Clark Khayat
Chief Financial Officer at KeyCorp
Thanks, Chris, and thank you, everyone, for joining us today. Now on Slide 4. For the second quarter, as Chris mentioned, we reported earnings per share of $0.25, up $0.05 per share versus the first quarter or $0.03 per share adjusting for last quarter's FDIC special assessment. Sequentially, revenue was essentially flat, down 0.5% as a 1.5% increase in net interest income was offset by a 3% decline in non-interest income, while expenses declined more meaningfully by 6% or 4%, excluding FDIC assessment impacts.
Credit costs were stable and included roughly $10 million build to our allowance for credit losses this quarter. On a year-over-year basis, EPS declined driven by a tough net interest income comparison, but as we've shared previously, we expect NII will start to become a real tailwind next quarter in the back half of the year. Non-interest income grew 3%, while expenses were flat.
Moving to the balance sheet on Slide 5. Average loans declined about 2% sequentially to $109 billion and ended the quarter at about $107 billion. The decline reflects tepid client demand, a 1% decline in C&I utilization rates, our disciplined approach as to what we choose to put on our balance sheet and the intentional runoff of low-yielding consumer loans as they pay-down and mature. As Chris mentioned, we continue to have active dialog with clients and prospects and our loan pipelines are building nicely, which gives us optimism that balances will stabilize or begin to improve from June 30 levels.
On Slide 6, average deposits increased nearly 1% sequentially to $144 billion, reflecting growth across consumer and commercial deposits. Client deposits were up 5% year-over-year as broker deposits have come down by roughly $5.8 billion from year-ago loans. Both total and interest-bearing cost of deposits increased by 8 basis points during the quarter, a slower rate of increase compared to the first-quarter as short-term rates have remained high. Three basis points of the increase is due to the intentional addition of roughly $1.6 billion of time deposits, reflecting a more conservative approach as we prepare for anticipated changes in liquidity rules. Non-interest-bearing deposits stabilized at 20% of total deposits and when adjusted for noninterest-bearing deposits in our hybrid accounts, this percentage remained flat linked-quarter at 24%.
Our cumulative interest-bearing deposit beta was 53% since the Fed began raising interest rates. Our deposit rates remained stable across the franchise with ongoing testing by product and market. Given higher rates through the year, we have not seen as much opportunity to reduce deposit rates. However, we've continued to attract client deposits without having to leave the market on rates, nor have we been paying the cash premiums that many of our competitors are offering to attract new operating accounts.
Moving to net interest income and the margin on Slide 7. Tax-equivalent net interest income was $899 million, up $13 million from the prior quarter. The benefit from fixed-rate asset repricing, mostly from swaps and short-dated U.S. treasuries was partly offset by higher funding costs, lower loan balances and impact from roughly $1.25 billion of forward-starting swaps that became effective this quarter. You will recall that we put these swaps in place in 2023 at a then prevailing forward rate of 3.4% as we were managing the roll-offs of the 2024 swaps.
Net interest margin increased by two basis points to 2.04%. In addition to the NII drivers just mentioned, the previously mentioned liquidity build this quarter impacted NIM by about two basis points. Cash assets increased by roughly $3.5 billion sequentially. We continue to believe that our NIM bottomed in the third quarter of 2023 and that NII bottomed in the first quarter of 2024.
Turning to Slide 8, non-interest income was $627 million, up 3% year-over-year. Compared to the prior year, the increase was primarily driven by trust and investment services, commercial mortgage servicing fees and investment banking fees. This offset a 21% decline in corporate services income, which has reverted to a more normalized level as 2022 and the first-half of 2023 benefited from elevated LIBOR SOFR related transition activity.
Commercial mortgage servicing fees rose 22% year-over-year, reflecting growth in servicing and active special servicing balances. At June 30, we serviced about $680 billion of assets on behalf of third-party clients, including about $230 billion of special servicing, $7 billion of which was in active special servicing. Trust and investment service fees grew 10% year-over-year as assets under management grew 7% to $57.6 billion. We saw positive net-new flows in the quarter and as Chris mentioned, sales production set another record in the quarter.
Our investment banking fees were consistent with our prior guidance for the quarter. Across products, higher M&A and debt origination activity offset lower syndication and commercial mortgage activity. On Slide 9, second quarter non-interest expenses were $1.08 billion, flat year-over-year and down 4% sequentially, excluding FDIC special assessments. This quarter, we incurred an additional $5 million FDIC charge on top of last quarter's $29 million assessment.
On a year-over-year basis, personnel expenses were up due to Key higher stock price, offset by lower marketing and business services and professional fees. Sequentially, the decline was driven by lower incentive compensation and employee benefits from FICA seasonality in the first quarter.
Moving to Slide 10, credit quality remained solid. Net charge-offs were $91 million or 34 basis points of average loans and delinquencies ticked up only a few basis points. Non-performing loans increased 8% sequentially and remained low at 66 basis points of period-end loans at June 30, and as expected, the pace of increase in criticized loans slowed markedly to 6% in 2Q following our deep-dive in the first quarter. We expect that to continue to moderate and flatten out by the end of the year, assuming no material macro deterioration.
Turning to Slide 11, we continue to build our capital position with CET1 up 20 basis points in the second quarter to 10.5%. Our marked CET1 ratio, which includes unrealized AFS and pension losses, improved to 7.3% and our tangible common equity ratio increased to 5.2%. The increases reflect work we've done over the past year to build capital and reduce our exposure to higher rates. We have reduced our DDL1 by 20% over the past 12 months and at June 30, our balance sheet is effectively interest-rate neutral over a 12-month run.
Despite higher rates, our AOCI improved by about $170 million to negative $5.1 billion at quarter-end, including $4.3 billion related to AFS. On the right-side of the slide, we've extended our AOCI projections through 2026. As we've been doing, we show two scenarios, the forward curve as of June 30, which assumes six cuts through 2026 and another scenario where rates are held at June 30 levels throughout the forecasted time horizon. With the forward curve, we would expect AOCI to improve by $1.9 billion or 39% by year-end 2026. If current rates remain in place, we would still expect $1.7 billion of improvement given the maturities cash flow and time.
Slide 12 provides our outlook for 2024 relative to 2023. Our P&L guidance remains unchanged across all major line items. We have updated our loan guidance to reflect the lack of demand we referenced. We now expect average loans to be down 7% to 8% in 2024 and for the year-end 2024 loans to be down 4% to 5% compared to the end of 2023. This implies fourth quarter loan balances are flat to up $1 billion from June 30 levels.
We also positively revised our average deposit guidance to relatively stable from flat to down 2% with client deposit growth in the low single-digit range. We continue to believe we can hit our full-year 2024 and fourth quarter exit-rate net interest income commitments even if loan volumes end-up slightly short of our revised target.
On Slide 13, we update the net interest income opportunity from swaps and short-dated treasuries maturing. The cumulative opportunity stood at about $950 million using the June 30 forward curve, little change from last quarter. As of the end of the second quarter, we've realized approximately 50% of this opportunity, which is shown on the left-side in the gray bars. This leaves about $480 million annualized NII opportunity left, which we expect to capture over the next three quarters with the most meaningful benefits expected to occur in the fourth quarter and first quarter of 2025.
Moving to Slide 14, we've laid out for you the path of how we intend to get from the $899 million of reported net interest income in the second quarter to a $1 billion-plus number by the end-of-the year under a couple of potential rate scenarios. In short, we believe we have about $130 million of tailwinds from lower fixed-rate assets and swaps running off and from higher day count. The rest largely nets out and includes what we believe are relatively conservative assumptions around modest loan growth, deposit costs, funding mix and near-term negative NII impact from a Fed rate cut or two.
In the top walk, we've laid out the drivers of the growth, assuming the Fed cuts once in December. In this scenario, we expect about $80 million benefit from swaps in U.S. treasuries. We also expect growth from redeployment of lower-yielding assets, more specifically approximately $2 billion of other security cash flows in the back half of the year and about $1.5 billion of maturing consumer loans. Day count and some pickup in loan fees drives the other $10 million to $15 million.
In the bottom walk, we performed the same exercise, but this time assuming the Fed cuts by 25 basis points in September and again in December. While we still believe we can comfortably achieve our full-year NII target rate in this scenario, we do become a little tighter on fourth quarter exit-rate, although we still think we'll hit that guide. Keep in mind, while two rate cuts this year would have a near-term impact on NII as it takes time to deploy deposit beta, we would expect to recapture that effect in 2025. It would also likely drive improved balance sheet dynamics as we would see benefit from the approximately $7 billion of forward-starting received fixed swaps that come off in the first-half of 2025 as we position ourselves to be modestly liability sensitive next year.
In addition, rate cuts would most likely provide benefits beyond NII, higher client transition -- transaction activity, more demand for credit and improvements of capital. So we would welcome this trade-off. With that, I'll now turn the call back to the operator for Instructions for the Q&A portion of our call. Operator?
