Terry Dolan
Vice Chair and Chief Financial Officer at U.S. Bancorp
Thanks, Andy. If you turn to Slide 7, as Andy mentioned, we reported diluted earnings per share of $0.57 for the quarter or $1.20 per share after adjusting for notable items related to the acquisition. Notable items related to Union Bank acquisition are comprised of three primary elements that reduced earnings per share by $0.63 related to balance sheet optimization, merger and integration costs, and the impacts of -- on provision expense related to acquired loans and actions taken to optimize the balance sheet.
During the fourth quarter, the company recognized a one-time $399 million pre-tax loss on a net basis related to several actions taken to optimize the balance sheet, manage the net -- the interest rate volatility impact on capital levels and position the company for future growth. Subsequent to obtaining regulatory approval for the transaction, we entered into interest rate hedges to manage rate volatility and its related impact on regulatory capital from the date of approval through the closing of the transaction in December.
During that time frame, long-term interest rates increased nearly 50 basis points before declining approximately 65 basis points. The interest rate swaps were terminated at the time of closing, and the losses recognized through earnings largely offset the interest rate marks recorded into the balance sheet through purchase accounting.
In addition, the company optimized its balance sheet by selling certain loans and repositioning its investment portfolio on certain equity investments. Within non-interest expenses, we incurred merger- and integration-related charges of $90 million that primarily included the impact of specific deal closing costs, professional services and employee-related expenses. We also incurred a $791 million charge to the provision for credit losses, which reflects an initial provision impacted by the acquisition of $662 million and a net loss of $129 million related to the securitization of approximately $4 billion of legacy indirect auto loans. Again, these moves enabled us to more effectively position the balance sheet for profitable growth and optimize returns.
Slide 8 provides a more detailed earnings summary. Union Bank, which was included in our consolidated results for one month, contributed $302 million of revenue, $221 million of non-interest expenses, $81 million of operating income and $44 million of net income to the company, representing $0.03 per diluted share.
On Slide 9, end-of-period loans increased 13.3% on a linked-quarter basis to $388 billion, which included core loan growth and acquired loans from Union Bank. Union Bank contributed ending loan balances of $54 billion net of purchase accounting adjustments partly offset by a reduction in balances of $15 billion related to balance sheet optimization actions, including loan sales and securitizations.
Slide 10 provides end-of-period deposit balance composition. End-of-period deposits increased 11.4% on a linked-quarter basis to $525 billion driven by the acquisition, which contributed $86 billion of lower cost deposits and actions taken as a result of the deal to optimize our funding sources. On a core basis, we saw deposit balances decline slightly this quarter.
Turning to Slide 11. The investment securities portfolio grew 4.2% linked quarter to $170 billion. The addition of securities from Union Bank were offset by balance sheet optimization actions.
Slide 12 highlights revenue trends. Adjusted net revenue totaled $6.8 billion in the fourth quarter, which included revenue contribution of $302 million from Union Bank, primarily representing net interest income. For legacy U.S. Bancorp, net interest income grew 5.5% on a linked-quarter basis and 29.2% year-over-year driven by strong earning asset growth and net interest margin expansion, which benefited from rising interest rates. Results were partially offset by higher deposit pricing and short-term borrowing costs.
Non-interest income, as adjusted for the legacy company, declined 3.0% compared to the third quarter driven by seasonally lower payment service revenue and lower commercial product revenue, offset by stronger mortgage banking revenue. Year-over-year, legacy adjusted non-interest income declined 5.5% driven by lower mortgage banking revenue from reduced refinancing activity and lower servicing charges, offset by stronger payment services revenue and trust and investment management fees.
Turning to Slide 13. Adjusted non-interest expense totaled $4.0 billion in the fourth quarter, including $221 million from Union Bank. Included in expenses was approximately $42 million of intangible amortization due to core deposit intangibles established at the time of the acquisition. Legacy non-interest expense, as adjusted, increased 3.8% on a linked-quarter basis largely driven by higher compensation-related expenses as well as higher expenses related to professional services, marketing, technology and tax credit amortization.
Slide 14 shows credit quality trends. We reported total net charge-offs for the quarter of $578 million. After adjusting for acquisition impacts and the balance sheet optimization activities, net charge-offs totaled $210 million or 0.23% of average loans, up from 0.19% in the third quarter, which reflected the continuing normalization of credit losses.
Non-performing assets for the legacy bank increased slightly, while Union Bank contributed $329 million to the total. On a combined basis, the reported ratio of non-performing assets to loans and other real estate was 0.26% at December 31 compared with 0.20% at September 30 and 0.28% a year ago, reflecting a continued strong credit quality.
The provision for credit losses was $1.19 billion, which included a provision of $791 million related to the acquisition and balance sheet optimization activities. This provision includes an initial provision impacted by the acquisition of $662 million and $129 million related to our balance sheet optimization activities. The allowance for credit losses as of December 31 totaled $7.4 billion or 1.91% of period-end loans, which reflects increased economic uncertainty and the incorporation of the Union Bank portfolio.
Slide 15 highlights the drivers of our linked-quarter common equity Tier 1 capital position. As of December 31, our CET1 capital ratio was 8.4%. Acquisition impacts of 180 basis points included an increase in goodwill and other intangible assets that reflected the impact of credit and interest rate marks, the initial provision for credit losses, balance sheet optimization actions as well as the increase in risk-weighted assets with the addition of Union Bank. These impacts were partially offset by an increase to equity related to shares issued to MUFG as part of the purchase price of Union Bank.
Slide 16 provides our current expectations of certain financial metrics related to the transaction. The financial and strategic merits of the deal remain intact and are very attractive. Earnings per share accretion is now expected to be 8% to 9% in 2023, which is higher than originally estimated. While our tangible book value per share dilution is higher than initially estimated due to the significant impact of rising interest rates on the interest rate marks at close, our estimated earn-back period is only slightly longer than our original estimate at two years versus our original estimate of 1.5 years.
Slide 17 provides a comparison of credit and net fair value marks from the time of our announcement to closing. Credit marks are lower due to favorable changes in portfolio composition and credit quality, partially offset by economic deterioration. Interest rate marks, inclusive of loans, securities net of sales and debt, are higher than anticipated at announcement due to higher interest rates, but we expect that to accrete quickly back through earnings. The core deposit intangible is also higher than originally estimated, reflecting the increased value of lower-cost core deposits in a higher rate environment.
I will now provide first quarter and full year 2023 forward-looking guidance, which is provided on Slide 18. Starting with the first quarter 2023 guidance. We expect average earning assets of between $605 billion and $610 billion in the first quarter and the net interest margin that is 5 basis points to 10 basis points higher than the fourth quarter level. Total revenue is estimated to be in a range of $7.1 billion to $7.3 billion, including approximately $100 million of purchase accounting accretion during the quarter.
Total non-interest expense as adjusted is expected to be in the range of $4.3 billion to $4.4 billion, inclusive of approximately $125 million of core deposit intangible amortization related to Union Bank. Our income tax rate as adjusted is expected to be approximately 22% to 23% on a taxable-equivalent basis. We anticipate merger and integration charges of between $200 million and $250 million for the quarter.
I will now provide guidance for the full year. For 2023, average earning assets are expected to be in the range of $610 billion to $620 billion with net interest margin expansion of between 5 basis points to 10 basis points compared with the fourth quarter of 2022. Total revenue is expected to be in the range of $29 billion to $31 billion, inclusive of between $350 million to $400 million of full year purchase accounting accretion.
Total non-interest expense as adjusted for the year is expected to be in the range of $17 billion to $17.5 billion, inclusive of approximately $500 million of core deposit intangible amortization related to Union Bank. Our estimated full year income tax rate on a taxable-equivalent basis as adjusted will be approximately 22% to 23%. We expect to have $900 million to $1 billion of merger and integration charges in 2023.
I will now hand it back to Andy for closing remarks.
