Terry Dolan
Vice Chairman 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 first quarter earnings trends. Average loans increased 3.4% compared with the fourth quarter, driven by 8.0% growth in commercial loans, 2.1% growth in mortgage loans, and 1.0% growth in total other retail loans. Commercial loan growth reflected slowing pay downs, increased business activity and higher utilization rates across many sectors and most geographies. Client sentiment is stable and commercial lending needs are being driven by inventory building, M&A activity, and capex expenditures. In the retail portfolio, we saw good growth in residential mortgage and other retail loans, including auto lending. Credit card balances declined linked quarter reflecting typical seasonality and the impact of certain loans being moved to held-for-sale in the fourth quarter which impacted average balance growth.
Turning to Slide 8, total average deposits increased 1.0% compared with the fourth quarter, despite the typical seasonal reduction in non-interest bearing deposits. Total average deposits increased 6.5% compared with a year ago.
Slide 9, shows credit quality trends. Credit quality continues to be strong across to our loan portfolio. The ratio of non-performing assets to loans and other real estate was 0.25% at March 31, compared with 0.28% at December 31, and 0.41% a year ago. Our first quarter net charge-off ratio of 0.21% was slightly higher than the fourth quarter level of 0.17%, but lower compared with the first quarter of 2021 level of 0.31%. Our allowance for credit losses as of March 31, totaled $6.1 billion, or 1.91% of period-end loans.
Slide 10, provides an earnings summary. In the first quarter of 2022, we earned $0.99 per diluted share. These results included a relatively small reserve release of $50 million.
Turning to Slide 11. Net interest income on a fully taxable equivalent basis totaled $3.2 billion. The 1.6% linked quarter increase reflected strengthening margins and strong loan growth in the quarter, particularly commercial loan growth. Our net interest margin improved 4 basis points to 2.44%, due to the change in yield curve, investment portfolio actions, and lower cash balances, partially offset by the impact of loan mix.
Slide 12, highlights trends in non-interest income. Compared with a year ago, non-interest income increased 0.6% reflecting strong payments services revenue, growth in trust and investment management fees and higher treasury management fees offset by lower commercial product revenue and lower mortgage banking revenue. The decline in mortgage banking revenue reflected lower refinancing activity in the market and tighter gain on sale margins giving excess capacity in the industry. In the first quarter, total payments revenues increased 10.1% compared to a year earlier, reflecting both continued cyclical post-pandemic recovery as well as strong underlying business trends supported by investments we are making.
Credit and debit card revenue increased 0.6% on a year-over-year basis as the impact of higher credit and debit card volume was offset by lower prepaid card activity. Excluding prepaid card revenue, credit and debit card fee revenue would have increased 9.6% compared with the first quarter of 2021. Both corporate payment, products revenue and merchant processing fees increased at a double-digit pace compared with a year ago with growth driven by both the cyclical recovery of pandemic-impacted industries, as well as underlying business momentum.
Slides 13 and 14, provide additional information on our payment services business. In the middle of Slide 13, we provide a table which illustrates the cyclicality that naturally occurs in each of our three payments businesses over the course of a typical year. On the right side of the slide, you can see that COVID-19 impacted industries continued to recover throughout the first quarter. As in the first quarter of 2022, credit and debit card travel volumes exceeded pre-pandemic levels. In March of 2022, airline volume was flat compared to March of 2019, the first time we have seen recovery to pre-pandemic levels. Although T&E related volumes in our corporate payments business are still below pre-pandemic levels, they continue their upward trajectory. In March, corporate T&E volumes in CPS were back to 75% of the pre-pandemic level.
Slide 14, provides linked quarter and year-over-year revenue growth trends for our three payments businesses. Because of the cyclical nature of our payments businesses, we believe year-over-year trends are the best indicator of underlying business performance in a normal environment. Year-over-year, credit card and debit -- credit and debit card revenue growth rates continued to be negatively impacted by the decline in prepaid card revenue as the benefit of the government stimulus has dissipated. We provide details on prepaid card fee revenue over the past five quarters in the upper right quadrant. While prepaid card revenue is approaching a run rate on a linked quarter basis, it will impact year-over-year credit and debit card fee revenue comparisons through the end of 2022. The bottom half of the slide illustrates the strong year-over-year growth rates in both merchant processing and corporate payments fee revenue over the past several quarters, which have partly reflected the pandemic-related recovery. While we expect the year-over-year growth rates to moderate from current levels, we continue to believe that both merchant processing and corporate payments fee revenue can grow at a high single-digit pace on a year-over-year basis, in a post-pandemic environment.
Turning to Slide 15, non-interest expense decreased 0.9% on a linked quarter basis. The decline was driven by lower professional services expense, marketing and business development expense, and technology and communication expenses, partially offset by increases in employee benefit expense, primarily due to seasonally higher payroll taxes, and other non-interest expenses. Linked quarter expense growth includes the impact of the acquisitions completed in the fourth quarter of 2021.
Slide 16, highlights our capital position. Our common equity Tier 1 capital ratio at March 31 was 9.8%. As a reminder, at the beginning of the third quarter of 2021, we suspended our share buyback program due to the pending acquisition of Union Bank. After closing the acquisition, we expect to operate at a CET1 ratio between our target ratio and -- 9.0%. We continue to expect that our share repurchase program will be deferred until our CET1 ratio reaches 9.0% following the pending deal close.
I will now provide some forward-looking guidance. The following guidance is for U.S. Bank on a standalone basis and does not include any potential impact from Union Bank. Let me start with full-year guidance. We have updated our interest rate expectations to be consistent with market expectations. Given our revised interest rate assumptions, we now expect total net revenue to increase 5% to 6% compared with 2021, reflecting 8% to 11% growth in taxable-equivalent, net interest income and stable fee income, primarily due to lower mortgage banking revenue and deposit service charges offsetting growth in other fee businesses. We expect positive operating leverage of at least 200 basis points in 2022.
As it relates to the second quarter specifically, we expect total revenue growth of 5% to 7% on a linked quarter basis benefiting from seasonal strength in many of our fee businesses, continued loan growth and the second quarter impact of higher rates on a net interest income and the recapture of fee waivers. In the second quarter, we expect expenses to increase 1% to 2% on a linked quarter basis, primarily due to seasonally higher compensation-related costs and business investment spend. Credit quality remains strong. Over the next few quarters, we expect the net charge-off ratio to remain lower than historic levels, but will continue to normalize over time. For the full year 2022, we expect our taxable equivalent tax rate to be approximately 21% to 22%.
If you turn to Slide 17, I'll provide an update on our previously announced pending acquisition of Union Bank. In September of 2021, we announced that we had entered into a definitive agreement to acquire the core regional banking franchise of MUFG Union Bank. We continue to make significant progress in planning for closing the deal in the first half of 2022, while we await regulatory approval. As you know, regulatory approvals are not within the company's control and may impact the timing of the closing of the deal. We expect to close the deal approximately 45 days after being granted U.S. regulatory approval. Conversion is anticipated late in the second half of 2022. We continue to believe this deal is a compelling use of our excess capital from both a strategic and financial perspective. We feel comfortable with our initial financial deal assumptions, including an expectation that it will generate an internal rate of return of about 20%, which is well above our cost of capital.
Assuming at June 30 close date, we expect Union Bank to contribute approximately $310 million to our pre-tax pre-provision net revenue in 2022, before considering cost synergies. We continue to expect to achieve approximately $900 million of total cost synergies related to the deal with approximately $85 million to $100 million of cost savings achieved in the second half of 2022. We continue to target total merger and integration costs of $1.2 billion of which approximately $950 million will be incurred in 2022 with some charges anticipated in the second quarter as we prepare for system integration. In addition, there will be day one -- there will be a day one loss -- loan loss provision required at closing in accordance with the existing CECL accounting rules of approximately $800 million to $900 million.
I'll hand it back to Andy for closing remarks.
