Don Kimble
Chief Financial Officer and Chief Administrative Officer at KeyCorp
Thanks, Chris. I'm now on Slide 5. For the fourth quarter, net income from continuing operations was $0.38 per common share, down $0.17 from the prior quarter and down $0.26 from last year. Our results included $0.20 per share of additional loan loss provision in excess of net charge-offs as we continue to build our reserves, reflecting a more cautious economic outlook. For the full year, we delivered positive operating leverage, marking on ninth time in the last 10 years. This is a testament to our differentiated and resilient business model and our ongoing focus on disciplined expense management despite the inflationary environment.
Turning to Slide 6. Average loans for the quarter were $117.7 billion or up 18% from the year ago period and up 3% from the prior quarter as we continue to add and deepen client relationships across our franchise. Commercial loans increased 17% from the year ago quarter, driven by growth in commercial and industrial loans and commercial real estate balances. Relative to the year ago period, consumer loans increased 22%, reflecting growth in consumer mortgage and Laurel Road.
Compared with the third quarter of 2022, commercial loans grew 3% and consumer loans were up 2%. Our commercial growth continues to reflect the strength in our targeted industry verticals and higher line utilization. Our consumer business continues to benefit from residential real estate originations, which were just under $1 billion for the fourth quarter. Approximately one-third of our originations came from targeted health care professionals.
Continuing on to Slide 7. Average deposits totaled $145.7 billion for the fourth quarter of 2022, down 4% from the year ago period and up $1.4 billion or 1% compared to the prior quarter. Year-over-year, we saw declines in non-operating commercial deposit balances and retail deposits. The increase in deposit balances from the prior quarter reflects higher commercial deposits due to seasonality and our focus on maintaining our relationship business. And consumer balances declined in the quarter, driven by inflationary spending and the movement of interest of rate-sensitive balances.
Interest-bearing deposit costs increased 49 basis points from the prior quarter and our cumulative deposit beta was 19% since the Fed began raising interest rates in March of 2022. We continue to view our strong deposit base as a competitive strength with approximately 60% of our balances in core consumer and escrow deposits. In addition, over 80% of our commercial deposits were from core operating accounts.
Turning to Slide 8. Taxable equivalent net interest income was $1.2 billion for the fourth quarter compared to $1.0 billion in the year ago period and $1.2 billion in the prior quarter. Our net interest margin was 2.73% for the fourth quarter compared to 2.44% in the same period last year and 2.74% for the prior quarter. Year-over-year, net interest income and net interest margin benefited from higher earning asset balances and higher interest rates. Quarter-over-quarter, net interest income and the net interest margin were negatively impacted by higher interest-bearing deposit costs and a change in the funding mix.
Later in the quarter, we experienced changing market conditions and customer behavior. Market rates increased more than we expected and the migration from noninterest-bearing to interest-bearing commercial deposits picked up. This resulted in a higher deposit beta, lower than expected net interest income and net interest margin. Our outlook for 2023 has our cumulative deposit beta peaking in the mid- to high-20% range, well below our historic levels.
Included in the appendix is additional information on our future net interest income opportunities and asset liability position. Based on our feedback from our shareholders, we have also included detail on the maturities of our interest rate swaps and short-term treasury secured.
As Chris mentioned in his remarks, we have been very intentional in the way we manage interest rate risk with a long-term perspective. Although our position has provided less near-term benefit, we have significant upside over the next two years as our swaps and short-term treasuries mature and reprice. We expect this to drive both our net interest income and our net interest margin higher over the next few years. We believe this is a true differentiator.
Moving to Slide 9. Noninterest income was $671 million for the fourth quarter of 2022 compared to $909 million for the year ago period and $683 million in the third quarter. The decline in noninterest income from the fourth quarter of 2022 reflects a $151 million decline in investment banking and debt placement fees, along with a $35 million reduction in other income primarily from market-related gains in the year ago period. Additionally, service charges on deposits were $19 million lower due to changes in our NSF/OD structure that we implemented in September, as well as lower consumer mortgage income down $16 million. Partially offsetting these declines was an increase in corporate services income, up $13 million due to higher derivatives income.
Relative to the prior quarter, noninterest income declined $12 million. Service charge on deposit accounts accounted for the majority of the decline, down $21 million, once again reflecting our new NSF/OD fee terms. Additionally, corporate services income decreased $7 million, driven primarily from an evaluation adjustment benefit in the prior quarter. Investment banking fees increased $18 million.
I'm now on to Slide 10. Total noninterest expense for the quarter was $1.16 billion, down $14 million in the year ago period and up $50 million from last quarter. Our expenses reflect our ongoing investments in digital, analytics and our teammates. Compared to the year ago quarter, we saw declines across most non-personnel line items, including business services and professional fees and operating lease expense. Personnel expense remained flat compared to a year ago period, reflecting higher salaries and employee benefits, offset by lower incentive and stock-based compensation.
Compared to the prior quarter, noninterest expense is up $50 million. Higher non-personnel costs drove most of the increase. Other expense increased $17 million, reflecting a pension settlement charge in the fourth quarter. Also, professional fees were higher in the quarter, some of which were temporary in nature. Personnel expense also increased, reflecting lower deferred costs from slower loan originations.
Moving on to Slide 11. Overall credit quality remains strong. For the fourth quarter, net charge-offs were $41 million or 14 basis points on average loans, which remain near historical low levels. Non-performing loans were $387 million this quarter or 32 basis points of period end loans, a decline of $3 million from the prior quarter.
Our provision for credit losses was $265 million for the fourth quarter, which exceeded net charge-offs by $224 million. The excess provision increases our allowance for credit losses, reflecting a more cautious model-driven assumption set. For our CECL modeling, we start with the Moody's consensus scenario. This quarter, the consensus estimates reflected a marked slowdown in the economy and meaningful reductions in home prices, both of which impacted our allowance levels. Despite the increases in the allowance, our outlook for net charge-offs in 2023 of 25 to 30 basis points remains well below our through-the-cycle loss levels of 40 to 60 basis points.
Now on to Slide 12. We ended the fourth quarter with common equity Tier 1 ratio of 9.1% within our targeted range of 9% to 9.5%. This provides us with sufficient capacity to continue to support our customers and their borrowing needs and to return capital to our shareholders. We will continue to manage our capital consistent with our capital priorities of: first, supporting organic growth in our business; second, paying dividends. In the fourth quarter, our Board of Directors approved a 5% increase, which now places our dividend at $0.205 per common share per quarter; and finally, repurchasing shares. Our current share repurchase authorization of $790 million is in place through the third quarter of 2023. We did not complete any share repurchases in the fourth quarter.
On Slide 13 is our full year 2023 outlook. The guidance is relative to our full year 2022 results. Importantly, using the midpoints of our guidance ranges would result in another year of positive operating leverage in 2023. We expect average loans will be up between 6% and 9% and average deposits will be flat to down 2%.
Net interest income is expected to be up between 6% and 9%, reflecting growth in average loan balances and higher interest rates. Our guidance is based on the forward curve, assuming a Fed funds rate peaking at 5% in the first quarter and starting to decline in the fourth quarter. These interest rate assumptions, along with our expectations for customer behavior and the competitive pricing environment, are very fluid and will continue to impact our outlook prospectively.
Noninterest income is expected to be down 1% to 3%, reflecting the implementation of our new NSF/OD fee structure last year and continued challenging capital markets activity, at least for the first half of the year. We expect noninterest expense to be relatively stable with the benefit of the cost takeout opportunities Chris described in his remarks, along with ongoing investments that we will make in our business. For the year, we expect credit quality to remain strong and net charge-offs will be in the 25 to 30 basis point range, well below the through-the-cycle range of 40 to 60 basis points. Our guidance for our GAAP tax rate is approximately 19% to 20%.
Finally, shown at the bottom of our slide are our long-term targets, which remain unchanged. We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns. Overall, it was a solid quarter and a very good finish to another successful year for Key. We remain confident in our ability to grow and deliver on each of our long-term targets.
With that, I'll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator?
