Clark H. I. Khayat
Chief Financial Officer at KeyCorp
Thanks, Chris, and good morning, everyone. I'm now on Slide 4. In the third quarter, we reported earnings per share of negative $0.47, including $0.77 impact from the previously disclosed securities portfolio repositioning. Excluding the repositioning, EPS was $0.30 per share. As Chris mentioned, in mid-September, we sold roughly $7 billion market value of mostly long-dated CMOs and CMBS, which had a weighted-average yield of about 2.3% and an average duration of almost six years. And at this point, we have reinvested all of the proceeds, mostly in October when we saw term rates rise by 30 basis points to 40 basis points. As a result, we will see roughly 260-basis point yield pickup on approximately $7 billion of securities starting in the fourth quarter. The new securities will also provide liquidity and capital benefits relative to what was previously owned. As a reminder, we currently contemplate doing a similar magnitude repositioning upon receiving the second tranche of the Scotiabank investment, assuming we get Fed approval.
Reported revenue was down approximately 55% sequentially and from the prior year, but excluding the securities repositioning, revenue was up 6% sequentially and up 3% year-over-year with growth across both net interest income and fees. Expenses remained well-controlled, down 1% compared to the prior year, a little better than we previously expected. This implies about 400 basis points of positive operating leverage on a year-over-year basis, excluding the securities portfolio repositioning.
Credit costs were essentially flat to the second quarter and included a $60 million release of our allowance for credit losses, reflecting primarily three charged-off credits that had specific reserve allocations held against them as well as lower loan balances. Our Common Equity Tier 1 ratio increased to 10.8% and tangible book value increased nearly 16% sequentially.
Moving to the balance sheet on Slide 5. Average loans declined 2.5% sequentially to $106 billion and ended the quarter just above $105 billion. The decline reflects continued tepid client demand, flat utilization rates, our disciplined approach as to what we're willing to put on the balance sheet, and the intentional runoff of low-yielding consumer loans as they pay down and mature. Additionally, we built the business to be able to serve clients with on- and off-balance sheet solutions, whichever works best for them. This quarter, we raised $28 billion of capital for our clients. And as Chris mentioned, we had a very strong quarter of investment banking fees. At the end of the third quarter, we warehoused approximately $600 million of loans for commercial clients that you can see in loans held for sale. Additionally, throughout the quarter, we refinanced about $300 million of CRE loans off our balance sheet into permanent mortgages through our Capital Markets group. We continue to have active dialog with clients and prospects and our loan pipelines continue to build.
On Slide 6, average deposits increased 2.5% sequentially to nearly $148 billion, reflecting growth across consumer and commercial deposits. Client deposits were up about 4% year-over-year as we managed brokered deposits down by roughly $2.2 billion from year-ago levels. Reported non-interest-bearing deposits declined 1% to 19% of total deposits, and when adjusted for non-interest-bearing deposits in our hybrid accounts, this percentage remained flat linked-quarter at 24%. Both total and interest-bearing deposit costs increased by 11 basis points during the quarter. 7 basis points of the increase reflected reduction of roughly $4.5 billion of FHLB funding yielding almost 5.6% that was replaced with lower-cost client deposits. Our overall interest-bearing costs increased just 1 basis point this quarter.
As Chris mentioned, we've been proactive across our deposit book in preparation for the Fed easing cycle that we all anticipated would begin last month. Ahead of the cut, we shortened CD tenors and took promo rates down, and on the commercial side, we moved significant amount of deposits into indexed accounts. Following the cut, we took rates down further across both front and back-book and consumer.
In commercial, we effectively passed along a majority of the cut to clients. Our deposit beta on the first rate cut is expected to be low- to mid-30s, which would benefit our fourth quarter net interest income.
Moving to net interest income and the margin on Slide 7. Tax equivalent net interest income was $964 million, up 7%, or $65 million and the net interest margin increased 13 basis points from the prior quarter. Our well-communicated net interest income opportunity is now providing more benefit as a greater portion of low-yielding short-term swaps in treasuries mature. Scotiabank investment and our mid-September securities portfolio reposition added roughly $12 million and about 2 basis points to third quarter NII and NIM, respectively.
Turning to Slide 8, reported non-interest income was negative $269 million and included a $918 million loss related to the securities repositioning as well as a $14 million VISA-related charge. Adjusting for those items, non-interest income was up 3% year-over-year. Investment banking and debt placement fees increased over 20% from the prior year and 36% from the prior quarter, reflecting a strong quarter for syndication debt and equity underwriting fees. Commercial mortgage servicing had a record quarter, reflecting higher active special servicing balances and growth in the overall portfolio. At September 30,
We serviced about $690 billion of assets on behalf of third-party clients, including about $230 billion of special servicing, $7.5 billion of which was in active special servicing. Given lumpiness of some of these fees and as interest rates come down, we would expect fourth quarter commercial mortgage servicing fees to look more like the second quarter.
Trust and investment services fees grew 8% year-over-year as assets under management grew to a record level of $61 billion.
On Slide 9, second-quarter non-interest expenses were $1.09 billion, up 1% quarter-over-quarter and down 1% year-over-year. On a year-over-year basis, higher personnel costs were more than offset by lower fraud losses, marketing expenses, and a modest reduction in the estimated FDIC special assessment charge. Sequentially, the increase was driven by higher incentive compensation from stronger investment banking fees.
Moving to Slide 10. Credit quality remained solid. Net charge-offs were $154 million, or 58 basis points of average loans, and 90-day delinquencies ticked up a few basis points. Net charge-offs were elevated due to three credits, two consumer goods companies, and one equipment manufacturer that were largely reserved for. Non-performing loans and assets were essentially stable, up 2.5% and 2%, respectively compared to the prior quarter. NPAs as a percentage of loans remain low at 70 basis points. Criticized loans declined by 2% in third quarter, reflecting lower rates and increased loan modifications with credit enhancements. We believe NPAs are peaking and criticized loans will continue to decline from here, assuming no material macro deterioration.
Turning to Slide 11. We continue to build our capital position with the CET1 ratio up 35 basis points to 10.8% as of September 30. Our marked CET1 ratio, which includes unrealized AFS and pension losses, improved nearly 130 basis points to 8.6%. Our AOCI improved by about $1.9 billion to negative $3.3 billion at quarter end, reflecting lower interest rates and the securities reposition in mid-September. We expect AOCI to further improve by about one-third by year end 2025 and about 40% by year end 2026, with approximately half of that improvement reflecting a second contemplated securities portfolio repositioning once the full investment from Scotiabank closes.
Slide 12 provides our outlook for full year 2024 relative to 2023. We currently expect net interest income to fall in the middle of the full-year guidance range of down 2% to 5%, albeit with about 150 basis points of positive impact from the Scotiabank investment and the securities portfolio restructuring this past month. Net interest margin should come in around 2.4% for the fourth quarter. We are tweaking our year-end loan forecast by 1% to down 5% to 6%. We are also positively revising our average deposit guidance to up 1% to 2%, including expectations for client deposits to grow by 3% to 4%. We now expect fees, excluding this past quarter's securities portfolio restructuring, to grow 6% or better this year, depending on how the capital markets environment plays out in the fourth quarter. Given the strong fee momentum and our higher stock price, we expect expenses to be up approximately 2% this year. This also includes the funding of our charitable foundation.
As we previously communicated, we expect the full-year net charge-off ratio to be closer to the high end of the 30-basis point to 40-basis point range, given lower loan balances than we had expected coming into the year. For the full year, we expect provision for credit losses to come in around $400 million, which is unchanged from what we'd expected back in January.
Moving to Slide 13. The last time, we are updating the net interest income opportunity from swaps and short-dated treasuries maturing as we sold the remaining roughly $3 billion of treasuries yielding 50 basis points that were to mature in the fourth quarter at the end of September, meaning we now expect the final chunk of benefit from this opportunity to come in the fourth quarter. The cumulative annualized opportunity ended up being about $830 million, of which 80% has been achieved to date.
Finally, on Slide 14, we've laid out for you the path of how we intend to get from the $964 million of reported net interest income in the third quarter to the fourth quarter exit rate that we had targeted at the beginning of the year. Regardless of whether the Fed cuts 50 basis points or 75 basis points in the fourth quarter, we believe fourth quarter NII will be at least 10% higher year-over-year, which equates to $1 billion and $20 million or better in the fourth quarter. We expect about $40 million of incremental benefit from the September portfolio restructuring and initial tranche investment from Scotiabank. We expect another $50 million or so of benefit from fixed-rate asset repricing, including from the accelerated sale of short-term treasuries I just described.
We also think we can drive a modest amount of commercial loan growth and some further funding optimization, offset by some short-term impact from the expected Fed rate cuts. While fewer cuts would be better for fourth quarter NII, that is largely a timing impact. Keep in mind that we would expect to capture more benefit of any rate cut over the ensuing six to 12 months, and rate cuts would likely provide benefits to other parts of our business, such as higher client transaction activity, more demand for credit, and improvements to capital.
With that, I will now turn the call back to the operator who will provide instructions for the Q&A portion of our call. Operator?
