Paul E. Burdiss
Chief Financial Officer at Zions Bancorporation, National Association
Thank you, Harris. Good evening, everyone. Thanks for joining us. On slide 7, a significant highlight for us this quarter was the strong performance in average loan growth. Average non-PPP loans increased $1.9 billion or 3.6% when compared to the third quarter. Areas of strength included commercial and industrial loans, residential mortgage and term commercial real estate as can be seen in the appendix on slide 30. The yield in average total loans increased 64 basis points from the prior quarter, which is primarily attributable to increases in interest rates.
Deposit costs increased during the quarter, but remain low. Shown on the right, our cost of total deposits rose to 20 basis points in the fourth quarter from 10 basis points in the third quarter. Our average deposits declined $3.2 billion or 4.1% linked-quarter. For deeper insight into deposit volume changes, please turn to slide 8, where we break down our deposits by size. As shown here, most of our deposits come from relationships holding less than $10 million on our balance sheet. The 20202 decline in deposits came primarily from larger balance accounts. What is not shown on this page is the operational nature of our deposit accounts. We believe that deposit accounts, which are used frequently, accounts which record many inflows and outflows are stickier and less rate-sensitive than other deposits due to their operational nature.
Likewise deposits invested for yield, including many of the deposits over $10 million shown on this page are by definition more rate-sensitive. Our operating account balances were relatively stable through 2022, with a slight decline in the fourth quarter compared to the third, which we believe reflects the rising value of deposits as interest rates have increased. The increase in benchmark rates and the widening differential and our deposit rates paid when compared to other investment products created an opportunity for us to have conversations with our more rate-sensitive customers to discuss off-balance sheet products designed for larger and/or less operational deposits.
A net 47% of the full-year 2022 deposit attrition moved into our off-balance sheet suite of products. This served to maintain the relationship with the customer, while keeping deposit costs well-managed. Looking ahead, the increasing value of deposits will lead us to adjust our deposit rates accordingly, as rate remains the primary lever to attract funds which are less operational in nature. While this will impact our cost of funds, we are confident that the nature of our deposit portfolio including the proportion of non-interest bearing demand deposits to total deposits will allow us to keep our overall cost of funds relatively low.
Moving to slide 9, we show our securities and money market investment portfolios over the last five quarters. The size of the securities portfolio declined slightly versus the previous quarter, but as a percent of earning assets, it remains about 9 percentage points more than it was immediately preceding the pandemic. The most significant change to the portfolio this quarter was the movement of funds from the available-for-sale accounting classification to the held-to-maturity classification. The value of this movement was nearly $11 billion of fair value and $13 billion of amortized cost.
This accounting reclassification effectively freezes $1.8 billion of an unrealized loss recorded in accumulated other comprehensive income, which will amortize over the remaining life of the bonds and which will limit the impact on reported accumulated other comprehensive income due to changes in interest rates. We anticipate that money market and investment securities balances combined will continue to decline over the near-term, which will create a source of funds for the rest of the balance sheet. Our revenue is primarily balance sheet driven. This quarter, 82% of our revenue is from net interest income.
Slide 10 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. Net interest income on the bars reflects the benefit of both loan growth and higher interest rates, while the net interest margin in the white boxes, largely reflects the impact of the rising interest-rate environment on earning yields combined with our ability -- earning asset yields combined with our ability to contain funding costs. The right-hand chart on this page shows the linked-quarter effect of certain items on the net interest margin.
Overall, earning asset yield improved 64 basis points, while the cost of interest-bearing funds increased 61 basis points, reflecting a 3 basis point expansion in our interest rate spread. However, nearly half of our earning assets are funded with noninterest-bearing sources of funds. Therefore, the 3 basis point expansion in interest rate spread is augmented by an increase of 26 basis points in the value of noninterest-bearing funds in the higher interest-rate environment. These factors combined to produce a 29 basis point expansion in the net interest margin in the fourth quarter when compared to the third quarter.
Slide 11 provides information about our interest rate sensitivity. As a reminder, we have been using the terms latent interest rate sensitivity and emergent interest rate sensitivity to describe the effects on net interest income of rate changes that have occurred as well as those that have yet to occur as implied by the shape of the yield curve. Importantly, the balance sheet is assumed to remain unchanged in size in these descriptions. Regarding latent sensitivity, the in-place yield curve as of December 31, which was notably more inverted than the curve at September 30, will work through our net interest income over time.
The difference from the prior periods disclosures of latent sensitivity is the shape of the curve and the accelerated pull-through of net interest income growth, which was attributable in part to our lower-than-expected deposit and funding beta. As we begin to increase our deposit rates to reflect the increased value of money and the limited rate movements we have reported so far, our modeling would now estimate a deposit beta of approximately 18% compared to the beta of 5% observed cycle to date. Therefore, given the model increase in interest expense and using a stable side balance sheet, the latent sensitivity interest rate risk measure indicates a decline in net interest income of about 1% in the fourth quarter of 2023 when compared to the fourth quarter of 2022.
Regarding emergent sensitivity, if the December 31, 2022 forward path of interest rates were to materialize and using a stable sized balance sheet, the emergent sensitivity measure indicates a decline in net interest income of about 2% in the fourth quarter of 2023 when compared to the fourth quarter of 2022. Again, this change in outlook can be traced to strong recent net interest income performance and the inverted interest rate curve. With respect to traditional interest rate risk disclosures, our estimated interest rate sensitivity to a 100 basis point parallel interest rate shock using a same sized balance sheet has declined by about 2 percentage points from the third quarter and about 10 percentage points from the beginning of the year.
As rates have risen and downside risks to net interest income has increased, we've been moderating our asset sensitivity, primarily through interest rate swaps, while generally maintaining customer operating deposit balances and allowing certain rate sensitive deposits to decline. The reported change in interest rate sensitivity this quarter largely reflects the recent decline in deposits and a higher net interest income denominator. As a result, this traditional interest rate risk disclosure represents a parallel -- as a reminder, sorry, as a reminder, this traditional interest rate risk disclosure represents a parallel and instantaneous shock, while the latent and emergent views reflect the prevailing yield curve at December 31.
Our outlook for net interest income for the full-year of 2023 relative to the full-year 2022 is increasing. While there will be seasonality along the way with fewer days in the first half of the year for example, we expect that by the fourth quarter of 2023, including the latent and emergent sensitivity as well as an expected increase in loans, net interest income will be modestly higher than that reported in the fourth quarter of 2022.
Moving on to noninterest income and total revenue on slide 12, customer-related noninterest income was $153 million, a decrease of 2% versus the prior quarter and an increase of 1% over the prior year. As we noted last quarter, we modified our non-sufficient funds and overdraft fee practices near the beginning of the third quarter, which has reduced our noninterest income by about $3 million per quarter. Improvement in treasury management fees has allowed us to make up the loss of that revenue. Our outlook for customer-related noninterest income for the 2023 full-year is moderately increasing relative to the full-year 2022 results.
On the right-side of slide, revenue which is the sum of net interest income and customer-related noninterest income is shown. Revenue grew by 24% from a year-ago and when excluding PPP income, it grew by 32% over the same period. Noninterest expense on slide 13, decreased 2% from the prior quarter to $471 million. The reduction is primarily due to a net decrease of certain incentive compensation items within salaries and benefits. The total of the remaining expense categories remained relatively flat to the third quarter. We continue to feel the influence of inflation and expect to continue to hire additional staff to support growth. We reiterate our outlook for adjusted noninterest expense to increase moderately for the full-year of 2023 relative to the full-year of 2022.
Another highlight for the quarter was the continued strong credit quality across the loan portfolio as illustrated on slide 14. Relative to the prior quarter, we saw continued improvement in the balance of criticized and classified loans. Recoveries from balances previously charged-off led to a net recovery of 2 basis points of average non-PPP loans in the fourth quarter compared to a loss of 21 basis points in the prior quarter. Notably, our nonperforming asset ratio and classified loan ratio continue to improve and are at very healthy levels.
Slide 15 details the recent trend in our allowance for credit losses or ACL over the past several quarters. At the end of the fourth quarter, the ACL was $636 million, a $46 million increase from the third quarter. The linked-quarter ACL increase can be ascribed to loan growth and weakening economic forecast. The reserve ratio to total loans was up 5 basis points from the prior quarter to 1.15% percent of non-PPP loans. Our ACL will continue to reflect the size and composition of our loan portfolio and evolving macroeconomic forecast.
Our loss-absorbing capital position is shown on slide 16. We believe that our capital position is aligned with the balance sheet and operating risk of the bank. The CET1 ratio grew slightly in the fourth quarter to 9.7%. Although, CET1 -- the CET1 ratio remained really relatively flat, I'd like to point out the significant amount of earnings retained over the past year. The balance of common equity Tier 1 capital grew by over $400 million or 7% in 2022. However, risk-weighted assets during the year grew by $7.5 billion or 13%, primarily driven by loan growth.
We repurchased $50 million of common stock in the fourth quarter and $200 million for the year. 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 first quarter in conjunction with our regularly scheduled board meetings this coming Friday. Our goal continues to be -- continues to maintain a CET1 capital ratio slightly above the peer median, while managing to a below average risk profile.
Slide 17 summarizes the financial outlook provided over the course of this presentation. This outlook represents our best current estimate for the financial performance in full-year 2023, as compared to actual results reported for the full-year 2022. This is a change from our historical approach where we traditionally provide an outlook for a single quarter one year out. We plan to return to that approach when reporting financial performance over the remainder of the year.
This concludes our prepared remarks. Joe, would you please open the line for questions.