Clark H. I. Khayat
Chief Financial Officer at KeyCorp
Thanks, Chris, and good morning. I'm now on Slide 6. For the first quarter, net income from continuing operations was $0.30 per common share, down $0.08 from the prior quarter and down $0.15 from last year, driven in part by two notable items. We incurred $64 million of restructuring expense or $0.06 per share, which included $36 million of severance and other related costs and $28 million of corporate real estate related rationalization and other contract terminations or renegotiations. Our results also included $94 million of additional provision expense in excess of charge-offs or $0.08 per share as we continue to build our reserves, reflecting a more cautious economic outlook and view on home prices.
Turning to Slide 7. Average loans for the quarter were $119.8 billion, up 16% from the year ago period and up 2% from the prior quarter, as we continue to support relationship clients. Commercial loans increased 15% from the year ago quarter. Relative to the same period, consumer loans increased 16%, reflecting growth in consumer mortgage. Compared with the fourth quarter of 2022, commercial loans grew 3%. Our commercial growth continues to reflect the strength in our targeted industry verticals and support for our relationship clients.
Continuing on to Slide 8. Average deposits totaled $143.4 billion for the first quarter of 2023, down 5% from the year ago period and down $2.3 billion or 2% compared to the prior quarter. Year-over-year, we saw declines in retail deposits, driven by elevated spend due to inflation, normalization from pandemic levels and changing client behavior due to higher rates. Commercial balances, which included $6 billion of brokered deposits remained relatively flat. The decrease in deposits from the prior quarter reflects a continuation of these same trends. Interest-bearing deposit costs increased 62 basis points from the prior quarter and our cumulative deposit beta was 29% since the Fed began raising interest rates in March 2022. Our outlook for 2023 now assumes a cumulative deposit beta peaking in the low-40s.
Turning to Slide 9. We wanted to provide incremental detail on the granularity and composition of our $143 billion deposit portfolio. At the end of the first quarter, approximately 54% of our deposits came from consumer, wealth and small business clients. An incremental 6% of deposits are from low-cost, stable escrow balances. The remaining approximately 40% of our deposits comes from our large corporate and middle market commercial clients. Over 80% of commercial segment deposit balances are from core operating accounts. Our total deposit -- of our total deposits, 56% are covered by FDIC insurance, while an additional 10% are collateralized. We maintain access to enough liquidity to cover over 150% of uninsured and uncollateralized deposits. The quality of our deposit base derives from the strength of our relationship-based strategy, which is benefiting Key both from a balanced stability and cost perspective. At period end, our loan-to-deposit ratio was 84%.
Now moving to Slide 10. Taxable equivalent net interest income was $1.1 billion for the first quarter compared with $1 billion in the year ago quarter and $1.2 billion in the prior quarter. Our net interest margin was 2.47% for the first quarter compared to 2.46% for the same period last year and 2.73% for the prior quarter. Year-over-year, net interest income and the net interest margin benefited from higher earning asset balances and higher interest rates, partly offset by higher interest-bearing deposit costs and a shift in funding mix. Relative to Q4, our net interest margin was negatively impacted by 22 basis points related to higher interest-bearing deposit costs and 22 basis points from a change in funding mix and liquidity and loan fees, partly offset by 18 basis points related to higher interest rates and earning asset growth. As Chris noted earlier, our swap portfolio and short-dated treasuries reduced net interest margin by 72 basis points in the quarter. Additionally, the net interest income was lower, reflecting two fewer days in the quarter.
Turning to Slide 11. As previously mentioned, Key stands to benefit significantly from the maturity of our short-dated swap book in treasuries. This opportunity is consistent with that $1 billion of upside we've been talking about over the last few quarters. While we recently offered more detail on the swaps and treasuries by quarter and interest rate, we thought it would be valuable to include a view on the realization of that potential value in both timing and amount. The chart on Slide 11 shows this with the forward curve.
We do not include -- we do include the value should short-term rates remain at current levels in a higher prolonger scenario as well. We have also gotten questions about how we plan to lock in this value. As we've shared, we've taken a measured but opportunistic approach to adding hedges to address this potential. The analysis on Slide 11 reflects the additional hedging activity we've undertaken beginning in Q4 and since. The point here is to provide one more level of depth to clarify the timing and magnitude of this opportunity. As this demonstrates, we continue to see significant future value in NII as these swaps and treasuries mature.
Moving to Slide 12. Non-interest income was $688 million in the first quarter of 2023 compared to $676 million for the year ago period and $671 million in the fourth quarter. The decline in non-interest income from the year ago period reflects a $24 million decline in service charges on deposit accounts due to changes in our NSF/OD fee structure that we previously discussed and implemented in September and lower account analysis fees related to interest rates.
Additionally, investment banking and debt placement fees declined $18 million, reflecting lower syndication fees, partly offset by an increase in advisory fees, while corporate services income declined $15 million, reflecting lower loan fees and market-related adjustments in the prior period. The decline in non-interest income from the fourth quarter reflects a $27 million decline in investment banking and debt placement, driven by lower advisory and syndication fees. Recall that Q1 is historically the low point for investment banking activity in the year. Other income decreased by $20 million driven by Visa litigation assessment and market-related adjustments. Additionally, corporate services income decreased by $13 million, reflecting lower derivative volumes.
Moving on to Slide 13. Total non-interest expense for the quarter was $1.18 billion, up $106 million from the year ago period and up $20 million from last quarter, inclusive of $64 million of restructuring charges related to actions we completed this quarter to take out $200 million in annualized costs. As we shared on the Q4 call, we took these steps proactively to support investment in our business in the face of continued inflation. Compared with the year ago quarter and in addition to restructuring charges, personnel expense increased, reflecting an increase in salaries and headcount, partly offset by lower incentive compensation. Compared to the prior quarter, and in addition to restructuring, business services and professional fees declined $15 million and marketing expense declined $10 million. Additionally, other expense increased in the first quarter by $9 million, reflecting an increase in the base FDIC assessment rate.
Moving now to Slide 14. Overall, credit quality remains strong. For the first quarter, net charge-offs were $45 million or 15 basis points of average loans, which remain near historically low levels. Our provision for credit losses was $139 million for the first quarter, which, as we pointed out, exceeded net charge-offs by $94 million. 30- to 89-day delinquencies to period-end loans were down 1 basis point to 14 basis points, while 90-plus day delinquencies remained stable. The excess provision increases our allowance for credit losses, reflecting a more cautious model-driven assumptions. Despite the increase in the allowance, our outlook for net charge-offs in 2023 of 25 to 30 basis points remains unchanged and well below our through-the-cycle levels of 40 to 60 basis points.
Moving to Slide 15. With regard to commercial real estate in particular, Key's exposure is well-controlled and credit quality remains strong. Over the past decade, we meaningfully repositioned our commercial real estate book by sharply reducing our exposure to construction and homebuilders and reducing the level of commercial real estate loans in our book. We focus on relationship lending with select owners and operators. Our improved risk profile has been demonstrated in Key's most recent stress test results where projected losses in our commercial real estate book stands at 8.2% compared to 11.5% for peers.
Now on to Slide 16. Our liquidity position is strong. Our period-end cash balances at the Federal Reserve stood at $8 billion, and we maintain flexibility with significant levels of unused borrowing capacity from additional sources. We would expect to maintain higher cash balances until the market stabilizes. Our levels of additional available liquidity have not changed materially since the end of the quarter.
On to Slide 17. We ended the first 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 relationship customers and their needs. We completed $38 million of open market share repurchases in the first quarter related to our employee compensation plan. Given market conditions, we do not expect to engage in material share repurchases in the near term. We will continue to focus our capital in supporting relationship client activity and paying dividends.
Over the last six weeks, there's been significant discussion of AOCI and its potential inclusion in CET1 capital levels for Category 4 banks. We've historically chosen to put most of our portfolio purchases and available for sale. And given the recent market rise in rates, we saw significant increases in the negative mark. As time passes and if rates have come down, we've seen our AOCI mark decrease by 13% and from $6.3 billion at 12/31 to $5.5 billion at 3/31. We share on Slide 16 the expected reduction in the AOC mark from 3/31 to the end of this year and the end of 2024. Over that time frame, the AOC mark declined by approximately 40%. And while this analysis assumes the forward curve, it's important to note that 90% of the value is for maturities and cash flows that is not rate dependent.
Although we have no unique insight into the path of potential regulatory changes, as we've seen historically when bank capital regulations have changed, they carry with them comment periods in a reasonable phase-in time frame. Our view is that for any new requirements, our reduction in AOCI mark and more significantly, our earnings, would allow us to organically accrete capital to required levels over the necessary period.
Slide 18 updates our full year 2023 outlook. The guidance is relative to our full year 2022 results. We expect average loans to grow between 6% and 9%. Importantly, most of this growth has already occurred relative to 2022, so we don't expect material loan balance growth. We'll continue to support relationship clients by recycling capital throughout the year. We expect average deposits to be flat to down 2%. Net interest income is now expected to decline by 1% to 3%, driven by higher interest-bearing deposit costs and a continued shift in funding mix. Our guidance is based on the forward curve, assuming a Fed funds rate peaking at 5.1% in the third 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.
Non-interest income guidance is unchanged. We continue to expect it 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 in the first half. Our non-interest expense outlook is also unchanged. We expect it to be relatively stable, driven in part by the actions we took last quarter to accelerate cost savings, which includes the impact of the $64 million in restructuring charge.
For the year, we continue to expect credit quality to remain strong and net charge-offs to be in the 25 to 30 basis point range, well below our over-the-cycle range of 40 to 60 basis points. Our guidance for our GAAP tax rate is now 20% to 21%. We feel confident in the foundation of our business, the relationship-driven value of our deposit book, the durability of our balance franchise and our improved risk profile. Despite near-term headwinds, we continue to be focused on execution in 2023 and the strong long-term earnings power of our Company.
With that, I'll now turn the call back to the operator for instructions on the Q&A portion of the call. Operator?
