Clark H. I. Khayat
Chief Financial Officer at KeyCorp
Thanks, Chris, and thank you, everyone, for joining us today. I'm now on Slide 4. For the first quarter, we reported earnings per share of $0.20 including $0.02 impact from the FDIC special assessment. This quarter's $29 million pre-tax assessment represented a 15% add-on to the charge we had taken in the fourth quarter relating to the bank failures last spring. As expected, our taxable equivalent net interest income declined 4.5% sequentially within the range of down 3% to 5% that we provided in January. Non-interest income increased 6% compared to both the prior year and quarter, primarily driven by strong investment banking performance.
Reported expenses were down and excluding selected items, expenses were up slightly linked quarter and essentially flat year-over-year at approximately $1.1 billion. Provision for credit losses of $101 million was roughly flat to the fourth quarter and included $81 million of net loan charge-offs and $20 million of credit reserve build. Our common equity Tier-1 ratio increased to 10.3%, while tangible book value declined 1% sequentially reflecting the impact of higher rates on AOCI this quarter.
Moving to the balance sheet on Slide 5. Average loans declined 2.6% sequentially to $111 billion and loans ended the quarter at about $110 billion, down approximately $2.7 billion from year-end. The decline reflects the expected follow on impacts of intentional actions we took in 2023 to reduce low return lending only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature. Lower balances are also a function of lower client demand driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off-balance sheet structures. We also remain disciplined and intentional about what we're putting on our balance sheet. We're very active with clients and prospects and still expect new loan origination to come back throughout 2024.
On Slide 6, average deposits declined about 1.5% sequentially in line with recent historical seasonal patterns and within that decline, we reduced brokered deposits by roughly $1 billion. Client deposits were up 2% year-over-year. Both total and interest bearing cost of deposits rose by 14 basis points during the quarter, primarily reflecting repricing of existing CDs and money market deposits as they come up for maturity and some continued migration out of non-interest bearing. When adjusted for the non-interest bearing deposits in our hybrid commercial accounts, our percentage of non-interest bearing to total deposits dropped from 25% to 24% linked quarter.
Our cumulative interest bearing deposit beta was just below 52% since the Fed began raising interest rates, up about 3 percentage points from last quarter. On the bottom left of the page, we split out for you our deposit mix by product type and for interest bearing by business, including how much of our commercial book is indexed or managed to benchmark rates. We hope you'll find this information useful as you think through potential beta sensitivities.
Moving to net interest income and margin on Slide 7. Taxable equivalent net interest income was $886 million, down 4.5% from the prior quarter. Approximately $40 million of benefit from fixed rate asset repricing mostly from swaps and short dated U.S. treasuries was more than offset by lower loan volumes, higher deposit costs and deposit mix migration. Day count impact was about $7 million. Net interest margin declined by 5 basis points to 2.02% driven by higher deposit costs, lower-than-expected loans and changes in funding mix. Both our net interest income and margin continue to reflect headwinds from prior balance sheet positioning. Our short dated swaps in U.S. treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter. That said, we affirm our prior commitments that our NIM bottomed in 3Q '23 and that this first quarter of 2024 reflects the low point for net interest income.
Turning to Slide 8. Non-interest income was $647 million, up 6% quarter-over-quarter and year-over-year. Compared to the prior year, the increase was primarily driven by investment banking fees, which grew 17% to $170 million, a record first quarter. Strong performance was broad based across products and industries. Commercial mortgage servicing fees rose 22% year-over-year reflecting growth in servicing, special servicing and active special servicing balances. At March 31, we serviced about $660 billion of assets on behalf of third-party clients.
Finally, trust and investment services grew by 6% year-over-year as assets under management grew 7% to $57 billion. We're seeing strong momentum in Key Private Clients as well as tailwinds from higher market levels. Conversely, on a year-over-year basis, corporate services income declined by 9% given elevated LIBOR to SOFR related transaction activity in the first quarter a year ago and the 5% decline in cards and payments fees reflects slowing spend volumes and lower interchange rates in credit card and merchant.
On Slide 9, total non-interest expense for the quarter was $1.1 billion and included $29 million related to the FDIC special assessment increase. Excluding selected items in all periods, expenses were flat compared to a year ago and up 1.5% from fourth quarter. Personnel expenses were flat year-over-year as a 7% decline in headcount offset impact from inflation in merit and higher incentive compensation associated with our strong fee revenue results and the impact of appreciation of our stock price associated with equity awards. Linked quarter higher personnel costs also reflect seasonal benefits costs in addition to the factors just listed.
Moving to Slide 10. Credit quality remains solid. Net charge-offs were $81 million or 29 basis points of average loans below our target of 30 to 40 basis points for the full year 2024. Delinquencies increased just 2 basis points this quarter and nonperforming loans increased 15%, but remain low at 60 basis points of period-end loans. As Chris mentioned, criticized loans increased and represented 6% of loans at quarter-end. Roughly two-thirds of the increase came from our C&I portfolio with the rest primarily in commercial real estate. Our internal ratings are driven by primary repayment sources as. As loans were moved to criticized, we reaffirmed our collateral coverage, reappraised properties, further engaged with borrowers to understand operating pressures, if any, and analyze secondary payment sources on these loans. Based on that thorough review, we feel good about the loss content on these loans and as Chris shared remain comfortable with our prior loss guidance for 2024 of 30 to 40 basis points.
On Slide 11, given this was a fairly unique quarter in terms of the ins and outs, we provided you with a walk of how we derived a roughly $20 million build in our credit allowance this quarter. We added roughly $117 million to account for the quarter's credit migration, partially offset by a $98 million release to account for an improved macro outlook. Even with this quarter's proactive deep dive, our net upgrade to downgrades ratio across the entire commercial book improved this quarter as the velocity of downgrades has slowed. As a result, our allowance for credit losses continued to build and represented 1.66% period-end loans at the end of March. When you analyze our levels of reserves by loan type, you'll find that we compare similarly or better versus our peers and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non-owner occupied CRE loans.
Turning to Slide 12. We continue to build our capital position with CET1 of 24 basis points to 10.3% or 330 basis points above our required minimum including our stress capital buffer. Our marked CET1 ratio which includes unrealized AFS and pension losses increased 13 basis points to 7.1% and our tangible common equity to tangible assets ratio held steady, down just 2 basis points at 5.04%. This outcome despite the roughly 40 basis point increase in five-year rates during the quarter reflects work we've done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration and putting on roughly $7 billion of paid fixed swaps while terminating about $7.5 billion of fixed cash flow swaps last fall.
We've reduced our DV01 by 27% over the past 12 months. Our AOCI was negative $5.3 billion at quarter-end, including $4.3 billion related to AFS. As we shared with you in the past, the right-side of the slide shows Key's go-forward expected reduction in our AOCI mark based on two scenarios, the forward curve as of March 31, which assumes six rate cuts through 2025 and another scenario where rates hold at March 31 levels through the end of next year. In the forward curve scenario, the AOC market is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1.7 billion of capital build through that timeframe. In the flat scenario, we still accrete $1.3 billion of capital driven by maturities, cash flows and time.
Slide 13 provides our outlook for 2024 relative to 2023. In short, our guidance is unchanged from what we shared in January. If there's one commitment we think will be a little more challenging to hit will be ending loan balances given the impact of rate increases on client demand and our own selectivity of loans. But as we'll show you in a minute, we don't believe this will impact our ability to deliver on our net interest income commitments both for the full year and the fourth quarter exit rate.
On Slide 14, we updated the net interest income opportunity from swaps and short dated treasuries maturing. As forward rates have moved higher this quarter, this cumulative opportunity has increased to $975 million from the roughly $900 million we estimated last quarter. Of course, some of this incremental benefit will be offset by higher funding costs and a higher for longer environment. As of the end of the first quarter, we've realized a little over 30% of this opportunity to date, which is shown on the left-side of the slide in the gray bars. This leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months.
Moving to Slide 15. We wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year. In the top walk, we've laid out the drivers of growth assuming rates generally follow the forward curve and the Fed cuts twice later this year once in September and again in December. In this scenario, we see about $120 million benefit from the swaps in U.S. treasuries in line with what we showed you on the previous slide.
We also have another roughly $1.1 billion of projected fixed rate cash flows rolling every quarter currently yielding in the low 2% range that will get reinvested at higher rates. This offsets the immediate impact that rate cuts would have on our variable rate loans and other short-term floating rate investments. We see some modest benefit in year from lower funding costs particularly from our index commercial deposits and wholesale funding. We'd also expect the net interest margin to improve meaningfully to the 2.4% to 2.5% range in the fourth quarter with about 75% of the improvement driven by the treasuries and swaps and the other 25% through lower funding costs.
In the bottom walk, we hold rates flat to where they are at March 31. In this scenario, we get more earning asset repricing benefit because variable rate loans and other short-term instruments do not reprice lower. That is partially offset by deposit betas continuing to creep a little higher. As we've said, we expect to support clients and prospects to drive high-quality loan growth throughout the year. Should loan demand remain softer-than-expected, we would still expect to meet our Q4 net interest income guidance in either scenario I just described.
With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator?
