All right. Well, I think we're just about 4:30 P.M. We'll get started here. Delighted to have Chris Gorman, CEO of KeyCorp. It's your first time at our Strategic Decisions Conference, but I've had the pleasure of meeting with Chris going back over a decade now. He led the build-out successful investment bank, and more broadly, his large corporate franchise, and then more recently, as he's focused the entire organization on the strategy, which I'm sure he'll articulate better, but I always think of as the term targeted scale as really setting them apart. So Chris, thank you for being here to start. You know, maybe let's start at the top. You mentioned on the earnings call back in April 2023 was a reset year.
You've been candid about some of the interest rate challenges, but it was also pretty notable to shift to focusing on offense and that pivot and calling that pivot back in April. Maybe walk us through where is that shift occurring, where are the biggest pushes going forward, where you can play offense?
Sure. Well, first of all, thank you so much for having me, and this is a great conference, and I think it's nice to be part of a conference that is much broader than just financial. So thank you. Appreciate being here. So as you correctly pointed out, last year was a transitional year for us. But I really think, in many ways, it was our, it was our finest hour. And I, I say that because we knew, when the banking crisis of last spring hit, that we were gonna have to take immediate and decisive action. Decisive action, first of all, to protect our deposits, which in fact, we did.
Our deposits grew 2% year-over-year, and underneath the surface, the actual composition of our deposits really improved from a client perspective, in that we ended up with $5 billion fewer brokered deposits, and as a consequence, $5 billion more consumer deposits. And that really goes back to our focus around primacy that's gone on for many, many years, where we're focused on having the operating account. So the first thing was deposits. The second thing is, we knew that it was inevitable that banks were gonna be required to carry more capital, and we knew we had to make some adjustments there. And we went about the business of shrinking our RWAs, and we were successful in shrinking our RWAs by about $18 billion, which is about 11% of our RWAs. And we did that by doing a few things.
One, we've always been a relationship bank, and we've always required that people had more than just a borrowing relationship with us. And so we combed through our portfolio and where we didn't have the kind of relationship we would hope to have had, we either went back to our clients and said, "Gee, either we need to get deposits or we need to do this or we need to do that." And in many instances, it was a very positive discussion. In other instances, we went through with a fine-tooth comb and said, "Do we have the right RWAs applied against all of our loans?" And we're pretty conservative, and in some instances, Brian, we actually had too many RWAs applied against some of our exposures, and so we were able to adjust those with really no collateral damage at all.
And then, you know, lastly, we just very, very prescriptively figured out where we wanted to be, and we ended up with only 6% of our loans being kind of credit only. So as a result of all those actions and then in taking down our RWAs, our CET1 went organically from 9.1% to 10.3%. Our wholesale borrowings went from 22%-14%, and all the while, we were able to grow our business, which I think is really important. We net-net, we grew our commercial business last year by 6% while we were going through this exercise. Speaking of growth, the other thing that we did, and it goes to the genesis of your question about kind of pivoting to growth, and it's really growth that we never pivoted away from.
Last year, we took out $400 million of expenses. We have an expense base of about $4.4 billion, and the reason we did that is we wanted all last year to continue to be able to invest in technology. We spend about $800 million a year in technology, but we also wanted to continue to invest in certain businesses that are asset-light businesses, because in the way this is gonna play out in the future is people that have the asset-light businesses are gonna be in a better position when all this rulemaking ends. And so whether it's Basel III Endgame, whether it's long-term debt, whether it's LCR, having this notion and focusing on asset-light businesses is important. And where we're focused in terms of playing offense is as follows: One, we're gonna continue to focus on our payments business.
We think we're a leader in payments. We've partnered with fintechs for the last decade. We've been investing in embedded banking, which is really software to help people that are middle-market businesses run their business. I talked about primacy earlier, so we'll continue to invest in, first and foremost, in payments. The next area where you're gonna see us continue to invest, we think, and you mentioned it in your intro, that was nice of you to say, we think we have a market-leading, integrated corporate and investment bank, and we're gonna continue to invest in that business. It's fully built out in terms of capabilities. The opportunity for us is to go out and to continue to hire bankers, and so you'll see us continue to do that.
And then lastly, an area that's not as developed is the whole, is our whole private client business. And by that, I mean, we start up from a very good place. We have $57 billion of AUM, which for a bank our size, is a really outsized AUM. One of the areas where in the past we haven't been as impactful as we would like to be, is in the mass affluent space. And so two years ago, we made some strategic hires. We changed the comp system, so people are focused on people that have investable assets of $0.5 million-$2 million. And that's a business that we think we can continue to grow.
Last year, we grew $2 billion of AUM in that business, and within our bank, we have a lot of people that we're not serving that we should be able to, because we have a very sophisticated wealth platform. It has, you know, we have a trust company, et cetera, built in there. And here's a few interesting stats as it relates to our mass affluent opportunity. Right now, we have 3.5 million customers. A million of them have—and we have—since we have primacy, we know what's going in and out of their accounts. We have a million of our 3.5 million customers have at least 250,000 of investable assets. Right now, our penetration rate of that group, that million people, is 10%.
So these are people that already know us, trust us, do business with us. We're penetrated to the tune of 10%, so an opportunity there. We also have 250 small business customers. Those customers, too, are good, good candidates for our mass affluent strategy. And then lastly, but importantly, we have about $20 billion of loans that are at first mortgages that are on our balance sheet to doctors and dentists through principally through our Laurel Road platform. They, too, either currently have 250,000 or more to invest or will so in the not-too-distant future. So when we talk about playing offense, Brian, that's kind of a quick round trip of what we did last year to position us to play the offense that we're playing this year.
And maybe to dig into each of these, you mentioned briefly some of the areas you're differentiating in payments. You know, we do hear about the payments opportunity from a lot of banks. So for clients who say, "Look, it's tough to differentiate," you know, walk me through how Key is really different in outgrowing the market?
Yeah.
What in payment stands out?
Sure. So, first and foremost, is we've been focused on primacy for some time, which really was really, really helpful, particularly in the crisis of last spring. So think about 85% of our commercial clients, where we have the operating account. And so that is just, that's, that's just really, really important. So this notion of focusing on primacy. Next, is because we're set up by industry verticals, we're able to have, you know, treatments that are unique to whether it's technology companies, whether it's healthcare companies, whether it's people that are in the multifamily business, so actually having software that helps these companies run their business. And then the next step is embedded banking. And of course, everyone in the room and listening to this, experiences embedded banking on a consumer level all the time.
Anytime you get in an Uber, you know, you call the car, you track the car, you rate the driver, you pay the driver, the driver rates you, it's all in the same app. That is effectively embedded banking for consumers. We're doing that, obviously, for our targeted verticals. So that's, that's what's going on in payments, and it's, it's really helpful as people run their business. Then the other thing that we have, of course, like everyone, we have purchase card. We also have merchant card. We do a good job there, but where we're really distinguishing ourselves is really two places. One is this long-standing focus on primacy, and the other is this notion around treatments that are specific to our industry verticals that help people run their business.
The primacy point is what? You get the first look or the first pitch to bring payments to that client-
Well-
- you have the-
I mean, it's-
- operating account?
... It's amazing how sticky it is. If you have the operating account, you are in a great position, one, to have very sticky deposits. You know, so if someone's whole business is flowing through this operating account, it's not as though people talk about deposit flight and people, you know, deposit beta. It has. When you talk about operating accounts, that's just not a consideration. And also, because you're embedded into their whole business, you're in a position to, A, understand their business better, B, have a lot of data and be able to offer them things that you have insights that others just wouldn't, because you see all the flows.
Yeah. Maybe investment banking. First, you know, we'll come back to the ebbs and flows of the market. When you think longer term, what are the competitive advantages you've built in that business, and where's the greatest opportunity to keep growing and expanding?
Sure. Well, I think there's a great opportunity to keep growing it. It's hard to believe, but we actually launched our corporate and investment bank almost 20 years ago now. So we've been at this a long time. It's not an easy business to pull together because it requires the coordination of a lot of people. We, at this point, have, as I mentioned, everything that we need to be competitive. So our competitive advantage is for someone. There's 4,600 banks in the United States. I think there's 10 or so that have the capabilities that we do with regard to our integrated corporate and investment bank. So for someone to compete with us, they have to have a balance sheet, have all the capabilities we have, be focused on the middle market, and be focused on one of our seven industry verticals.
Now, we're certainly not alone, but you can imagine as you go through each of those screens, you go from a potential of 4,600 possible competitors to literally a handful. Now, there's a lot of people that have a lot of expertise. But I at one point in my career worked at a boutique. People that work at boutiques are incredibly clever. They typically have one or two products, but without a balance sheet, it's really hard to compete for this middle-market business. And so, we typically hire people from boutiques just because we think they can be really impactful once they plug in to our balance sheet. The people that have our capabilities generally are a significantly larger than we are and are focused on larger companies.
One of the nice things is, as you, as you go down the pyramid, it gets a lot wider and there's a lot more businesses. Now, on the flip side, middle-market companies don't transact as often as some people that are serial transactors. So we think we have a real, there's a real moat around this business. The biggest moat might not be obvious until I start talking about it, but the biggest moat is you have to be committed to go to the market based on industry verticals. So there's a lot of people that have purchased, for example, an M&A boutique that is a really good business. But to have an integrated corporate and investment bank, you have to, you have to move away from the standard generalist/geographic approach to being committed to the industry verticals.
I just think that makes you a lot more impactful as a banker. So those are some of the, the things that I think give us a unique competitive advantage.
Well, and you talked about hiring bankers. Is it strengthening a particular industry vertical? Is it adding an eighth?
Yeah.
Where's the opportunity to hire right now?
So we're kind of across our platform, we're hiring, but we're particularly hiring right now in technology and healthcare, and we're also looking at a couple new verticals that are really kind of sub-verticals, where it's sort of in contiguous areas to where we're currently operating. There's a lot of talented people out there and, you know, we're out there in the marketplace.
And then maybe coming back to the near term, any commentary on what you're seeing in terms of market activity?
Sure.
You know, are we seeing a pickup more broadly, or is it still, you know, just hitting the bid on tighter credit spreads?
So it's definitely in the mode of recovering. Just to give everyone an order of magnitude, the last two, I've been around this business for a long time, the last two years were singularly the worst years I've seen in terms of transaction activity. In the first quarter, you probably saw the numbers were clearly better. Right now, we enjoy the biggest backlog we've ever had in our M&A business. M&A business is really important to us 'cause in a middle-market company, for example, if you have the strategic relationship with the decision maker, in addition to that work, you're able to pull through a lot of other things like hedging, financing, payments, et cetera. So having record M&A backlog is important. We're not seeing kind of a steady pull-through yet of the backlog.
It's kind of starting, and I would describe it as a little bit herky-jerky. Unlike 2021, where everything, it was kind of a straight pull, everything was done and was done immediately, this is kind of back to sort of regular way M&A, where there's just a lot of puts and takes. One of the things that needs to happen. There's a couple things that need to happen, I believe. The first thing that needs to happen is everyone's in price discovery, and I think as that comes together, I think you'll see a lot more transactions completed. And I think we're pretty far along on that process, actually, I think people. The biggest challenge right now is our rates. And the reason rates are such a challenge is you can get a lot of things done with a 4.5 10-year.
That's not a problem at all. What is a problem is if you have a 4.5% 10-year, and people think for a variety of reasons, that it's gonna be a 4% 10-year, and then they sort of sit on the sideline because they think, "If I just wait a little bit, the cost of capital will be significantly cheaper," or if it's at 4 or 5 and they... You know, so that volatility, I think, is a challenge. More broadly, just on the loan demand side, similarly, I think there's a fair amount of uncertainty out in the marketplace. We don't see people yet investing in property, plant, and equipment.
You know, there's a lead time of about 18 months, and I think there's enough questions out there about sort of the macro economy that people aren't making those kind of investments yet. I do see, and I just sat down with our team as recently as yesterday morning, we're starting to see some of the loan pipeline building, which I think is another sign of a bit of encouragement.
Maybe we could round out that with the near-term discussion around deposit trends.
Sure.
What are you seeing, mix shift, betas? Are we in kind of the eighth or ninth inning, or any concerns around higher for longer?
... So my personal assumption is that we will be higher for longer, and I've had that view for some time, as you know. I think under a higher for longer scenario, I personally think deposit betas have principally played out. I would say, we're in the seventh inning stretch, to go to answer your question directly. I think, if you look at non-interest-bearing, we peaked at 33%. Right now, we're around 20, and I don't see that moving a lot. One of the things that I always look at in terms of the trajectory of deposit betas is, what is the delta between the back book and the promotional rates? Those are pretty close.
I mean, those used to be really wide, and those have kind of closed, which by definition means there's not that much room left. Our base case is that our cumulative deposit beta right now is at 50.5%, and our base case is, with rates staying flat, that it drifts up a bit to maybe mid-50s. But I think we're pretty far along. Now, if we get 50 basis points of rate increases, which is not my base case, by the way, I think, you know, all bets are off, and the game kind of starts over again. I don't envision that to be the case. For us, our best case is flat for the balance of 2024 in terms of NII.
The reason for that is you don't get the deposit beta to sort of drift. You know, if you went up or down 25 basis points, I don't think you're getting a lot of deposit beta drift either way. Conversely, if you get a 25 or 50 basis point cut, that obviously is immediate. I mean, 62% of our loans float, so that's a day kind of event.
And maybe kind of broadening out on net interest margin more broadly. You know, when I think about where you are, around 2%, your 20-year average is just about 3%, and that 100 basis point gap, among all banks, above $25 billion of assets, there are only 4 have a bigger gap than KeyCorp. So you're a pretty unique company in terms of, quote, unquote, “under-earning on net interest margins today versus normalized.” Maybe help us understand, where do you pencil out, a normalized margin for Key over time, and what are the building blocks to get there over the next,
Sure
... year or two, three years?
So first of all, you were polite to characterize it as unique. You know, we were not well-positioned for what was an unprecedented hiking cycle. And, as a result of that, we've made a series of changes, not the least of which is right now, and I'll come back to this, basically neutral right now. I'll come back to our position in a second. But I'm a big believer in people, and we made a series of changes in our finance and treasury area. You know, Clark Khayat is our CFO now. Tim Schmidt is our treasurer, who we picked up from Discover, and he put in new teams, we put in new processes, new procedures, in terms of when we go into a position, when we go out of a position, obviously being liability sensitive.
We were synthetically liability sensitive because of our, our balance sheet, because of our floating rate loans, is naturally asset sensitive, by the way. So, that's kind of a little, a little bit of the history. And so as we step back from that, so what is the opportunity from here, and what's the trajectory? We now have the benefit, and it has been a headwind, we now have the benefit of a lot of these positions starting off, and our pickup in both NIM and NII is really dependent, not on loan growth, not on absolute rates, not on the shape of the curve. I mean, obviously, all those things would have an impact, but it's really straight up duration.
And in this quarter, between our bond portfolio, between our short-term treasury, between our short-term swaps, we will reprice $3.5 billion worth of securities at an increase of 300-400 basis points. So that's in this quarter, the second quarter. Similarly, in the balance of the year, we will in the same three categories, we will reprice $11 billion. And so as you can see on our size of balance sheet, that is significant, and that's where you'll see the pickup, both in NIM and NII, as we progress through the year.
And when you think about, I think cumulatively, the size of it, it's $1 billion of net interest income opportunity from this kind of short, you know, shorter-dated Treasuries.
Yeah
... and swaps rolling off. This idea that it's independent of loans, deposits, rates, is it simply because as they mature, if, you know, you can put it into loan growth, or you can put it into securities, or you can pay down borrowings, is it just that, that optionality that makes it independent of the environment?
It is that optionality, and it's the fact that it's so short-durated that it rolls off relatively quickly. And it doesn't hurt either that we're, you know, in an environment with an inverted yield curve, that there's a whole bunch of opportunities where we can just reinvest it.
That's happening.
Well, I mean, the opportunity for us is that it's a 300-400 basis point delta between what's coming off and what we're going to be able to reinvest it.
Okay, you can-
Yeah.
Invest into your price.
That's right.
Something you want to know, reach.
Right. It's not like, it's not like we have to reach from a credit perspective. It's not like we have to reach from a duration perspective. If you think about all the rules, having a pretty short-durated loan portfolio is where many of us are going to end up.
Well, maybe on that, and if I hopefully quoting it right, but I think on the earnings call, you posited that mid-seventies could be the new normal for loan deposits for large regionals. I definitely get the direction of travel. I was a little surprised by the specific level.
Yeah.
You know, maybe just walk us through the puts and takes there.
Yeah. Well, I think let's kind of start at the macro level. I think there is a, an absolute realization that, one, the gating item for all banks is the quality, the duration, the granularity of the deposit base. There's also a realization among, I think, all banks that, on a relative basis, the value of deposits are significantly greater than the value of loans. So as people think about, and it goes back to me talking about an asset-light business, it goes back to me talking about our ability to underwrite and distribute securities. I just don't think going forward, sort of the spread lending business is gonna be anywhere, even if it's done well, it's gonna be anywhere near what it used to be.
And so I think as you think about the wave of rulemaking, whether it's the Basel III endgame, whether it's the long-term debt, whether it's LCR, and I just feel like, you know, we keep telling people as recently as three years ago, that our targeted loan-to-deposit was 90%-95%. I just don't think you're gonna see those kind of ratios at all. We were at 77% at the end of last quarter. So there wasn't a ton of precision in my 75, other than we've run a bunch of analysis, and I really do think that you're gonna see loan-to-deposit ratios which is gonna put incredible pressure on people to have lots of their balance sheets, so you can give investors the returns that they're looking for.
In terms of how Key fits in that, not to lead the witness, but I think each quarter you kind of give a number around the loans as a percentage of total capital you've raised for clients-
Yep.
-tends to be 20-ish%?
Yep.
So you kind of have that multiplier, even with a 70% loan-to-deposit ratio. For every loan you're making, you can raise 5 times as much money for clients.
Indeed.
Okay.
And especially in a market like this, where, frankly, everything is flashing green, and so we can serve our clients by placing paper in a variety of markets that, frankly, is in our clients' best interest. And so, I think that's a real competitive advantage that we have. And just to put it, the markets were so wide open in the first quarter that we only actually kept 12% of the capital we raised on our balance sheet. And where it can get really interesting is if some of these markets go into this location.
If certain markets were to really back up, that's when, for a brief moment in time, because there's excess capacity in the bank lending market, for a brief moment in time, you'd be able to structure loans that you want to put on your balance sheet. And obviously, we clearly have the dry powder to do that.
Maybe a similar discussion on capital. You know, hopefully, the peak AOCI fireworks are behind us. Where do you see capital ratios going over the medium term? Are you focused on the stated ratio or the AOCI adjusted ratio? And as you kind of flip from capital build mode to, you know, capital enough excess mode, what are the first things on the priority list to deploy capital?
Yeah. So, you know, I'm not sure we saw many, quote, "fireworks" as we were, you know, going around building CET1. But I think as we think about kind of capital, I focus first and foremost on CET1, and the reason I do is, while clearly there is gonna be, you know, marked AOCI, I think will be part of the Basel III endgame. I think, by the time you go through the process of finalizing those rules and you go through the phase in process, I think a lot of the delta between fully marked CET1 and-
Bonds.
Yeah, I mean, the bonds-- I mean, it all goes to zero, right? And it's just a matter of, it's a matter of when. As I said, we-- in CET1, we're at 10.3%. This is just a guess, but my guess is on a unmarked basis, CET1 is probably gonna have to drift up to around 11%. I just think by the time you look at all this rulemaking, I think it's just realistic to assume. Now, for some time, we had given guidance that our target was 9%-9.5%. And when Basel-- the first rulemaking came out on Basel III, we made the decision we're not gonna change any of our long-term targets, the rules finalized. I don't know, sitting here today, when that will be finalized.
But I think, as it's finalized, I'm confident that we'll be able to leg into it. As you think about just the build that happened, both on a marked CET1 and on an absolute CET1, as you think about the pull to par and, you know, that alone is 15 basis points per quarter of build on the marked CET1. And of course, the whole time you're starting to make more and more money. So, I think that the two converge. What's interesting is we have a fair amount, 80% of our bonds are assets held for sale, only 20% are held to maturity. So it'll be interesting to see how all that plays out.
Maybe sticking with capital, you know, you've been a very disciplined acquirer for some time, a lot of tuck-in deals, adding capabilities. As you look forward, how do you see M&A as part of the story for Key?
I think M&A will continue to be part of the story for Key, but it will be around these niche entrepreneurial businesses. One of the things I'm immensely proud of is our ability to buy these entrepreneurial businesses and with our targeted scale, plug them into our platform. And whether it's hiring groups of people, whether it's buying boutiques, whether it's buying digital businesses, I think that's where you're gonna see us continue to focus in things that fit in with our targeted scale.
What we found is that, as we buy these entrepreneurial businesses, they are additive to our business, which, I'm really proud of that because frankly, a lot of large companies, they buy entrepreneurial businesses, and they proceed to basically through, you know, having a large company kind of mindset, they tend to absolutely destroy that which they respected and just paid a premium for. I think we've been able to keep people on board, and we've been able to integrate successfully. Having said all of that, I do think long term, and this is not, this is not just with my KeyCorp lens on, I do think long term there will be consolidation in banking. 4,600 banks is too many banks. I had the privilege of leading our First Niagara acquisition, which is the biggest one we've done.
We did it back in 2016, and in that particular instance, we were able to take out 42% of the costs and keep the, the people that we wanted to keep and keep the clients. That's a pretty good business model, right? And so, that's not something that... It's not that we would never consider such a thing, but it would be a really high bar. One, it would have to complement our targeted scale, and we think we have a little bit of a unique business model. Secondly, it would have to hit all the financial metrics. And third, and probably most importantly, culturally, it would have to be a fit.
That's where most acquisitions, in my experience, both as a banker and as a leader, most of the ones that don't work, it isn't that they don't work conceptually, it's that they don't work from a cultural perspective. So that'll be really important.
Maybe two follow-ups, and, and to be clear, especially with the transcript and everything, we're talking from an industry standpoint.
Right.
Key standpoint, but on this idea that 4,600 banks is too many, I think you'd be hard-pressed to find people say, "No, 4,600, if we drew the industry from scratch, that's the number we would have come up with.
Yeah.
What do you think the hangup is? Is it, is it the AOCI marks and the accounting? Is it certainty and time to deal close? Is it achievability of cost saves? Like, what—when you look at your, these 4,600 banks as a pretty unique observer of the industry, what do you think the hangup for M&A is?
Well, I think right now there's a unique confluence of events that work against consolidation in the financial services. One, you know, the DOJ, the OCC and the FDIC have been very explicit in the recent past about their perspective on consolidation. So I think that's kind of so that, that's out there. On top of that, the deals that were done from the pre-pandemic, they took a long time. And when you're buying, you're paying a premium for a business, what you're really paying a premium for are the teammates, right? And, you know, hard to look your board in the eye and say: I'm certain if we announce this today, that 18 months from now, all the people are gonna be here. So that's the regulatory piece.
The next piece, and you mentioned it, is everyone has unrealized losses, and unrealized losses become realized losses in the event of an acquisition. And so that creates a bigger capital hole, and it creates a bigger capital hole at a point in time when people don't know exactly how much capital is going to be required. So that, that is a challenge. Then the next challenge is, as though that isn't enough, the next challenge is just from a macro perspective. You know, I have one view of where the economy is going, you may have another view. I've spent a lot of time having our team dig through, in great detail, our entire loan portfolio.
I feel very confident that I know what is in our loan portfolio, but obviously, if you're making an acquisition, it's tough to know exactly, in this kind of important time, what's in other people's portfolios. So you put all that together, Brian, and I really think you're not gonna see a lot of... You're not gonna see very much. I think last year there were, like, three deals of size that were done in the industry. I think similarly, you're not gonna see a lot of activity in 2024, but I do think once the consolidation starts, I think it will feed on itself a bit. And I think there'll be very little consolidation until there's probably an ever-increasing amount.
Maybe to piggyback on that last point on credit, you know, your credit is normalized a little bit, but still very muted, under 30 bits of charge-offs. Most other credit metrics pretty well contained. What do you think is driving the outperformance for Key this cycle? And when you look across the book, any areas that you're watching most closely or would flag as hotspots?
So there's a couple things that, that really are driving our outperformance this cycle. And, you know, with loans, we have $111 billion of loans. I mean, there's nothing you can do once the cycle starts to change. You own what you own. And so what really has done it for us is all the de-risking we did coming out of the great financial crisis, particularly around our real estate business. We had, in fact, didn't like the outcome, and we changed that business completely: focused it, de-risked it, de-risked it, got out of certain business lines that we were in. So those are decisions that we made, some time ago. And so I think that those are really important.
The other thing that is important from our perspective is I think we're pretty intellectually honest that loans in and of themselves can't really return your cost of capital. And if you take that posture, then you don't sort of convince yourself that lending money by itself and really stretching is a great exercise, right? You lend money so that you can serve your clients, so that you can do other things for them. And so that those are the kind of the decisions that I think we made some time ago that have positioned us really well. So now we find ourselves, we, you know, we've gotten out of businesses like indirect auto, which 2021, $3.3 billion.
Last year, we exited vendor finance, which is not a relationship business. And then, in terms of our actual lending, 55% of our C&I book is either investment grade or the equivalent. And then, you know, we've really focused a lot on, as I said, de-risking our real estate book, which makes up about 13% of our loans. 60% of those are targeted multifamily, certain developers in certain markets at certain times. And then of that, 40% of those are affordable, which I don't think there's been, you know, any defaults of substance in the last 25 years in affordable. So that's kind of how we positioned our book, and I think that it's serving us very, very well. The second part of your question was, what are the areas that we're concerned about?
I always focus on where you have a slowing economy, you have declining EBITDA, and you have rising interest rates. The two combined, the two together, when you have declining EBITDA and rising interest rates, that is where you need to focus. So for us, our leverage loan book is $1.8 billion, which is less than 2% of our loans. We feel good about that. And the other area where there's leverage is real estate. And the reason people talk so much about real estate is because, by definition, real estate is leverage. And so, I commented a little bit about how I feel about our real estate portfolio. I feel good about it.
Okay. Maybe a little bit more in the weeds, but piggybacking on that, you did have a larger than average jump in criticized assets in the most recent quarter. To be clear, you know, your C&I went from 5 to 7. 7 still is pretty average among peers. Your CRE went from 10%-13% criticized. Again, still pretty average among peers. So some of it was just coming from a lower base. But any commentary on, you know, why did we see that jump specifically in the first quarter, and what gives you comfort that it's not a warning sign?
Yeah, that's a great question. So under my premise that things were gonna be higher for longer, and given the two things that can really do in your loan book, is this notion of rising interest rates and declining cash flow. I got the group together, and I asked them to go through, and they went through 90%, 90% of our non-investment-grade loans. And I said: I wanna know anything that isn't currently cash flowing. And I'm a big believer that the only way you can really get your loan paid back is through cash flow. That's what drove this migration to criticized. Now, in many instances, we have secondary and in some instances, tertiary, forms of repayment of these loans, but we disallowed any of those for the analysis that we did in the first quarter.
I'll give you a for instance. There's a certain client of ours that's an important client, happens to be a billionaire, has a bunch of separate real estate projects. He personally guarantees all, everything he does with us. This loan is personally guaranteed by him. I'm not worried at all about his ability to repay. The fact is, the project is not cash flowing, it goes to criticized. So I just think you need to take a really critical eye, because what you want, as a leader of a financial institution, is you want people to not get complacent. Complacency is something that in business, I think you have to fight all the time. And I think forcing people to do such an analysis is really important.
Having said that, as we look at these alternative source of repayments, I'm not worried about the loss content.
So we've got about eight minutes between what I've got and a few that have been submitted, maybe two specific questions and then circle back to one bigger picture one. So, on expenses, I guess consolidating a couple things people have asked. You know, when you talk about taking out $400 million against $4.4 billion, I'm sure that's an ongoing process, but what are the remaining places you're doing that kind of thing, and what's the opportunity? And then when you talk about reinvesting those dollars, what does that process look like? Is there a scarcity of places to reinvest? I'm not saying that right. Is there a... Are you able to reinvest everywhere you want to right now?
Well, I think in any business, you never have the freedom to invest everywhere you'd want to the degree that you'd like to.
I've only worked in equity research in my career, so there's no investment ever. I don't know what the process for investing dollars looks like.
It's usually, it's typically not unlimited in business. But I do feel that not only were we able to continue to, as I mentioned, invest all through last year, Brian, but we're also continuing to invest in this year. And that's really why we made the reductions that we made. And so, in terms of, you know, how we allocate those investments, what we've said publicly and the guidance we've given, is that we'll be relatively stable, which we define as ±0%-2%. And I don't think that will be a challenge for us this year at all, given all the expenses that we took out last year.
As we go to next year, I think you'll see probably our expenses continue to nudge up a bit, and they'll do so just for no other reason than inflation. But what I don't want you or anyone else to think is that we've starved the business to kind of hold expenses flat. We actually created the headroom through the actions that we took last year. You asked if they're ongoing. Really, I think we did it in two waves. I think we're where we need to be, and that's not something that we're really, as a team, focused a lot on right now, is continual expenses. Now, I mean, so that continuous improvement is a requirement of any business. You know, what can you do to get more efficient?
That's just something we expect our leaders to be doing all the time, as opposed to specific, and targeted cuts.
Then, CRE servicing and special servicing, really nice business for you-
Yeah.
Really unique business for you. And to be clear, if anything, it kind of benefits from the stress in the CRE market. So less from a Key standpoint, but more from the view you get of a market. As people worry about the maturity wall in CRE, the ability of loans to roll, the ability to access new financing, what kind of learnings and observations do you have from that CRE servicing business right now?
Sure. So just to kind of frame it for people, we have broadly, we are servicing about $660 billion worth of loans. Of that, call it 220 of those we're the named special servicer. And then what happens is, you're basically, you get sort of a ticking fee, and then when you go they become active, special servicing is basically you're orchestrating a workout or restructuring of those, of those. We're still seeing active special servicing increasing, so as you can imagine, more coming in than going out. The areas where we're seeing flow in, not surprising to anyone in this group, office.
We are seeing a step-up in servicing around multifamily and specifically around the Southeast, where there seems to have been, from a supply-demand perspective, more supply than other places in the country. We did see, interestingly enough, another little bit of a step up, which seems like it's a little late for the cycle and kind of mall-based retail. So that's kind of an insight. Now, these are mostly CMBS loans. Some of them are single asset. Many of them, the ones that, by the way, are in as bank lenders, or as bank investors, you may find it interesting, most of these are not funded, almost all of them are not funded by banks. They're funded by funds.
They typically funded to the tune of 90%-95% loan-to-value. And so they were, to some degree, priced a bit for perfection in that regard. So, you know, more to come on that, but it does give us great insight, Brian, into kind of what's going on out there.
In a wrap-up, you know, this conference is meant to be a little bit more generalist-focused. And, you know, the common complaint I hear about generalists, both now and kind of through the cycle is, you know, regional banks all look the same. Their macro plays based on rates, and you buy based on credit. I'm sure you disagree somewhat with that assessment. I'd love to hear your view, you know, that skeptical generalist investor that says: "Why would I differentiate them?
Yeah.
What makes Key different? What makes the investment opportunity unique?
Well, first of all, thank you for the question because I think it is the question when you have 4,600 market participants, and frankly, many of the market participants are on the s-, it's loans, deposits, and payments, and many of them are on the same platform as whether, you know, it's FIS or Fiserv, et cetera. Where we differentiate ourselves is this whole notion of targeted scale. We are very relevant to the people that we are focused on being relevant to. We're not trying to be a really small version of a really huge bank. What we're trying to do is be relevant in these seven industry verticals, for example. So this notion of targeted scale. Another advantage that I think we have vis-a-vis others is our ability to distribute paper and consequently, our loan book.
There's nothing that destroys value more at banks than having loans go bad, so that's unique. Our focus on primacy on the deposit side has been really helpful, and as I mentioned early in our discussion, I think that's a real gaining item. Our ability to have what I call an asset-light business, as you think about the future of banking, I think is also very, very important, as we think about what differentiates Key. But from the very beginning, it's this whole notion of targeted scale, knowing who you wanna do business with, where you win, how you win, why you win. And I think it served us really well, and I think it will continue to serve us well.
That's great. Well, thank you for taking the time today, and for attending the conference.