Terrance R. Dolan
Vice Chair and Chief Financial Officer at U.S. Bancorp
Thanks, Andy. If you turn to slide 7, I'll start with a balance sheet review followed by a discussion of fourth quarter earnings trends. Average loans increased 2.0% compared with the third quarter, driven by a 2.6% increase in commercial loans, which benefited from new business activity and improved utilization rates. Retail loan growth was driven primarily by higher credit card balances, growth in residential mortgages and strong production of installment loans including auto lending. At December 31, PPP loan balances totaled $1.4 billion compared to $2.4 billion at September 30.
Excluding PPP loans, fourth quarter average loans grew by 2.7% on a linked quarter basis. Turning to slide 8, total average deposits increased by $18.4 billion or 4.3% compared with the third quarter. We continued to see favorable mix shift, with average non-interest bearing deposits increasing by 5.4% and average saving deposits increasing by 4.4% while higher cost time deposits declined by 3.0%. Slide 9 shows credit quality trends. The ratio of non-performing assets to loans and other real estate was 0.28% at December 31, compared with 0.32% at September 30 and 0.44% a year ago.
Our fourth quarter net charge-off ratio of 0.17% improved on both a linked quarter and year-over-year basis. Borrower liquidity and stronger asset valuations continued to support repayment and recovery of problem loans. Our reserve release was $145 million this quarter, primarily reflecting strong credit quality metrics. Our allowance for credit losses as of September 31 totaled $6.2 billion or 1.97% of loans. Slide 10 provides an earnings summary. In the fourth quarter of 2021, we earned $1.07 per diluted share. These results included a reserve release of $145 million.
Turning to slide 11, net interest income on a fully taxable equivalent basis of $3.2 billion came in a little higher than our expectations. The $47 million decrease compared with the third quarter was driven by a $82 million decline in PPP interest and fees, partially offset by earning asset growth. Our net interest margin declined by 13 basis points on a linked quarter basis to 2.40%. The net interest margin decline was related to a 6 basis point impact from lower PPP loan interest and fees and a 6 basis point impact from elevated liquidity and related investment portfolio and cash management strategies aimed at optimizing our asset sensitivity going into 2022.
Slide 12 highlights trends in non-interest income. Compared with the year ago, non-interest income declined by 0.6% as strong growth in payments revenue, trust and investment management fees, deposit service charges and commercial product revenue was more than offset by a decrease in mortgage revenue, reflecting the interest rate environment and lower securities gains and other fee revenue. On a linked quarter basis, non-interest income declined by 5.9%, primarily reflecting the seasonally lower payments and capital markets revenues and declining mortgage banking revenue as expected.
Slide 13 provides information on our payment services businesses. Sales volumes in each of our three businesses exceeded pre-pandemic levels in the fourth quarter, despite some Omicron related softness in late December. We expect year-over-year payments momentum to continue into 2022, as lagging sectors such as airline, hospitality and corporate T&E benefit from a continued cyclical recovery toward pre-pandemic levels and as our multiyear investments in e-commerce and tech-led drive secular growth improvements. As we saw in our earnings press release this morning, effective January 3, U.S. Bank has eliminated fees for certain non-sufficient funds.
We believe this is not only the right thing to do for customers but it is a smart business decision. For some time, we have been at the forefront of using digital technology to help our customers avoid overdraft charges, and our efforts have helped our customers more easily and effectively manage their money, which has contributed to increased customer satisfaction. This latest move is simply the next step in the process. Turning to slide 14; non-interest expense increased by $104 million or 3.0% compared with the third quarter.
This increase was driven by higher medical claims within employee benefit expense and higher professional services expenses, higher marketing and business development costs. Tax credit amortization expense was also higher in the fourth quarter, in line with typical seasonal trends. Slide 15 highlights our capital position. Our Common Equity Tier 1 capital ratio at December 31 was 10.0%, which decreased slightly compared with September 30 driven by risk-weighted asset growth and the impact of acquisitions completed near tend of the quarter.
As a reminder, at the beginning of the third quarter we suspended our share buyback program due to our recent announcement that we have agreed to acquire Union Bank. We continue to expect that our share repurchase program will be deferred until the second half of 2022. After the closing of the acquisition, we expect to operate at a CET1 capital ratio between our target ratio and 9.0%. I will now provide some forward-looking guidance. We expect both net interest income on a taxable equivalent basis as well as our net interest margin to be relatively stable on a linked quarter basis with growth expected in subsequent quarters.
Under our base case scenario, which incorporates three rate hikes, we expect full year 2022 net interest income on a taxable equivalent basis to increase at a mid-single digit pace. We expect mortgage revenue to be slightly lower in the first quarter on a linked quarter basis, in line with slower refinancing activity in the market. Payments revenue is seasonally lower in the first quarter. On a year-over-year basis, we expect total revenue to increase at a high single-digit pace, driven by double-digit growth in both merchant processing revenue and corporate payments revenue.
We expect credit card revenue to be stable on a year-over-year basis, as high single-digit growth in credit and debit card fees is offset by lower prepaid processing fees. Excluding the prepaid headwind, which will abate after the first quarter, we expect total payment revenue to increase at a low teen rate on a year-over-year basis in the first quarter. We expect other revenue to approximate $125 million to $150 million per quarter over the course of 2022.
We expect expenses to be relatively stable in the first quarter compared with the fourth quarter. Credit quality remains strong. Over the next few quarters, we expect the net charge-off a ratio to remain lower than historical levels but will normalize over time as the effects of the pandemic continue to subside. For the full year of 2022, we expect our taxable equivalent tax rate to be approximately 21.0%.
I will hand it back to Andy for closing comments.
