Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association
Thank you, Scott, and good evening everyone. Nearly 80% of our revenue is net interest income, which is significantly influenced by loan and deposit growth and associated interest rates. Scott has already discussed the loan growth. Moving to Slide 15, we show our securities and money market investment portfolios over the past five quarters. The size of the period end securities portfolio increased by nearly $10 billion over the past year to $27 billion. Money market investments had been increasing significantly with the growth in deposits. Money market investments declined in the quarter by $5 billion to $7.4 billion reflecting growth in loans and securities and a modest decline in period end deposits.
The combination of securities and money market investments is now 40% of total earning assets at period end, which compares to an average level in 2019 before the pandemic of 26%. Over time, we would expect the mix of highly liquid assets such as securities and money market investments to revert to historical levels. We continue to exercise caution regarding duration extension risk by purchasing bonds with moderate duration both in the current and in an upward shock scenario, the durations of both are listed on the bottom left-hand side of the page.
The $4.7 billion of securities purchases for the quarter had an average yield of 2.1%, which is about 40 basis points higher than the prior quarter's yield. The annualized rate of principal and prepayment based cash flow coming from the securities portfolio was $4.2 billion in the first quarter. Again that's an annualized rate and depending upon the opportunity, we expect to be able to deploy the majority of that cash into either loans or higher yielding securities. Also depicted on Slide 15 is a summary of our interest rate swap portfolio, maturity and yield information by quarter. This includes both maturing swaps and forward starting swaps that are in place today, but won't be reflected in our financial results until the start date.
Slide 16 is an overview of net interest income and the net interest margin. The chart on the left shows the recent five quarter trend for both. The net interest margin in the white boxes has trended down over the past year but gained 2 basis points this quarter. The trend reflects the change in earning asset mix due to the deposit driven rise in excess liquidity over the past year, as described on the prior page. Until the first quarter growth in deposits has impacted the composition of earning assets through a larger concentration in lower yielding money market and securities investments. The weighted average yield of our securities and money market investments is 1.39%, an increase of 30 basis points over the prior quarter. The volume and yield of securities coupled with a smaller balance of money market investments help to improve the net interest margin. Importantly, the increased interest income from securities over the past quarter and year have helped to make up the shortfall from decreased PPP related revenues and have underscored the value of our exceptional deposit growth.
Slide 17 shows information about our interest rate sensitivity. Focusing on the upper left hand quadrant, as a general statement, we remain very asset sensitive. Each 100 basis points, a parallel shift adds -- would add approximately $175 million of annual net interest income or just under about $0.90 per share holding all other factors constant. Our estimated interest rate sensitivity to 100 basis point parallel interest rate shock was about 4 percentage points lower in the first quarter than that reported in the fourth quarter.
A portion of this reflects the higher denominator, that is net interest income as our outlook for net interest income from the March 2022 starting point was materially higher than at the same outlook at the end of 2021. This change is largely attributable to increased loans, increased securities and a steeper yield curve. The remaining change in asset sensitivity is due to active balance sheet hedging. We may continue to add interest rate swaps, including forward starting swaps, which would help to dampen our natural asset sensitivity, we expect to begin to see the impact of short-term interest rate increases in the second quarter as approximately 40% of our earning assets after giving the effect to swaps are tied to indices within one year.
Non-interest expenses on Slide 18, grew by $15 million from the prior quarter to $464 million. Adjusted non-interest expense increased $18 million or 4% again to $464 million. The linked quarter increase in adjusted non-interest expense was primarily due to seasonal expenses typically experienced in the first quarter related to compensation, which was the same factors that affected pre-provision net revenue as detailed earlier by Harris. These seasonal expenses were somewhat offset by a decrease from the $10 million charitable donation made in the fourth quarter.
You may have noticed that we made some changes to the categorization of non-interest expense in the current quarter on the face of our financial statements. As the banking industry continues to move toward information technology-based products and services, we have improved the presentation and disclosure of certain expenses related to our technology-related investments and operations. These improved disclosures will be amplified in our upcoming 10-Q filing.
Another significant highlight for the quarter was the credit quality of the loan portfolio, as illustrated on Slide 19. Relative to the prior quarter, we saw continued improvement in problem loans. Using the broadest definition of problem loans, the balance of criticized and classified loans dropped 11% and classified loans dropped 7%, although not shown relative to the prior quarter, special mention loans declined 20%. Of course, net charge-offs to average loans is the most important measure of credit quality. We had only 5 basis points of annualized net charge-offs relative to average non-PPP loans in the first quarter and a loss rate was only 1 basis point in the prior quarter. Shown on the chart on the bottom right, one can see the volatility of the provision for credit loss contrasted with the relative stability of net charge-offs.
Slide 20 details our allowance for credit losses or ACL. In the upper left, we show a recent declining trend in the ACL over the past several quarters. At the end of the first quarter, the ACL was $514 million or 1.02% of non-PPP loans. The economic scenarios that we use to build our quantitative ACL model improved relative to the prior quarter, and we released the qualitative reserves associated with expected losses related to the pandemic. However, as a partial offset to that, we raised the probability of a recession in our assessment of the economy largely due to changes in uncertainty about the spillover effects of the war in Eastern Europe and because of the risk inflation may have on our borrowers' profit margins.
Our loss absorbing capital position is shown on Slide 21. We repurchased $50 million of common stock in the first quarter. With the loan growth we achieved in the quarter and continued minimal charge-offs, we believe that our capital position is generally aligned with balance sheet and operating risk. We typically show that trailing five quarters in our investor slides, but in this case, we went back to a year before the pandemic in order to provide a longer perspective. In the chart on the left, you will note that we had reduced our common equity Tier 1 ratio to 10.2% in the fourth quarter of 2019. And with the onset of the pandemic and with line draws in the first quarter of 2020, we saw the CET1 ratio declined to 10%. After capital growth through intentional earnings retention, during the uncertainty of the pandemic, the CET1 ratio has now returned to 10% in the current quarter.
Shown on the right are our credit losses, we've intentionally matched the scale on both charts so that you can see the order of magnitude of losses incurred during this time frame relative to the capital set aside for expected loss, also known as the allowance for credit losses and the capital set aside for unexpected loss in the form of common equity. Given the extremely low level of loss, we believe our capital position is appropriately strong relative to our risk profile.
Our financial outlook can be found on Slide 22. This is our best current estimate for financial performance for the first quarter of 2023 as compared to the actual results reported for the first quarter of 2022. The results in between are subject to normal seasonality. Consistent with recent quarters, our outlook for loan and net interest income exclude PPP loans. The impact of PPP loans on interest income is expected to dissipate over the next couple of quarters. We reiterate our outlook for loan growth at moderately increasing. We are expecting net interest income, also excluding PPP loan revenue to increase over the next year. As noted previously, we believe our net interest income will improve as interest rates increased, particularly along the short end of the curve.
We had another successful quarter for customer-related fees, and we remain optimistic that many components of fee income will continue to grow. However, the reduction of overdraft and non-sufficient fund fees, which Scott discussed previously and with mortgage banking fee income likely to decrease as the production shifts to held for investment our outlook for customer-related fees has shifted to stable from slightly increasing. For adjusted non-interest expense, we are reiterating our expectation of moderately increasing with the largest risk factor continuing to be wage and price pressure.
Finally, regarding capital management, we are hopeful that our capital will continue to be deployed to support customer-driven balance sheet growth. As a reminder, share repurchase and dividend decisions are made by our Board of Directors, and as such, we expect to announce any capital actions for the second quarter in conjunction with our regularly scheduled Board meeting this coming Friday. This concludes our prepared remarks.
Kyle, would you please open the line for questions?