Clark H. I. Khayat
Chief Financial Officer at KeyCorp
Thanks, Chris. I would echo your comments on Vernon and a warm welcome to Brian as well. I am now on Slide 5. For the fourth quarter, net income from continuing operations was $0.03 per common share, down $0.26 from the prior quarter and down $0.35 from last year. Our results this quarter were impacted by three items totaling $0.22 per share: first, $190 million from an FDIC special assessment; second, $67 million from an efficiency related expense; and third, $80 million from a pension settlement charge for a total of $275 million pretax or $209 million after tax. The breakdown of these items can be found in the last page of our slide presentation.
Our fourth quarter results were generally consistent with the guidance we provided last month. As expected, we saw stability in the net interest income line this quarter and our net interest margin increased by 6 basis points relative to the third quarter as we began to see some early benefits from our swap and treasury portfolios. Fees declined 5% sequentially on the better end of the range we provided last month. Expense growth was primarily attributable to the three items I mentioned. Without these items, expenses would have been relatively stable compared to the third quarter.
Net charge-offs as a percent of loans remained low at 26 basis points and we added $26 million to our allowance for credit losses to reflect some modest migration of the portfolio primarily in real estate and the still uncertain macro outlook. Additionally, as Chris highlighted in his remarks, our results reflect our focus on privacy and building relationships, our improved capital position and our strong risk discipline.
Turning to Slide six. Average loans for the quarter were $114 billion, down 3% from both the year ago period and prior quarter. The decline in average loans was primarily driven by a reduction in C&I balances, which were down 4% from the prior quarter. The reduction reflects our plan balance sheet optimization efforts which prioritize full relationships and de-emphasize credit only and non-relationship businesses. We reduced risk weighted assets by $4 billion in the fourth quarter and as Chris mentioned by approximately $14 billion in 2023. The majority of the decline in risk weighted assets this quarter was from lower loan balances with some reduction in unused commitments also contributing. We would expect modest RWA reductions in the first half of 2024.
Turning to Slide 7. Key's long standing commitment to privacy continues to deliver a stable diverse base of core deposits for funding. Despite a year of market volatility, we grew period end deposits year-over-year by $3 billion and average deposits were relatively stable compared to the year ago period and prior quarter. On a sequential basis, commercial deposits grew 4%, which we attribute primarily to seasonal build and consumer deposits grew 1%. The increase in commercial and consumer deposits was mostly offset by a $2 billion decline in brokered deposits on average as we continue to improve the quality of our funding mix by growing core relationship balances and reducing reliance on wholesale funding and broker deposits.
Since the end of the first quarter, we generated almost $13 billion of liquidity by reducing loans and growing relationship deposits and reduced wholesale borrowings by $12 billion. Our total cost of deposits was 206 basis points in the fourth quarter and our cumulative deposit beta which includes all interest bearing deposits was 49% since the Fed began raising interest rates in line with our prior guidance of approaching 50% by year end 2023. The higher rate environment continued to impact our deposit mix as our noninterest bearing deposits declined by 1% sequentially to 22%. Pressure on deposit pricing appears to be abating across the franchise, so we expect some mix shift to continue as long as rates remain high.
Turning to Slide 8. Taxable equivalent net interest income was $928 million for the fourth quarter, down 24% from the year ago period and up slightly from the prior quarter. Our net interest margin was 2.07% for the fourth quarter compared to 2.73% for the same period last year and 2.01% for the fourth quarter -- the prior quarter. Year-over-year net interest income and the net interest margin reflect the impact of higher interest rates as increased cost of interest bearing deposits and borrowings outpace the benefit from higher earning asset yields.
Additionally, the balance sheet experienced a shift in funding mix from non-interest bearing deposits to higher cost interest bearing deposits. Relative to the third quarter, the increase in net interest income and net interest margin were driven by actions taken to manage Key's interest rate risk, elevated levels of liquidity and an improved funding mix. The increase was partly offset by higher interest bearing deposit cost, which exceeded the benefit from higher putting asset yields. While the planned reduction in loan balances adversely impacted net interest income sequentially, it benefited Key's net interest margin.
Our net interest margin and net interest income continue to reflect a headwind from our short dated treasuries and swaps, which together reduced net interest income by $345 million this quarter or by $1.4 billion for the full year and lowered our net interest margin by 77 basis points this quarter. As previously discussed during our third quarter earnings call, in October, we terminated $7.5 billion of received fixed cash flow swaps, which were scheduled to mature throughout 2024. Last quarter we said that net interest margin would bottom and it did. Throughout 2024, we would expect continued benefit from the maturities of our short-term swaps and treasuries, especially as more mature in the back half of the year.
Moving to Slide 9. Non-interest income was $610 million for the fourth quarter of 2023, down $61 million from the year ago period and down $33 million from the third quarter. The decrease in non-interest income from a year ago reflects a $36 million decline in investment banking and debt placement fees driven by lower syndication fees and M&A advisory. Additionally, corporate services income declined $22 million driven by lower customer derivatives trading revenue. The decrease in non-interest income for the third quarter reflects a $13 million decrease in other income, primarily driven by a gain on loan sale in the prior quarter.
I'm now on Slide 10. Total non-interest expense for the quarter was $1.4 billion, up $216 million from the year ago period and up $262 million from last quarter. As mentioned, fourth quarter results reflect $275 million of impact from FDIC assessment, efficiency related expenses and pension settlement charge. Efficiency related expenses included $39 million related to severance and $24 million of corporate real estate rationalization and other contract termination or renegotiation costs. Excluding these items, expenses were relatively stable in the quarter and down compared to the year ago period. We continue to proactively manage our expense base and simplify and streamline our business, so we can continue to reinvest in all our business.
Moving to Slide 11. Overall, credit quality and our related outlook remains solid. For the fourth quarter, net charge-offs were $76 million or 26 basis points of average loans. This compares to $71 million in the prior quarter. Criticized outstandings to period end loans increased 50 basis points this quarter driven by movements in real estate, healthcare and consumer goods. While nonperforming loans and criticized loans continue to move up off their historical lows, we believe Key is well-positioned in terms of potential loss content. Over half of our NPLs are still current. Our provision for credit losses was $102 million for the fourth quarter, including $26 million of reserve build and our allowance for credit losses to period end loans increased from 1.54% to 1.60%.
Turning to Slide 12. We significantly increased our capital position throughout 2023. We ended the fourth quarter with common equity Tier 1 ratio of 10%, up 20 basis points from the prior quarter and up 90 basis points from the year ago period. We remain focused on building capital in advance of newly proposed capital rules while continuing to support relationship client activity and the return of capital. As such, we expect to stay above our current targeted range of 9% to 9.5% and do not expect to be buying back our stock in the near-term. Our AOCI position improved by $1.4 billion this quarter.
The right-side of this slide shows Key's go-forward expected reduction in our AOCI mark based on two scenarios, the forward curve as December 31, which assumes six FOMC rate cuts in 2024 and another scenario where rates remain at their current levels. In the forward curve scenario, the AOCI mark is expected to decline by approximately 24% by the end of 2024 and 34% by the end of 2025, which would provide approximately $1.8 billion of capital build through that time frame. In the flat rate scenario, we still achieve 90% of that benefit between now and year end 2025. Said differently, we still accrete $1.6 billion of capital rates remain flat to current levels driven by maturities, cash flow and time.
Slide 13 provides our outlook for 2024 relative to 2023. Given uncertainty regarding eventual timing and extent of Fed interest rate cuts in 2024, our guidance reflects outputs from a few potential scenarios ranging from the December 31 forward curve, which assume six 25 basis point cuts over the course of 2024 starting with an initial cut in March to a scenario more closely aligned with the Fed's dot plots which currently assumes three rate cuts. We expect average loans to be down 5% to 7% mostly reflecting the actions we have already taken over the course of 2023. In other words, the vast majority of the decline in average loans is a function of our reductions in 2023 and are reflected in our year end balance.
We expect period end loans at the end of 2024 to be relatively stable compared to the end of 2023 with some decline in the first half of the year, offset by growth expected in the second half of 2024. We expect average deposits to be flat to down 2%. Net interest income is expected to be down 2% to 5% mostly reflecting the lower fourth quarter exit rate relative to the first half of 2023. This equates to net interest income in 2024 that is up low single-digits relative to our annualized fourth quarter exit rate. I'll provide more color on our net interest income outlook shortly. We expect noninterest income to be up 5% or better with upside of capital market activity normalizes and market levels and GDP trends remain constructive.
Non-interest expense should be relatively stable at about $4.4 billion as we realize the benefits from our 2023 efficiency actions. We will continue to tightly manage our cost base including executing on additional opportunities to simplify and streamline our organization. At the same time, we will continue to protect and invest in our franchise, including most importantly our people. As Chris mentioned, our guidance suggests moderate positive operating leverage in 2024 driven by meaningful expansion in the second half of the year outpacing tough comparisons in the first half. For the year, we expect credit quality to remain strong and net charge-offs to continue to modestly increase to the 30 to 40 basis point range, still well below our over the cycle range of 40 to 60 basis points. Our guidance for our GAAP tax rate is approximately 20%.
Turning to Slide 14. Given heightened investor focus on this topic, we wanted to provide a little more granularity than we have in the past about the pacing of our net interest income opportunity as we move through 2024. Hopefully by now you're familiar with our well-defined net interest income tailwind as the impact of our short-term swaps roll off and treasuries mature, especially in the back half of 2024. The ultimate opportunity remains largely unchanged at approximately $900 million. As a reminder, the benefit increases each quarter as more of the swaps roll off and treasuries mature culminating in the full amount in the first quarter of 2025. So this all builds quarter-by-quarter since the initial set of swaps came off the books in the first quarter of 2023.
As we turn the page on 2023, we are nearing the halfway point of this journey. Since we're now through three full quarters, we're sharing three part view. First, on the left in light gray are the three quarters of benefit we've already realized. In total for 2023 that was approximately $85 million of additional income. The next four bars show the progression through 2024. As you see, the value builds from each quarter's tranche and accrues in the following quarter. Each bar represents the value for the quarter. In other words, in 1Q '24, we expect to realize $78 million of additional net interest income versus 1Q '23 from these positions.
For 2024, we estimate the benefit to be approximately $500 million in total, which is the sum of the four quarterly bars. This would represent an increase of more than $400 million over the benefit received in 2023, which as previously mentioned was approximately $85 million. The final bar to the far right which has been the main focus of this discussion over the last year or so is the first quarter 2025 number. This shows the benefit currently estimated for the quarter at approximately $220 million for essentially the entire swap in short-term treasury portfolios rolling off. Again, this is incremental to 1Q '23 and represents an annualized value of approximately $900 million. We believe the reinvestment of these fixed rate assets and swaps represents an outsized opportunity for Key relative to our peers, but it's also important to remember that this is just one component that drives our net interest income outlook.
On Slide 15, we provide other key inputs and assumptions driving our NII outlook, deposit betas, balances and mix, loan growth as well as seasonal factors. Putting this all together, we expect our first quarter NII to be down 3% to 5% from the fourth quarter. From there, we expect to grow and start to accelerate in the second half of the year as the pace of swaps and U.S. Treasury maturities pick up meaningfully at nearly $5 billion in aggregate per quarter. From the fourth quarter of 2023 to the fourth quarter of 2024, we expect our quarterly net interest income to grow 10% plus and exit the year north of $1 billion. We would also expect the net interest margin to improve meaningfully to the 2.40% to 2.50% range by the end of 2024. This will put us on a strong trajectory as we enter 2025.
With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator?
