last week over in Europe, and one of the areas that was coming up in conversation, of course, was multifamily. And KeyCorp is a player in the multifamily market. And so maybe you can give us some color on how you're approaching managing the multifamily portfolio and differentiating how you guys run the affordable portfolio versus some of the headlines we're seeing about the rent control market.
Sure. So I think, as most people know, you know, look, commercial real estate's an important business to Key. We've been in it a long time. I think we have a differentiated platform among many in that we distribute a significant amount of the capital we raise for clients. We can do that through agencies, life companies, CMBS. You know, in a sort of normalized market, maybe we put 20% of what we originate on the balance sheet. That's very consistent across our commercial bank, but lines up for CRE as well. And then within CRE, a really important part of our book is multifamily. So that's been in the news lately. We continue to feel good about that book, and I would really split it into kind of market rate, you know, traditional, I think, what people think about as multifamily.
We tend to work with experienced operators who are not particularly aggressive. They're not trying to lever up. We're underwriting fairly conservatively. They tend to put a lot of equity in. We don't put a lot of positions beneath the senior debt. So it's a pretty clean capital stack. And, you know, clients who know the business well, they've been in the markets for a long time, and they stand by their credit. And we're seeing, you know, performance that we're very comfortable with. The other part of the book would be affordable, as you mentioned. By the way, market rate's about 5% of our loan book. Affordable, about 3%. Affordable is not the same as rent control necessarily, or rent control in Manhattan. So I should have said in market rate, we have zero exposure to New York City rent control.
We have a little bit throughout the country, but as people have been following the news, the 2019 law in Manhattan's pretty onerous. Most markets do not really follow that. In affordable, if you think about it, you know, huge demand given the demand supply imbalance in the in the country, very high occupancy rate, waiting list to get in, pretty significant subsidies and tax credits that sit beneath it. And I think maybe the most important part of it is generally all of the capital's committed upfront. All of the rules are well understood, so you kind of know what your path of rents are going to be. You know what the capital stack's going to look like. You generally go in with a permanent execution committed to on the back end.
And so there's not a lot of surprises about where the market's going to go and what things are going to look like. So and it's very well, sort of, managed and administered by the state. So again, pretty straightforward, not a lot of surprises, performed really well over the last couple decades. Cumulative affordable losses in the U.S. are like 50 basis points in total. So very clean credit book. We love the business. And if you look at our construction, book and exposure on the balance sheet, that's almost all affordable. So as I said, that's got a permanent exit. So we continue to feel really good about it. It's not, you know, we're not immune to some of the stress there. But overall, the way we run that business, we feel very comfortable with.
Because of your depth of knowledge of the affordable market, is there still a lot of demand as you guys look out to grow, like, you know, new affordable in the construction book? Is that an avenue of growth if the demand is there?
Yeah. I mean, look, we it's one of the places we would lean in. You've, you've, sort of shared our view on targeted scale. I think affordable's a place where we believe we have it. And to the extent we have good operators that we have a relationship with who will, you know, have a relationship with us, we'll continue to support them. Yeah. And then the other piece, just, you know, I'd be remiss if I didn't just talk about the last piece of our commercial real estate platform, which is our loan servicing book, which, you know, is about $400 billion in primary servicing, $200 billion plus in special servicing, gives us very good insight into what's happening off our balance sheet. And, you know, we continue to follow the industry that way.
And that's been a great business for us, source of deposits, source of good, you know, high-quality fee revenue, and obviously just good intelligence around the sector.
Yeah. If I recall correctly, you guys have indicated last year Special Servicing had a record year in revenue. And what are those folks in that division telling you about their pipeline? I mean, is it cresting yet or can they see that?
Yeah. I mean, the Special Servicing book is really kind of a it sort of rolls, right? As you can imagine, if you go back to coming out of the pandemic, retail was the issue. That was not a surprise. That sort of abated a bit. Office jumped up. Office, I don't think, is growing at the rate it was growing, but it feels like it might just be a kind of slow bleed over time as leases come up for renewal. The biggest kind of jump in the last year has been Multifamily and that's some of the issues we've talked about. But what we've seen is it's largely in higher leverage deals in markets that are a little bit oversupplied. Right. And as Chris has said a few times, we sort of backed away from some of those markets maybe too early.
But being too early is probably better than being too late. So we're feeling a little bit better about that position right now.
No, absolutely. And you touched on office there just a moment ago, Clark. KeyCorp has distinguished itself from many of its peers on its very low exposure to office. Maybe you could just give us some color on what you have and the thinking behind that exposure being so low.
Yeah. So it's about $800 million or maybe 70 basis points of the loan book in total. We've provided for it at about 6%, which we feel good. It's maybe a little lower than peers, but the mix, you know, we have a very small portion of that, Class B and C in Central Business District, something like $112 million, roughly. But that's a pretty small exposure. If we had to go to 8%-10% or whatever, where, you know, we look at maybe the top end of the group, that's, you know, you're talking about $30 million. So we don't think that is a huge risk. Right. And again, we're seeing some stress in that book like everybody else, but that's just not a place historically where we think we've had as much strength. Right.
You know, Multifamily and some of the other areas and places we really have made our bets in terms of supporting clients.
When you say stress, and the reason I like to talk to, folks like yourself that don't have big exposures, you can give us a more candid view of what you're seeing. The stress you're seeing in the, is it due to rates or vacancy rates going up? The refinancing risk?
I think the best view I can give you is just if you think about Key as a tenant. Yes. Right. We've reduced our corporate space by a third over the last three years. And if you just think about, you know, Key Tower in Cleveland, which is a Class A building, we give a floor back in that building. Somebody moves from a Class C or Class B building around, you know, around the block and they move into that space. It's not clear somebody's moving into the place they vacated. Right. Right. And then that over time just becomes a, you know, a question about are you going to be able to fill it? A lot of conversations in the industry around converting to multifamily. Yes. I think we're, again, starting to see in certain markets a multifamily supply. Yeah.
So it's not clear that the deals pencil out at these rates with, you know, kind of more supply in the market. And I just my view would be the conversion process is not simple. Right. Right. Again, one of Chris's favorite comments is when he sits in an office building and looks around and says, if you were going to convert this to multifamily, how many bathrooms would we have to put in? And that feels like a lot of work. So, and then you think about just, you know, cost of supplies, availability of labor, time frames, rates, right? All that sort of goes in the mix to make those look a little bit harder to pencil out.
Sure. Speaking of Chris, I think he was quoted last week or the week before about saying that zero Fed funds rate cuts in calendar year 2024 would be a pretty good outcome for Key's performance. Can you walk us through, you know, that kind of thinking for the calendar year 2024?
Sure. So one, you hit the key point, which is calendar year. Right. We tend to kind of truncate some of the trends based on whatever the calendar says. I think the biggest takeaway here is like we're pretty close to neutral at the moment. So we think we can manage a variety of rate environments we've talked about, whether it's, you know, it was six, you know, six weeks ago. Now it looks more like two or three and could be zero. And we feel comfortable that we can manage the balance sheet within that within that range. The zero at this point really is a function of our view would be if cuts are coming, they're probably coming back half.
If there's more, there's going to be more, but in the probably very end of the year and you'll hit earning assets immediately and it just takes time to get beta into the market. So it's really a timing thing in 2024. I would say if you end 2024 with zero cuts versus six cuts, again, because of the relatively neutral balance sheet, it's manageable. I think entering 2025, your balance sheet composition probably looks a little bit different. Yeah.
In fact, looking out beyond 2020, calendar year 2024, what's the best rate scenario? If you had the ability to manipulate rates, what's the best one for Key?
Yeah. So the good thing for us, as we've talked about swaps and treasuries maturing, is it really we get through the vast majority of that in 2024. Right. So if we started to see rate cuts in 2025, that doesn't have the same repricing risk as we'd have in the back half of 2024. Right. And I think, you know, so more cuts, I think, brings a little bit more loan activity, brings a little bit more capital markets activity, which, as you know, is an important driver for us. I think it takes some pressure off deposits in both rate and probably brings a little bit more balances back. So I think that becomes a more constructive environment. And then to me, the biggest piece long term is just can we get some version of a flat or slightly upward sloping yield curve?
Because again, that just becomes the, you know, the market in which I think we're all kind of most productive.
Sure. No doubt about it. Speaking of deposits, maybe if the Fed starts to cut rates, so now let's say they're actually cutting starting in June, maybe, what are you thinking about deposit betas as rates come down? You know, how do you benefit from that in terms of cutting your deposit rates because of the Fed fund rates coming down?
Yeah. So as you know, it's a piece. It's some piece of knowing your book, the types of clients, the markets you're in, the products they're in, the, you know, when are your CDs maturing or, you know, what is the composition of the book? And then the other piece is just competition. Right. So, in some cases, you only need one person in a market to need the deposits. And that can set the price in some cases. But if we think about it, we've discussed sort of truncating and cutting out, take our commercial book, which is 35%-40% of our deposits. We've talked about 2/3 of those being contractually or behaviorally indexed and the index rate being sort of 60%-70%.
So if you take all that together, you should have sort of a mid-teens beta out of the gate just based on that dynamic. And that's for the whole book, probably mid-forties for the commercial book. Then you say, how do I activate that, the rest of that commercial book and how actively can I get them moving? And then really it comes down to the consumer book. And that's got a wealth piece that feels a little bit more indexed just given the sophistication of that client base. And then you get into markets, you know, different deposit types, what's your MMDA promotional rate, what's your CD maturity, you know, profile looking like, and then how quickly can you get rates and terms into the market? So, you know, there's a lot in there and it is a local business.
So we're executing that kind of market by market. But, you know, I think there'll be a lag to some degree as there is in any down. We saw it on the way up. So I think it's not expecting it on the way down might be a little aggressive. Right. But if competitors move, we're certainly prepared to move. And what we're really actively doing is trying to get stuck with rates in a CD book, for example, that bridge into 2025 that we can't action in this year.
Right. Speaking because your geographies are different, you know, in the Northeast, of course, Pacific, out in the Pacific West, and of course, Ohio. Are there different competitive features in those markets on deposits?
Yeah. So we've, if we think about kind of our Northeast market, our Great Lakes, our Midwest and our West, we tend to see, and it's just, it's largely demographics, right? A little bit older client base, a little bit wealthier client base, but less growth in the Northeast. And then the competitive set, you know, is pretty robust, but more canted towards credit unions, small, small community banks, often who will be a little bit more aggressive on deposit rates. So you can see some in certain markets kind of hyper competitiveness. If you move to the Midwest, similar demographic, probably, you know, maybe not quite as wealthy, but, you know, similar growth profile. And then the competitive profile looks a little bit more like, you know, a regional mix. So the banks, you know, in some cases will be a little bit more rational overall.
In some cases, they're defending, you know, really important clients to them. The difference also being that one goes kind of up the food chain a little bit because if you're competing with a credit union in Maine, as you know, right, they're not competing for your large corporate business. Right. So that, you know, so that dynamic changed a little bit. And then out West, you tend to have younger clients, a lot of growth. You know, the our five main states out there are five of the fastest growing states in the U.S. And the competitive sets a little bit more of the of the bigger banks. And so you tend to see a little bit more rational kind of checking pricing with the one caveat being sometimes the CD rates can be a little bit more aggressive, but that's just kind of part of that strategy.
So we really are, again, client by client, product by product, market by market, and trying to balance each of those.
Got it. It sounds pretty positive. You know, the net interest income outlook with 0-6 rate. I mean, you're managing that pretty well. At the same time, Key has expressed optimism in the past. Why is it different this time? And then you're nearing officially, I guess, one year CFO, but, you know, monthwise you're there. What are the learnings and changes that you've put in place to manage risk going forward?
Yeah. So the first part, again, just to go back to the current position of the balance sheet, we're basically neutral. Yeah. Given the swaps and treasuries rolling off and given the underlying floating rate nature of the book, we're, if we do nothing, we'll become asset sensitive. So we will likely not do nothing. But, you know, time has helped as painful as it may have been. So we're kind of in a little bit of a reset. And then it's, you know, how are you going to manage it going forward? So you have a little bit of opportunity to influence that. You know, one, we brought in a new treasurer, came from Discover, you know, very experienced, started his career as a Fed economist.
So really, I think appreciates the dynamism of some of these economic moves and kind of the view of the Fed as it pertains to rates. We've put in a lot more governance around how we manage the balance sheet, inclusive of, you know, what are the core assumptions going into it at a, you know, painfully detailed level? Because I think it's important to understand them at that level. Being clear about objectives of when we put positions on and when we take them off. So last year, we terminated the swaps for 2024. We talked about that. We also added some payer swaps, really as insurance against higher rates to balance some of the AOCI or tangible capital ratio risk we saw. We entered that thinking, you know, time helps us.
Every quarter we get some, you know, pull the par on the AOCI and those ratios get better. So this isn't a portfolio we're putting on for years. We're putting it on for that objective. And when that objective is no longer served, then, you know, you make a decision to exit. And we're actively talking about that. So that's different than where we were two years ago. And we probably should have been talking about terminating swaps in 2022 and not waiting until 2023. So I think just a lot of, you know, some different personnel and, you know, different talent, a lot more governance and a lot more engagement around the right assumptions, the main objectives, and sort of the entry-exit parameters. And then the last piece would just be around thoughts on the portfolio.
As you and I were talking before we came up here, it's kind of some leak on liquidity rules coming in. I think expectations, you know, the industry is sort of in the horizontal liquidity review right now. We're getting good views on where, you know, the world is going. So I think, you know, liquidity after last year is obviously going to be an important point. If you think about objectives for the investment portfolio, and, you know, you could probably recite this after last week, but really, you know, a store of liquidity, a tool to manage interest rate risk, and then an earnings generator in that order. And, you know, we can talk about the magnitude of difference between rank.
But we weren't always consistently thinking about it that way and making sure that, you know, that portfolio was positioned appropriately to sort of manage liquidity, capital and earnings.
Yep. We've talked a bit here about the Net Interest Income outlook. Let's come over to fees. You're uniquely positioned amongst your peers with your Capital Markets business. You know, Chris, we're in that for a number of years, of course, and you've melded it together with corporate banking rather well. Maybe share with us what you're thinking for that business this year and versus a year ago's numbers.
Yeah. So, you know, I think if you go back to 2021, I think we now all appreciate the anomaly, that that that was on a lot of fronts, but one of them was certainly Capital Markets. We printed, you know, our highest number ever, something in the $940 million range. Last year, kind of the flip side of that, $541 million, I think we would view our kind of normal year $600 million, $625 million, $650 million, somewhere in that range. I think we are going to expect progression back to that this year. And we're seeing activity that would at least support that perspective. We guided fees for the year 5%+ over last year. The plus is really if we get a fully kind of normalized run on Capital Markets, which I think probably requires a little bit of rate, of rate cut in the back half of the year.
So we're seeing good activity out of the starting point. We've seen some larger deals in the market that I think are cross-industry, cross-product. So that's a, you know, a good sign to start the year. Yeah. But as you know, things, you know, things can change, but it's it's consistent with where we were. The other thing I'd step back and say on fees broadly is our view on fees for the year is pretty consistently positive across the categories. Yes. With one exception, and that would be corporate services, which for us is client derivatives and foreign exchange. That's not a bad year. It's just last year was a great year because of the SOFR/LIBOR transition. Got it. So when that comes off, we'll sort of revert to our historic levels. And that'll be the one fee category that's got some pressure on it.
But the rest, I think, are looking, you know, not necessarily lights out in the way that we hope Capital Markets is this year, but certainly, you know, some good sustainable strength.
Yep. Within the capital markets sleeve, what parts of the capital markets is most beneficial to come back, meaning DCM or advisory, or you've got one of the best originate to distribute models as you talk about and what you like to keep on your books. Can you share with us some color there?
Yeah. I mean, we try to be one of the really differentiating pieces of the model. The objective is to not want to lean to any particular product or solution. We want to give clients a range of the best options and make sure we execute there. That's why, as we've tried to describe, and you've pushed us on what is a normal market, you know, we've tried to say, look, externally it probably feels like loan growth in the GDP range and internally a place where we're putting kind of that 20% of what we're originating on the balance sheet. If you go back a year, first quarter it was 30. That to me is an indicator like the markets are not functioning because 30% of the time our balance sheet should not be the best answer.
If you're at 10, it probably feels like it's a little overheated. So 20 is, you know, high teens, low twenties is really a pretty good spot for us. If we had to pick one, you know, often M&A advisory is the thing that sort of drives the truck because there's a syndicated loan that comes out of that. There might be some bond issue when it comes. So there's a bunch of pieces that come from that type of transaction that make it a little bit more broad-based. But really what we want to do is, you know, support all our client needs in the most appropriate way for them. And, you know, if we do that well, we'll maintain relationships. And when the next product opportunity shows up, we'll be there to do it.
Yep. And within the seven verticals that you guys focus on, where do you sense there could be activity this year? Is it, you know, the real estate or is it healthcare or technology? What do you think?
I think there'll be activity in real estate. We don't know exactly what it is at the moment, but, you know, look, there is an opportunity if we get some term rate reductions. And we saw a little bit of the activity pick up when rates rallied in November and it's kind of lagged a little bit as we've backed up a bit. But people will refi into the market. And my view would be likely into some capital market execution to refi off the balance sheet, which will allow us to, you know, again, get back to recycling capital. We have seen, as I said, you know, we had one of our largest deals ever in building products, right? Which generally is, you know, a subsector of our industrial group. That's a pretty good indicator that things are going okay in the economy.
If you're getting a lot of lean into building products, we've seen some healthcare deals. You know, I mean, again, it's been kind of cross markets, whether it's healthcare, whether it's real estate, whether it's industrial and products. So M&A, syndicated loans and IPO. So we were a co-bookrunner in an IPO, large IPO in the first quarter. So all of that sort of feels like some broader market return. Again, not full fledged, but definitely on the range of rebound.
Got it. Capital, obviously your CET1 ratio is about 10% above your kind of targeted level of 9%-9.5%. Can you share with us, are you comfortable with that level? And then at what point would you consider maybe starting buybacks again?
Yeah. So, very comfortable with it right now. You know, the 9-9.5, we've basically said we're not going to make a change till we know exactly what the rules are. We didn't want to declare and then redeclare. So hopefully we'll have a little bit more sense of where we land there. We have said, look, we're not going to buy shares back until we really know where that is. And once we reset and see the path to getting, you know, to the right levels over time. So we'll revisit that as we know more. But look, given the composition of our portfolio, which generally we think is pretty conservative, we tend to lean into very high quality borrowers. We don't have a lot of credit card exposure.
Most of our consumers are very prime with, you know, residential real estate collateralized. So we're not a big credit risk taker, which is, again, kind of a result of coming out of the recession, out of the Great Financial Crisis, saying, you know, we shouldn't do that again. Let's reconstitute the portfolio. But again, given that, the question is, you know, how much more capital do you need to sustain losses over time? And we feel good where we are, but, you know, we'll reset the boundaries when we have the rules and we'll figure out exactly, you know, where we need to be.
Sure. And regional banks like your own will have the AOCI issue, which just doesn't look like that's going to be eliminated from Basel III phases in over three years. And you're comfortable with the burn off that you're.
Yeah. I mean, look, the phase in piece was done thoughtfully for exactly the reason to not create stress. So if you follow that, I feel very good about that. Yeah. If you say, look, at some point, when do you get to the fully marked number? You know, we've talked about our AOCI burning off kind of 25% by the end of 2024, 34% by the end of 2025. That looks like 20 and 32 if rates are flat. So, you know, we're going to see some pretty good rundown in that. We hope, you know, we're hopefully building capital organically. We'll continue to optimize RWAs where we can, not through the loan reduction process that we had last year, but we'll put all those together. And I think you'll find we'll be comfortable with the path there.
Speaking of the RWA reduction last year, I think it was $14 billion, about half loans, half other assets. It's over, obviously. What does that mean for loans this year, though, on just a comparison basis?
Yeah. So we've talked about for the year down 5%-7%. Yeah. Remember last year's average was 118. Last year's ending point was just over 112. So a lot of that was out. And we've sort of said, look, we're going to come down in the first half because the ending resulting actions of that RWA, you know, reduction will come through in the first half. And then we think we'll start to build back to roughly where we ended the year. Right. That'll be a function of rates. So, you know, again, as you've heard me say this now 30 or so times in the last week, but, you know, if there's no cuts in rates, I think that translates to maybe a little less loan demand. If there are cuts and there's more cuts, I think you'll see loan demand pick up.
It's a little bit of, you know, what's out in the market and where can we consistently apply our relationship philosophy and get, you know, that full relationship client?
Yep. Talking about freeing up capital, we've seen some banks execute the credit risk transfer transactions recently. Is that something that you guys would be open to? What's your thinking there?
Yeah. I mean, we've looked at these historically. I think in prior, you know, CRT or credit risk transfer is kind of the broader category. We've looked historically more at things like credit default swaps. Yep. Given the Fed guidance last fall, the credit-linked notes have come back into vogue because there's just a little bit more regulatory support there. So we're understanding those. And again, in my view, which I don't think is particularly enlightening in this case, but, you know, you use those when you have really high-quality assets and borrowers and a really high risk-weighted asset. Right. So if you think about the current standard approach, you know, you can have an investment-grade commercial loan and it's 100% risk weight. So that feels economically imbalanced. And this is a way to, you know, get some of that back.
So we'll continue to look at that. And if you think at the what I said earlier, it's just sort of the quality of our book. Yep. And then the, you know, the regulatory risk weightings associated with that, there's probably some opportunity to lean into that a little.
Maybe one that we're running out of time here, but I do want to touch on one other area, which is expenses. If you guys are able to hold the line on expenses plus or minus slightly, that'd be the fourth year in a row, which is pretty impressive. So maybe share with us what you're thinking on expenses for this year and how you're managing that.
Yeah. So I think it's the third year because 2021 would have had a lot of Capital Markets.
Correct.
Would have had a lot of capital markets. Some comp in there. So look, what we've been trying to do is just get ahead of both keeping the company operating the way we need to, which means you have to invest and generating organically the pool of investment. And we're really trying to do that by not making, you know, a lot of times people, we've done this before, you just sort of say everybody cut 5% and you don't make the best decisions. We've been much more intentional about where you reduce and try to get out of it. Like if we're not going to be in that business, take 100% of that expense base out and let the franchise continue to lean in. So we've done that.
I think we did that really well last year that freed up a fair amount of capital. We took investment capital. We did take out about 8% of the workforce. A lot of that was at higher levels, which allowed our business to be a little bit simpler. Yep. Simpler for employees to navigate, simpler for clients to operate with us, and a little bit better risk management because there's more transparency. So that simplification theme is something you'll hear from us a lot. And we think we have some ongoing opportunities to do that and continue to generate dollars to invest in the places we need to, which, you know, you can't run a bank of any size, but certainly at this size and not be invested in, continue to invest in important areas.
Sure. Now, with that, we've gone over a little bit, but I want to thank Clark for joining us this year. Thank you very much.
Starting the next session here with Old National Bancorp, I just want to thank everyone for being here. I have my old friend Jim Ryan up here. We've known each other for a long time. Jim's the Chairman and CEO of the company. I think the best thing for us to do, I think right now, is give us a description of Old National. I think most of you are familiar with the company, but some of you are not. We were talking about generalist investor interest outside and hoping for a little bit more. So for those of you that aren't familiar with it, Jim, why don't you go ahead and give us a little bit on the company?
Sure. The first thing that I always have the opportunity to share is Old National turns 190 years old this year. We are in the exact same spot. We started the company 190 years ago in 1834 in Evansville, Indiana. Having said that, what I will say is the last five years have really been transformational.
And I had the opportunity to become CEO and Chairman just almost five years ago and really have transformed the company into better growth markets, really created a better sales organization and culture, had the opportunity to hire in the last three years; we've hired 75 top talent relationship managers to join us in some key markets like places like Minneapolis, places like Chicago, places like Detroit and Indianapolis, and really joining us out of some of our largest banks in our footprint and really have transformed how we think about the business. Having said that, Old National is always known to have this conservative credit culture that serves us incredibly well. So really low and stable net charge-offs, really consistent and low, stable net charge-offs. And the hallmark of our company is we call it basic banking, old-fashioned basic banking. And what does that mean?
It means we turn around and gather deposits up in our footprint and lend them back out. So John, you can appreciate this. John Moran, our head of corporate development, has been trying to tell everybody that boring is the new sexy. So after what we saw in March and April, we think boring is probably better than having high concentrations or being overly exposed to one sector over another. And so old-fashioned basic banking, we think, creates real value over the long term. And if you look at our Return on Average Tangible Common Equity, you look at our risk profile, you know we think we're creating real value for shareholders. Last year, we were able to grow Tangible Book Value by 17%. Ex-OCI, it was still 12%. We think with a reasonable dividend yield on top of that, that provides strong shareholder return.
So you know what's in store for Old National? It's just more of the same, old-fashioned basic banking, you know growing at our deposits in a really granular way. You know our loan portfolio is incredibly granular. Our average loan size is under $2 million. Similarly, on the deposit side, really long-tenured deposit relationships. And that really helped us, whether it was the pandemic we had to navigate, which we'd never close the doors, continue to go off and be on the offense, or whether it was this March and April timeframe, which you know obviously everybody looked at our industry a little bit differently post the failures. We continued to navigate incredibly well through that and continue to grow and never shut our doors in terms of new client opportunities.
Quite frankly, that created opportunities because many of our regional peers were taking a pause, whether it was a Basel III diet or just making sure they had enough liquidity. It really allowed us to stay in the game. In fact, in the last 3 years, we produced record adjusted results the last 3 years in a row. You have to go back 20 years prior before you see that record again. We're really pleased where we're at, but it's old-fashioned basic banking. If you leave with anything today, hopefully you think boring is the new sexy.
I think you described it once in an investor meeting as oatmeal with a little bit of brown sugar.
Exactly.
Is that right?
Yeah. Oatmeal with brown sugar.
You can use that next time. That's fine. From an economic point of view, touch a little bit on your markets and we'll get into lending after that. But you know, what are you seeing from the economy? It's obviously kind of a tension point between what we read every day and that sometimes is different in terms of what you're seeing.
Yeah. What I would see is we've seen a lot of consistency across our markets. You know these are you know highly concentrated manufacturing markets with you know individual entrepreneurs who run these companies. And we've seen really not much change over the last couple of years. We've seen nice growth opportunities. You have markets like Chicago, which continue to drive a lot of the headlines in terms of demographic changes. And what I will say is places like Chicago maybe aren't growing, but we have such small share of the total and we're actually able to take share away, particularly from the new hires and our speed to market and our approach to banking. It really allows us to drive you know above-average growth. So even if that market's not going to grow, our small share and our ability to take share really allows us to grow.
Places like Minneapolis, I would say the same thing, maybe a little bit more dynamic, your hometown, than Chicago is. I would say those are two great examples where the urban cores are challenged in terms of demographics. But you look at the suburban markets, there's still a great amount of growth happening in those suburban markets. You know Michigan continues to produce strong results for us. We just added an office this last year in Detroit and that's worked out really nicely. Places like St. Louis and Kansas City, which are relatively new entrants for us. Again, I'd put in that same kind of classic Midwestern market, lots of you know entrepreneurs, you know owners who we do business with directly. You know our classic customer is a small business owner that we know we've known for 20 years in those marketplaces.
You know, we go to church with them, we go see them at the grocery store, see them out. And those are our type of clients versus somebody that's trying to buy some type of credit or investment-grade credit or leverage credit. It's just, you know, kind of old-fashioned basic, gets back to old-fashioned basic banking.
Okay. Lending environment, what are you seeing from a loan demand environment? Has it changed at all recently? I know you've laid out some guidance kind of near-term and longer-term and how you track.
Yeah. So that's a great question. We talked about this on our fourth quarter earnings call, really mid-single digit kind of loan guidance for the full year. And we think it's kind of equally spread. And that's really based on our pipelines. If you look at our pipelines you know heading into the year, we really feel like you know mid-single digit growth makes a ton of sense. Maybe it's a little bit softer than we've seen the last couple of years. I think the challenge becomes you know uncertainty. We have uncertainty around the direction of interest rates, the shape of the curve, and then obviously the presidential election creates a lot of uncertainty. So if anybody's holding back, I think it's mostly due to uncertainty.
You know, we still see good loan demand, though, across our footprint based on obviously the growth that we outlined in our guidance. And additionally, those 75 people we put on our books in the last three years, it takes them a year plus to kind of get ramped up. They're getting ramped up. And this is across wealth management and commercial banking mostly. And I think as those folks get ramped up, that's really that opportunity to go out and steal share away from our competitors. And I think that's causing maybe slightly above-average growth, you know, vis-a-vis some of our peers.
Okay. Good. Also, if anyone has questions, just put your hand up and we can definitely handle them. Commercial real estate is a hot topic. What are you seeing in terms of demand? You know, talk a little bit about your book and your exposure to commercial real estate as well.
Yeah. You know much of our commercial real estate exposure really falls into, well, first of all, there's a big chunk that's owner-occupied, right? We think that more is more kind of the C&I kind of classic category. In terms of the investor stuff, much of it falls in the multifamily and industrial warehouse space, both of which have held up really nicely. The multifamily product tends to be suburban multifamily, newer product. And there continues to be the structural deficit of new housing, particularly in the markets we serve. So that's held up. You know it was interesting during COVID when we were all worried about you know what that, because it tends to be a little bit more expensive than the housing, the rental housing you and I think of as we were coming up. And you know occupancy rates have been incredibly strong there.
There's still new projects coming online. Even at today's interest rates, there's still so much demand and they're able to do that. There's been a lot of talk about the refinance risk. You know we automatically stress all of our deals for up 3%. And so if you think about where those things may have been originated, you know from a 4%-7% today, which is kind of roughly the rates we're talking about here, there's still, you know when we originally underwrote those, we underwrote them to those kinds of standards. And then you think about the rent growth and the opportunities. So the cash flows, the debt service coverage leverages are still holding up very nicely even upon renewal of these higher interest rates.
Okay. Competitive environment in commercial real estate, is it competitive at all?
Yeah. I would say it's still competitive. I mean, you know maybe we lost a couple of competitors along the way, but I would say it's still, it's not like we have a cakewalk here for new opportunities. It's still definitely competitive. We're really focused on client selection here. This is where it's so important to make sure you're doing business with the right organizations. You know we're still competing for those organizations as hard as we ever have. If maybe one or two, you know instead of having six, you have four that are out competing for the same business today. Still a lot of competition.
Okay. But still good activity, good competition.
Correct.
No big wall of maturity worry that you're thinking about?
No. As we look out and forecast, we don't have that many maturities coming due. And the ones we do, we already stress them for that up 300 and feel really good about you know what the new underwriting will look like once they go through.
Okay. Not on the question list, but is it frustrating as a banker to read some of the headlines?
It is very frustrating. I think sometimes education will go a long way in making sure we're getting the real truth and facts out there about the real estate. I think we know enough just to be dangerous sometimes in the reporting cycle. And everybody's looking for a salacious headline. So it is frustrating sometimes to see some of the headlines that are being written about commercial real estate out there. And obviously, not all commercial real estate is created equal. There's all sorts of risks created. There's a bunch of differences in even in the same market. If you're going to underwrite a multifamily project in downtown Minneapolis or one out in the suburbs, I think there are different types of risks. So it is frustrating. But you know the reality is our industry will continue to navigate. Our industry is very healthy overall, I believe.
Yes, we have some banks that make the headlines here now and again. We're all frustrated by that because it feels like we're just opening the wound back up. But by and large, our industry is very healthy. If you go and look at the numbers and look at the charge-off history, other than some episodic kinds of credit losses as a whole, I think our industry is holding up very nicely.
Yeah. I would agree. Deposits. In fact, we're coming up on the one-year anniversary of having some fun with deposits. But talk about deposit pricing, what you're seeing in your markets. Has it changed at all? And just generally, what you're seeing in terms of pricing?
Yeah. Great question. Deposit pricing as a whole has gotten a little bit easier, a little bit easier. Having said that, you know there are some smaller banks that can be thorns in your side relative to total deposit pricing. You know our treasurer did an awesome job in making sure that you know we went out and we have roughly approximately 30% of our total deposit book has a special price to it. Otherwise, it's just the normal rack rates. And the rack rates are really unchanged from the big rate you know climb we had here. And most of that special price actually comes due over the next 12 months. So we really have the opportunity to take a look at that. And we're really being really thoughtful about the opportunity to lower prices and test you know where we have more opportunities to lower prices versus others.
Some places, you know we're continuing to grow deposits. On the margin, and we said this on our call, we're going to be unapologetic about growing core deposits because we do think that will continue to be a long-term differentiator between banks that are successful and banks that aren't. We've always had this really strong low-cost deposit franchise. You know when rates were zero, it was tough to demonstrate value there. It was interesting you know during March and April, while we had a couple of weeks for Old National, which were you know we were concerned with the rest of the industry, we sailed through that really smoothly overall and lost very little clients because we just don't have big exposure to uninsured deposits. The ones we did, we have long-tenure relationships with.
It's really granular deposit base, which you know serves us well in these kind of crazy, uncertain times. But I do think that our ability to reprice our book will be better than what our guidance was out there. We were on a 20% beta on the way down, which we think served, it's relatively conservative to some others that put up you know higher betas. But we think that's a realistic number to live up to and gives us opportunity to grow the margin in the back half of the year.
Okay. Good. Some of the promotional pricing or exception pricing, talk to us a little bit more about that. What do you expect? What do you have to do to test it? And what kind of expectations do you have?
Yeah. You know it's really interesting. It's almost a relationship-by-relationship conversation. We put in a lot of guardrails in place to make sure we didn't price up you know every single deposit en masse. And so I think we can be really tactical. Even if you're getting 10, 15, 20 basis points lower, you're still heading in the right direction. And that's what I think we have to think about as an industry. We're not just, we didn't turn the rack rates up and we're not going to just turn them all off at the same time. And again, I think while maybe from some of the biggest competitors, deposits are not as competitive to go after, I do think long-term, we've got to focus on continuing to grow deposits.
Particularly, we got to think about deposit growth, at least consistent with kind of our mid-single digit loan growth to make sure we're funding it on the margin you know with low-cost deposits.
Okay. Any updates on the non-interest-bearing targets that you have? You know.
We expect those numbers to slip a little bit, just kind of some late-cycle repricing. It's definitely slowed quite a bit. But you know those things are moving around 1% or 2%. So we don't expect major changes there. And probably back to kind of, and I would say longer-term kinds of levels before you know after the deposits were cheap and easy for such a long period of time.
Okay. But almost over in terms of.
Yeah. I think almost over.
Okay. Got it. The guide on the margin is still the same. No update there.
Yeah. Guide on the margin is still the same. We think the inflection point is here in the first quarter, you know kind of relatively flatish in the second quarter. And then you know growth in the back half of the year. We had assumed three rate cuts in our guidance. One thing that is interesting, though, in our original guidance, we didn't have the midpoint of the curve as high as it is today. So we have kind of plus 25 basis points. And for us, probably the steepness of the yield curve and the midpoint of the curve is probably more relevant than it actually the short-term rate curve is. So you know banks historically like us price off that kind of five-year point.
We've got kind of +25-30 basis points from that original guidance in terms of the middle part of the curve, which we think creates upside opportunities for us for the rest of the year.
Okay. And that was my next question. So that's good. So maybe a little bit of relief from that.
Little bit of relief from that.
Probably not six cuts, which is good.
I don't think six cuts. We've been working really hard to get to neutral. We're not quite there. We're very close to getting there. But by the middle part of the year, we should be pretty close to neutral. So whether it's, you know, when we ran our models, whether it was six cuts or three cuts, it was about the same. You know, and clearly, a more steep curve is better. And you know, one or two cuts is helpful, but relatively indifferent.
Okay. Okay. Good. I want to talk about CapStar a little bit. It's interesting. Do we call it record time? Record approved time?
I don't know. Yeah. I don't.
Just give it, you know give the audience a little bit on CapStar, what it is, how quickly you got it approved. Then we can talk about the market a little bit after that.
Yeah. So you know we weren't necessarily, let's start with Old National, wasn't necessarily looking for its next partner. However, this thing came along and we already have nine people that were sitting in the national market, seven of which were on the wealth management side that we attracted from you know super regional and two on the commercial side that had just joined us recently. And so when we saw this opportunity come along, we were, I was quite frankly skeptical that we were going to participate given its size and you know kind of where we're at in the cycle. We got in, we dug in, we realized this is a really clean bank with great growth opportunities. And while it's headquartered in Nashville, it also has offices across the state of Tennessee, including Knoxville and Chattanooga and Athens and then Asheville, North Carolina.
And really, while it's only going to be, you know, call it 8% of our total assets today, I think it has an opportunity much, much bigger going forward. And another reason why I think the asset growth opportunities are going to lead the way, we got to make sure we're following it with strong deposit growth to make sure that, and in our modeling, we never price in revenue synergies as we think about these things. But clearly, and this is an organization which needed to find a partner and can provide more capital and more funding for allowing them to grow. They have some great team members in the commercial and wealth space. We feel like we can really unleash them. And they're excited about joining our team. I was just with them all last week. They're excited about joining our team.
I think that ability to close it a little bit earlier than we anticipate, which is kind of marginal better to our model, not materially better to the model, will be helpful. And I think this is an important lesson that we've always tried to have great regulatory relationships. You know obviously, we wanted to preview this before we even thought about going down this path, which we do. And you know I think we're one of the few organizations, at least that you know we're showing them opportunities that are way ahead of what we actually think we might execute on something. And so we're just that constant dialogue about what those opportunities look like. And so they were familiar with you know our strategy, familiar with what we want to do. And we're able to be consistent with what we said.
You know we run a really, what we think is a really clean shop relative to regulatory relationships and follow-ups and items they have for us. That application went in. I think it's kind of four months from application time. We were really pleased. We went off and also made sure that you know we think about our community partners and benefiting the underserved communities. We went off and we worked with a national organization called NCRC and went off and worked with them to help us figure out how we can make you know all of Tennessee better as a result of this partnership. I think that helps with the regulatory approval process, being proactive on that front. You know very little overlap. Not a lot of you know lost content there.
You know we're adding some branches to the footprint, particularly in the underserved markets. Again, that's a good thing to do when you're looking at the regulatory approval process. So we're really, really pleased to get it done. And I don't know if it was a record or not, but we were pleased. And I think it's just a testament to the reason why you have strong regulatory relationships.
Yeah. Okay. We have a question here from Ashley, but I just joke with you a little bit. You're the bank of Big Ten country. Did you need Big Ten approval to go to Nashville?
I know. That's a good question. Yeah. And I joke with John because I'm going to be in Minneapolis the next two weeks. We've got the women's tournament and the Big Ten women's tournament in Minneapolis, sold out, by the way. I don't know if it's ever been sold out before, but what an exciting thing to see Caitlin and all that's going to go on there. And then we're heading back up for the men's tournament the following week. So we're happy to be the bank of the Big Ten. It's been an awesome partnership for us, particularly as the Big Ten continues to be a stronger conference.
Oregon, Washington, and California are next.
Well, we're not going there, but yeah.
Ashley, go ahead.
Thanks, Jim. This is my first exposure to you guys. So you may have talked about this already elsewhere. When you think about the context of scale and like everyone tends to get assets, and I'm curious for how you view where you guys fit into that. And there's different perspectives on how the industry might evolve in terms of sort of like bifurcation and you have bigger and smaller and not sure what's in the middle. And so I'd be curious for your thoughts on that, generally speaking, and then how it applies to you.
I think it's a great question. It's a question that's incredibly relevant in today's market. I feel like at $50 billion, there's a couple of sweet spots in banking. I think at $50 billion is kind of a sweet spot of banking. You look at our return profile, you look at our ability to navigate you know change, you look at our ability to invest in ourselves, both in talent and technology. We have enough scale to be able to do all of those things and produce you know high returns. Then I think you get obviously to $100 billion, which is a no-fly zone in today's environment, right? Then as I talk to my you know brother that are up in the $200 billion range, they're all talking about how do we be a trillion-dollar bank?
I think it's the SIFIs and I think it's us, I think, are really in the sweet spot of banking right now, which is kind of a weird space to be, but there's not that many between us and you know the biggest banks in the country. I think it's tough at that $10 billion-$15 billion range. I think it's a tough space to be. I think we've finally gotten there and we feel like we've finally achieved scale and finally have the growth opportunities and make all the necessary investments in technology and more importantly, attract the talent. I mean, the talent attraction, with the 75 people, you know may not sound a lot to you know some of the folks in the room. I'm telling you, these are quality people.
These are top decile, top quartile performers across our footprint that are really changing the growth dynamics of our company. I think at $50 billion, that gives us the opportunity to do that.
Okay. Good. So $100 billion, just no-go zone? You don't even think about it or?
I don't even think about it right now. There is no way. And you know, I do think as maybe as fast as $100 billion came as a demarcation line, it could go away. But we don't want to come anywhere near the no-fly zone, which is obviously much, much less than that. And you know, we put up, like I said, 17% tangible book value growth last year. I feel really comfortable being able to do that. You know, again, you know AOCI was 12%, but continue to do that and not have to rely on it. And the good news is you know M&A is often a tool to fix something. You're trying to fix a succession planning, you're trying to fix a balance sheet issue, you're trying to fix a growth issue. We have none of those issues.
We have a really young, vibrant management team that has great growth potential with strong efficiency ratio, great returns. I just, I don't think we're looking to solve anything through M&A.
Okay. Yeah. You touched on commercial real estate before. It doesn't sound like you have any major concerns there. Anything else on credit to note? What are you generally seeing from your borrowers?
You know, Midwest continues to be strong. And I think those that have avoided those softest pockets, the central business district areas, whether it be hospitality or office, which we have, I think 1% of our total exposure is in central business district office. We really just have minimal exposure. I think those are the pockets that I see in the Midwest. And I can't, you know, give you a perspective across the country. But for us, those suburban, you know, communities, the smaller, you know, tier two communities continue to, by and large, operate the way they have before. And you know, like I said, we're still seeing growth opportunities, you know, both in the industrial warehouse space and the multifamily product, particularly the multifamily product. You know, given where rents have, you know, trended over time, they can still make deals work, which is good.
We're doing fewer of them. Few of them are going to have enough, because what's interesting is that you know oftentimes these developers are putting more equity into the deals. That's how they're making up for the higher rate environment.
Okay. It's all right to be a little bit speechless on credit, kind of thinking through it. How strenuous are you with your reserves? Talk about that. What kind of stress testing and you know qualitative factors do you have in there?
Great question. Actually, you know during COVID, we moved to the Moody's S3 scenario in terms of our reserve setting. We felt like it was a prudent thing to do. There were lots of questions around whether we should have moved off that or not. In fact, we were kind of getting to that point maybe in the beginning part of last year where there were some questions around that we could maintain you know the higher level reserves. And we decided to continue to maintain those. And obviously, it gave us a lot of air cover what happened in the beginning part of the year. So we feel like we're you know appropriately reserved. We feel like it's the right place to be. Having said that, we use our stress testing work internally to really drive a lot of our major decisioning.
Any strategic decision is really run through that stress test model. And so we feel confident that we've got the right capital. You know we have this really long history of relatively low charge-off to our peers. And while we've acquired banks like First Midwest and others along the path, you know we get in really early. Risk identification is a big part of our strategy. We want to get in early. We want to identify risk before it's a problem. And oftentimes, you know we make a determination whether this is a credit we want to continue to work with or this is a credit we should find another partner for. And I think that early risk identification has really helped us navigate and turn in you know much better loss content vis-à-vis our industry peers.
Okay. The buyback, you have a new authorization out there. It came out shortly after your deal approval. How aggressive do you want to be with that? Or what's the logic behind it?
Yeah, it's a great question. So we're really just replacing the buyback that was already in place. And our tangible common equity ratio was around 7.85, 6.85, 6.85, thank you, 6.85 at quarter end. And so 7% is a number that we're watching. And we really like to be north of 7%. And so I think while I have said this earlier today with some meetings with investors, it's really data dependent. And I think it gives us how the rest of the year plays out. Do our assumptions come true? We're obviously going to build capital throughout the year. We have strong capital, you know, retention. And so I think in the back half of the year, it certainly could be a tool we utilize. You know, but it'll depend on where the economy is at and you know what our stock price is doing at the time.
But it's a tool that I think will be a good tool for us just to help manage kind of capital accumulation and return back to shareholders.
Okay. Any other questions? All right. Last minute or so, anything to call out on fees, fee income? How are things tracking and where do you see some of the opportunities?
You know clearly, mortgage continues to be a tough spot. One area that we continue to invest heavily in is our wealth management business. And that you know the investment lead time is a little bit more there. But we've put a lot of investment in leadership, a lot of investment in some new products, new talent to help drive that. We feel really bullish about you know wealth management for a long term. We've you know historically have focused on kind of more retail-type asset management. But we've added high net worth teams to help us. You know Nashville is an example where we built a high net worth team. And they've already had tremendous success. They went from zero to about $500 million in assets under management in kind of 18 months. And so they were able to really grow quickly in that space.
That will be one area that I look for a source of growth. You know, treasury management, capital markets continue to be great spots for us. And you know the service charge programs are under pressure, as we all know, and probably will remain under pressure. But we're really long-term bullish on our ability on the treasury management side and wealth management side.
Okay. But same guide, same?
Same absolute guide. You know kind of mid-single digit plus growth in those categories.
Okay. I think we'll wrap it up there. Anything else that you want to touch on or?
No. Thanks so much. Appreciate it.
Good. Thank you, Jim.
Have a great day.
Yeah. Thanks, everyone.