First Citizens BancShares Inc (Delaware) (FCNCP) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares' Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce the host of this conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations. Deanna, you may begin.

Thank you. Good morning, everyone, and thank you for joining us to review First Citizens Bank's second quarter 2022 financial results. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding; our Chief Financial Officer, Craig Nix; our President, Peter Bristow; and our Chief Credit Officer, Marisa Harney, who will be speaking to you today to provide an update on our merger integration progress and our second quarter 2022 performance.

We are also pleased to have several other members of our leadership team in attendance, who will be available to participate in the question-and-answer portion of our call, if needed. During the call, we will be referencing our investor presentation, which you can find on our website. An agenda for today's presentation is on Page 2 of the materials. Following the completion of our formal presentation, we'll be happy to take any questions you may have.

As you are aware, we closed the merger with CIT Group on January 3, 2022. Given the magnitude of this merger on our legacy results, we have included combined numbers for historical periods for comparison purposes. There are footnotes embedded in the presentation to indicate when historical numbers are combined or if they are presented on a legacy First Citizens stand-alone basis.

As a reminder, our comments during today's presentation will include forward-looking statements, which are subject to risks and uncertainties that may cause our actual results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined for your view on Page 3 of the presentation. We will also reference non-GAAP financial measures. Reconciliations of these measures against the most directly comparable GAAP measures are available in the appendix.

Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties.

With that, I'll hand it over to Frank.

Thank you, Deanna, and good morning, everyone. We appreciate all of you joining us today, and we hope this call will be informative and give you a sense of where we've been as well as where we're headed in the second half of the year.

We announced another quarter of solid financial results this morning and remain excited and optimistic about the direction of our company. While we recognize there are some economic uncertainties in the current environment. Our customers, by and large, continue to be in good shape and our portfolios are performing well.

We saw positive momentum in net interest income as a result of the recent increases -- recent rate increases, as well as an improved mix of earning assets driven by a solid quarter of loan growth, all leading to another quarter of positive operating leverage. We're excited to announce that our Board of Directors approved a share repurchase point, which will allow us to repurchase up to 1.5 million shares of our Class A common stock over the next 12 months, representing approximately 9.4% of our total common shares outstanding. Returning excess capital to our shareholders is a key strategic focus, and we are excited about this opportunity to execute on the plan.

Turning to Page 5 of the investor presentation. We are now substantially complete with merger integration and are continuing to concentrate our efforts on optimization of our processes and operations. We recently completed the former One West bank branch conversion with no significant issues, thanks to the dedication of our hard working integration team. Our long-term focus, attention to relationships and diversity of our business segments have positioned us well for the future, which we are extremely excited about.

Turning to Page 6. I'm going to provide a quick update on our cost savings initiatives. If you'll remember in the first quarter call, we talked -- we reported cost savings to date of $100 million. Since that time, we've made good progress reducing our annual expense run rate by another $70 million increase in the cost savings to date of $170 million or 68% of our $250 million target. The largest reduction to date has been in personnel expense, but we've additionally benefited from savings in areas such as FDIC insurance, professional fees and third-party processing expenses.

We remain confident in our ability to achieve our $250 million cost savings target by the end of 2023. We've also been hard at work on many of our strategic business objectives, which include building out capabilities across various lines of business to recognize revenue synergies as a combined company.

And with that, Peter Bristow, our President, who leads our Commercial Bank and Rail Business segments will provide an update on the state of those businesses. Peter?

Thanks, Frank, and good morning, everyone. I'm pleased to speak with you today about the exciting opportunities we are seeing in our Commercial Bank. As Frank mentioned, we've been able to capture some of the synergies we knew existed between our 2 great companies early on, and we are thrilled at how this merger has positioned us for long-term success.

We've put an emphasis on retaining the top talent in our Commercial Bank, and we believe our ability to execute on this continuity of sales leadership has positioned us well not only for our quarterly results, but also in the future. On that positive note, Q2 was a strong quarter for the Commercial Bank with solid performance across our businesses. In addition, our strong business leadership has enabled our teams to hit the ground running as we integrate the banks. Our Commercial Finance business has continued to see momentum and demand remains strong in most verticals with pipelines well above 2021 levels.

We are continuing to see strong pockets of growth within our renewable energy, medical office real estate and in our technology, media and telecom businesses. Additionally, we're seeing an ongoing flow of referral business from our branch network and middle-market banking relationship managers to many of the legacy CIT business lines. Leveraging these combined organization expertise, we can offer new products and services to meet these growing client needs. This includes the ability to deliver increased capital market capabilities to FCB cloud-base and delivering FCB's wide breadth of treasury management products and services to CIT's commercial customers.

With that said, we are continuing to monitor the markets closely as market volatility has increased driven by the Fed balance sheet runoff forgetting in earnest and continued rate increases. As credit spreads reset higher, we expect well-structured deals to continue to be highly competitive. In real estate finance, the lending environment remains extremely competitive with record levels of capital being raised for lending and investment. We're seeing that play out as originations are strong, but like many in the industry, we continue to be impacted by elevated prepayments and significant competition for new deals driving down our balances.

Our credit quality remains strong, but given where we are in the current economic cycle, we don't want to take a digital credit or structure risk in this area. Within our factoring business, we're seeing that retail sectors are still performing well, although we are being selective on customers. The new business pipeline is strong and with added sales leadership and a continued integration in the FCB footprint, new business should continue to build. However, as consumer confidence starts to be impacted by increased inflation and market volatility, spending had its good change across the entire economy, and we will continue to be watchful.

Moving to Business Capital, which is our leasing organization. Originations and portfolio performance remains stellar, despite declines in small business optimism and increasing economic uncertainty. Current asset levels are near record highs for business capital and credit quality remains strong as net losses continue to run favorable to historic rates. At prior high asset levels, the business had notable franchise finance and transportation portfolio balances, and today, those have since largely run off.

Still a sizable opportunity exists to better serve bank customers, who sell equipment with business capital, vendor finance capabilities, creating stickiness and deepening key relationships. FCD legacy vendor programs are going to be transitioned to the Business Capital unit, as initial pilot vendors are going to be consolidated in August with the remaining to follow by year end.

In our Rail business, utilization improved to 96.2% in Q2, up 72 basis points from the prior quarter. For the third consecutive quarter, repricing was favorable at 114% of the expiring rate. We are starting to see the results of our focus on extending terms, averaging 43 months across the portfolio and 48 months on freight cars for the quarter. While there are no recessionary indications of parent in the portfolio currently, we continue to watch the markets closely, particularly with industrial production and the purchasing managers index being down slightly in June.

Our near-term outlook remains positive but mixed across certain markets. We expect utilization to be flat to modestly improving through 2022. The strong performance of our Commercial Bank will not be possible without the experienced nimble management teams across each of these businesses. These established leaders help provide stability to both our associates and our clients while also identifying new leaders to promote additional opportunities, which is critical to our continued success.

One of the items we continue to be pleased with is the performance of the legacy CIT portfolio as we deal with the economic uncertainty of today. Prior to the merger, the CIT team executed a multi-year strategy to reduce portfolio risk and our Chief Credit Officer, Marisa Harney, is here today to provide an overview of these efforts.

Marisa, I'll turn it over to you.

Thank you, Peter, and good morning, everybody. As Peter noted, reducing credit risk was a strategic initiative for CIT in the years leading up to our merger with First Citizens and managing this risk remains critically important given the macroeconomic uncertainties we're all facing today.

And as Frank mentioned earlier, loan growth has been solid this quarter as we continue to originate business in areas where we believe there are opportunities, while maintaining consistent underwriting standards. We continue to manage our portfolio prudently and effectively, and I want to take a minute to demonstrate how legacy CIT executed on these efforts prior to the merger, positioning our commercial bank for long-term success.

Beginning with Page 9 of the presentation, I'd like to provide an overview of the legacy CIT profile, specifically related to changes that were initiated following the 2008, 2009 financial crisis. And those efforts were aimed at strengthening the portfolio. As depicted on the slide, CIT sold or significantly reduced high-risk portfolios that were deemed likely to cause stress in times of economic disruption. As part of our multi-year transformation, we exited many of the riskiest asset classes that were in our portfolio going into the last credit cycle, including subprime mortgages, mezzanine and subordinated commercial real estate loans and private student loans.

We also exited businesses with higher credit risk, asset risk and regulatory risk, such as commercial air operating leases and international equipment portfolio. Further, we significantly reduced exposure to cash flow or enterprise value dependent loans, the bulk of which were leverage loans to approximately 10% of our exposure as of the merger close. The de-risking of our portfolios enables us to focus on appropriate risk adjusted returns and will serve us well as we consider the challenges in the current macroeconomic environment. This is achieved by enacting more robust credit underwriting standards and enhancing credit discipline among other things. The strong risk culture and credit risk discipline resulted in a more stable and healthy loan book, as demonstrated during the COVID-19 pandemic.

Page 10 demonstrates that we were able not only to weather the pandemic, but to thrive, by continuing to enjoy strong asset quality, despite the macroeconomic pressures and uncertainty in the market. And this was accomplished again by being selective and disciplined in the face of very competitive market conditions. As we look forward to our future as a combined company, you'll see that Page 11 shows First Citizens and CIT have complemented each other to create a combined company with a moderate credit risk.

While each legacy company was more skewed to one side of the risk spectrum or the other, the combined company's risk appetite will enable us to be more competitive in the changing market, while still maintaining a balanced approach with a focus on long-term growth and stability. Despite some of the uncertainties out there, I'm very comfortable about the quality of our book. We continue to strengthen our portfolio and demonstrate our discipline through new business originations that continue to come in at better risk ratings than our existing credit portfolio. The combined company's deep industry expertise and structuring capabilities give us confidence that we're properly balancing our growth strategy with our underwriting strategy. This merger integration we've come a long way in a brief time. We're in a good position and thanks to our experienced and professional associates, who're executing well. We believe we'll position well to keep this momentum going strong.

I'm now going to pass the mic to Craig to discuss our second quarter financial results in more detail. Craig?

Great. Thank you, Marisa, and hello, everyone. I'm going to start on Page 13. I will begin with second quarter takeaways, which as Frank mentioned points to another strong quarter of financial performance. As Frank mentioned, we are excited to resume our share repurchase program, which has been suspended since the third quarter of 2020. We believe the share repurchases will allow us to return to more optimal capital levels, while leaving room for organic growth, deliver higher returns on capital and earnings per share, and return capital to our shareholders in the most cost efficient way.

Pre-provision net revenue growth continues to be a bright spot. PPNR adjusted for notable items grew by 17.1% over the linked quarter and by 38.5% over the second quarter of last year. Positive operating leverage of 6.9% and 12.8% was achieved for the linked and comparable quarters, respectively, as revenue growth exceeded expense growth by a wide margin in both periods.

The most significant contributing factor to PPNR growth was a 7.9% increase in net interest income over the linked quarter and a 14.4% increase over the comparable quarter last year. Net interest margin expanded by 31 basis points from 2.73% to 3.04% during the second quarter. We also are pleased with expense management, especially given inflation headwinds. Our efficiency ratio improved to 57.55% during the quarter, due to strong net revenue growth and the continued recognition of merger cost savings that Frank alluded to earlier.

We had a provision build during the quarter after having several quarters of provision reversals as COVID-related reserves were released. The build during the current quarter increased provision expense over the linked quarter by $91 million. The current quarter build was primarily related to a deterioration in the CECL macroeconomic forecast, used to arrive at the ACL, as well as maintenance reserves to cover net charge-offs and loan growth.

Despite the provision build, the ACL remains fairly stable in terms of dollars and the ACL ratio declined 3 basis points from 1.29% to 1.26%. As Marisa mentioned, credit quality remains excellent. The net charge-off ratio during the quarter remained below historic norms at 13 basis points and the nonaccrual ratio declined during the quarter to 0.76%. Loan growth exceeded our expectations this quarter, growing at an annualized rate of 13.5% and by 14.3% ex-PPP. Growth was strong broadly in both the Commercial and General Bank business segments. And finally, total deposits declined during the quarter as higher cost acquired deposits ran all. However, the decline was partially offset by strong growth in noninterest-bearing deposits in our branch network.

Now turning to Page 14, I will touch on the financial highlights for the quarter. Please note that our GAAP results are presented on Pages 36 through 38 in the appendix. The primary focus of my comments today will be on supplemental reporting, which combines legacy BancShares and legacy CIT for historical periods presented with adjustments to account for the after-tax basis of notable items such as gains and expenses, associated with the merger, gains and losses on sale and debt extinguishment and other nonrecurring non-core items. GAAP net income for the second quarter was $255 million, a $14.86 per share. On an adjusted basis, net income was $287 million or $16.86 per share, yielding an annualized ROE of 11.9% and an ROA of 1.07%.

On to Page 15, we present 2 condensed income statement. The one at the top representing our reported GAAP results for the first and second quarters of '22. And the results as of legacy FCB and CIT are combined for the second quarter of 2021. The second in the middle summarizes the impact of notable items to derive the adjusted results at the bottom of the page from the reported results.

Page 17 provides a detailed listing of the notable items affecting the quarter and year-to-date periods, along with their impact on these line items and diluted earnings per share. Focusing on the adjusted results at the bottom of the page, net income available to common shareholders was $270 million for the second quarter, down from $299 million in the first quarter and $286 million in the second quarter of the prior year. The decline for both periods were due to increases in provisions for credit losses of $91 million and $136 million, respectively, as reserves were built in the current quarter and release for the comparable quarters.

The increase in provision expense was largely offset by PPNR growth, which increased by $60 million or 16.8% over the linked quarter and by $114 million or 37.6% over the comparable quarter a year ago. The increases for both periods were driven by positive operating leverage as net revenue grew at a faster pace than expenses.

Page 16 provides a view of our year-to-date result on the same basis for your reference. Page 17 provides detail with respect to notable items for the relative quarterly and year-to-date periods. During the second quarter, these adjusted -- minimal net impact of adding $2 to GAAP EPS.

Starting on Page 18, I'll touch on the major trends impacting our operating results. And as noted otherwise, the historical financial trends on the upcoming pages are consolidated, as if the merger took place during the period presented. Net interest income totaled $700 million for the quarter, up 7.9% over the first quarter, and 14.4% over the second quarter last year. The drivers of the increase over the linked quarter were loan growth, higher yields on earning assets and the $3 billion debt redemption that occurred in February.

The yield on earning assets increased by 29 basis points, and the cost of interest-bearing liabilities remains fairly stable, declining by 1 basis point, primarily due to the debt redemption only partially offset by a 2 basis point increase in the cost of interest-bearing deposits. Analysis for the comparable quarter and year-to-date periods are presented on Page 18 for your reference.

Now turning to Page 19. We highlight the drivers of the 31 and 48 basis points margin expansion from the linked and comparable prior year quarters respectively. We continue to see positive impact from the debt redemption that took place at the end of February, allowing us to eliminate a higher cost funding channel and rebalance our mix of earning assets. This coupled with strong loan growth in reductions in interest-bearing deposits, eliminated the excess liquidity that we have had on our balance sheet since the start of the pandemic. The 31 basis points increase in margin from the linked quarter was due to the impact of higher loan yields and strong loan growth, the impact of the debt redemption and expanding yields on investment securities and overnight investments, partially offset by a small decline in SBA-PPP income and slightly higher interest-bearing deposit costs.

With respect to earning asset yields, the loan yield increased by 13 basis points over the linked quarter, as we started to benefit from the recent rate increases. Purchase accounting and PPP income impact on the loan yield was minimal. We expect the loan yield to continue to increase as we recognize the full benefit of rate increases as many of our variable rate loans did not reset until the start of the third quarter, given floors that were embedded in some of them.

The yield on our earnings -- on our investment securities portfolio increased by 14 basis points during the quarter, and we expect continued improvement throughout the remainder of the year. The improved yield was driven by higher reinvestment rates and lower prepayments and premium amortization on our MBS portfolio. The yield on purchase volumes during the quarter averaged 3.5% compared to the overall portfolio yield of 1.85%.

NIM was up in the comparable quarter by 48 basis points, some of them exist that I stressed in the linked quarter with the exception of the timing deposit rate and a higher investment securities balance, both of which provided for additional expansion, partially offset by a $1.1 billion decline in average loan balances, lower purchase accounting accretion and SBA-PPP income.

Looking ahead, while we expect interest expense to increase, we expect interest income will increase at a faster pace, leading to further growth in net interest income over the coming quarters. And at this time, we expect the earning asset yield will increase at a faster pace than the cost of funding them, thus leading to continued expansion of net interest margin.

Turning to Page 20. The line graph on the left hand side of the page indicate, we continue to be asset sensitive, albeit slightly less than in the prior quarters due to a reduction in rate sensitive assets. As we noted before, we have been operating the liquidity above normal operating ranges for a number of quarters, and we're able to optimize our asset mix during the second quarter. We have and will continue to take a measured approach to interest and market rate risk management to position our balance sheet to benefit from higher interest rates, while at the same time providing downside protection, should interest rates fall in the future.

We estimate that a 100 basis point shock in rates with increased net interest income by 5.2% and a 100 basis point ramp that increased it by 2% over the next 12 months. The main drivers of our asset sensitivity are our variable rate loan portfolios, which represents 43% of total loans, our cash position and expected modest deposit betas driven by our strong core deposit base. We model our blended deposit beta between 20% and 25%, which is aligned with historical experience and a rising rate environment.

Core noninterest income, turning to Page 21, increased by $3 million over the linked quarter, or by 1.1%. The increase is primarily due to higher capital markets and wealth management income, partially offset by a decline in net rental income or operating leases due to higher depreciation and maintenance expenses despite growth in gross rental income. While net operating lease income was down compared to the prior quarter, we are encouraged by the continued growth this quarter in gross operating lease income, a further reflection of rail utilization increasing to 96% from 95.5% in the first quarter and 90% last year.

We see further momentum here as repricing rates were 114% of first quarter prices. The higher depreciation expense was related to an update on salvage values and operating leases. And moving forward, we expect quarterly depreciation to be in the range of the average experience for the first 2 quarters of this year. The increase in maintenance expense was expected as a higher percentage of cars renewed leases during the quarter and the impact of inflation. The timing of maintenance expense can be lumpy, however, we expect moving forward it to be in the range of what we experienced in the second quarter to slightly higher moving forward.

The increase in wealth management income was led by our brokers channel, which offset some of the pressure we felt in trust from broad-based equity and bond market decline. In brokerage, the income was driven by slight safety of production in both annuities and structured products was significantly up in the second quarter. We do expect further momentum in workers in the second half of the year, which will help offset headwinds from declining asset value. Our assets under management declined to $31.7 billion in the second quarter, down from $32.2 billion in the previous quarter, compared to the second quarter of '21, however, assets under management are up $1.4 billion, which reflects continued client acquisition efforts and expansion of our wealth management sales teams.

Regarding capital markets fees, we saw an increase of $4 million from the prior quarter, with a slightly higher number of total deals. While the quarter-over-quarter experience was positive, the overall outlook is muted as industry-wide issuance is down year-over-year and is expected to continue to be down, given the absolute rate environment. Core noninterest income increased by $37 million as compared to the second quarter of last year, led by increases in net rental income on operating leases, service charges on deposits and wealth management income, all partially offset by a decline in mortgage income.

Net rental income was higher due to increased utilization, as discussed earlier. In wealth management, the increase was led by mortgage and trust. The increase in service charges is split between commercial and individual with commercial led by pricing increases in client acquisition and individual charges rising above the press levels in the second quarter of '21, as a result of consumer stimulus.

Turning to the remainder of 2022, we expect continued momentum in our wealth, merchant, card and wealthy income producing businesses. While service charges on deposits will decline as we enacted the NSFOD policy changes at the beginning of the third quarter, we anticipate a high single-digit percentage increase in adjusted noninterest income year-over-year. With respect to the lost fee income from NSFOD fees, we are looking for opportunities to offset it by broadening customer relationships to product offerings that will add value, such as card, merchant, wealth and treasury payment services.

Now turning to Page 22. Noninterest expense adjusted for depreciation and maintenance on operating leases was $609 million, a $77 million decline from the linked quarter and a $55 million increase over the second quarter last year. The $77 million decline from the linked quarter was due to a $101 million decline in merger-related expenses, partially offset by a $27 million reversal of expense in the first quarter related to the termination of 2 legacy retiree benefit plans and a $6 million decline in core noninterest expense.

In terms of the decline in merger-related expenses, the first quarter included more significant deal-related change in control, retention and severance payments, as well as legal and consulting costs. Our total estimate for one-time merger expenses is still in line with the $445 million we guided at the beginning of the year. The $6 million decline in core noninterest expense from the linked quarter was primarily related to an $11 million reduction in personnel costs driven by lower benefit expenses, lower incentive compensation and higher deferred origination costs. Partially offset by higher salary expense due to annual merit increases and net staff additions.

The net staff additions are a result of building out teams to support our move to large bank compliance as well as the backfill vacancies from the prior quarter. Personnel expense is one of the areas, where we are facing the greatest inflationary pressures, especially as it relates to new hires, but the impact of new hires are somewhat muted in the quarter driven by the continued recognition of cost saves.

Analysis for the comparable quarter and year-to-date periods are presented on Page 22 for your reference. Before I leave noninterest expense though, the big takeaway here is that our efficiency ratio improved to 57.55% during the quarter. Its core net revenue growth outpaced core expense growth for both comparable periods. When we initially announced the merger, we estimated a mid-50s efficiency ratio once we are fully synergized and the improvement this quarter in the efficiency ratio is in line with us hitting those expectations.

As Frank mentioned, we expect positive operating leverage from further net interest income expansion and muted expense growth from cost saves helping to temper inflationary pressures. Therefore, we expect the efficiency ratio to continue to trend down to the mid-50s in the current -- in the coming quarters. With respect to inflation, we are feeling pressure in wages, professional services and time track costs. We do expect, however, as we are able to remove another $30 million out of our cost base this year, it will help neutralize the natural noninterest expense growth that exclusive of merger cost saves will be closer to the mid-single-digit range for this year.

Prior period that our noninterest expense growth was more naturally in the 3% range, however, the current inflationary pressures, we estimate this to be closer to the 5% to 6% range. We expect a low single-digit percentage increase in adjusted noninterest expense year-over-year, with respect to merger-related expenses moving forward, we expect them to be in the general range of where they were for the second quarter. For your reference, we've included pie graphs on Page 23, showing the composition of our core noninterest income and expense. Page 24 provides balance sheet highlights and key ratios, and I will cover the significant component on subsequent pages.

Turning to Page 25 and a bright spot during the quarter. Total loans increased $2.2 billion over the linked quarter or by 13.5% on an annualized basis, exceeding our single -- our mid-single-digit guide last quarter as our teams generated production above target levels and prepayments reduced due to increasing interest rates. In the General Bank had an annualized rate of 18.4%, led by the branch network. Growth was primarily concentrated in business and commercial loans. We have continued to add bankers in our commercial business teams, and we think the growth in the second quarter was a result of the continued business development efforts of our branch teams in addition to loan borrowing pulling through ahead of the rising rate environment.

Additionally, within the General Bank, we saw growth in residential mortgage loans for the quarter, even the overall mortgage production was down, lower prepayments and the shift in production of the ARM products that we hold on balance sheet contributed to the growth. We continue to be encouraged by the growth in the General Bank as we penetrate higher growth markets and continue to be relevant in our legacy footprint. To expand on Peter's earlier comments on the commercial bank, loans grew at an annualized rate of 8.4%, led by strong growth from a number of our industry verticals, middle-market banking and business capital.

Offsetting the growth somewhat, we continue to see loan declines in real estate finance loans due to continued elevated prepayments. However, we are comfortable with our current level of new production in real estate finance, having opted not to increase those levels of production to cover the elevated runoff, given where we are in the economic cycles. On a year-over-year basis, loans increased $1.3 billion or by 2%, excluding the impact of purchase accounting adjustments and PPP runoffs, loans increased by $2.8 billion or 4.3%. The growth from the prior year quarter was in similar areas that I just noted for the linked quarter.

As we would step in our outlook section, while we expect to have continued loan momentum in the third quarter, we do expect the pace to moderate from the second quarter. We believe that both the rising rate environment as well as a few larger loans booking in the second quarter will moderate our growth back into the range of mid-single-digits in the third quarter. To the extent we exceed those expectations, we view as a positive, as we are pursuing good credit aligned with our risk appetite as Marisa mentioned, and we have increased our rates in line with market movements. So we would expect that growth to further enhance our -- the bank's earnings.

For the reference, we've included pie graph on Page 26, showing loan composition by type and segment. Moving to Page 27. Deposits declined $2.3 billion or by 9.9% on an annualized basis, a 2.5% quarter-to-quarter unannualized. The main driver of the declines in the linked quarter was a $3 billion decline in interest-bearing deposits driven by reductions in money market deposits and time deposits, as we sell, the most rate sensitive customers begin to move funds in response to recent Fed rate increases.

The reductions were primarily concentrated and acquired higher cost channels, including the direct bank and legacy One West branches. These declines were offset by -- partially offset by growth in noninterest-bearing deposits of $747 million or 11.6% annualized rate, primarily from our branch network. We have been very encouraged by the continued double-digit percentage growth in noninterest-bearing deposits in our branch network, which we attribute to continued emphasis on developing client relationships, which includes not only fulfilling our client lending needs, but also focuses on depository and other banking service needs.

Our cost of deposits was 19 basis points, which was flat compared to the linked quarter and down 8 basis points from the second quarter last year. We do remain guarded on the outlook for absolute deposit growth in 2022 as the interest rate environment continues to evolve and the Fed impact liquidity in the system by deleveraging its balance sheet. We do expect to decline in interest-bearing deposits to moderate in the coming months and continue to be partially offset by growth in DDA and checking accounts.

For your reference, we have included pie graphs on Page 28, selling deposit composition by type and segment. Moving with age 29, our balance sheet continues to be funded predominantly by core deposits, with total deposits representing over 95% of our funding base at the end of the quarter. Continuing to Page 30, as Marisa mentioned, credit quality remains strong. The net charge-off ratio was 13 basis points, well below historic norms, deterioration in the CECL macroeconomic forecast and strong loan growth, partially offset by improved credit quality led to a $42 million provision for credit losses compared to a $49 million benefit in the prior quarter. The non-accrual ratio improved from 82 basis points to 76 basis points. And despite the positive provision expense, the ACL ratio declined by 3 basis points.

Turning to Page 31, we provide a walk forward of the ACL from the first to the second quarter. The ACL was up by $2 million to $850 million. Net charge-offs totaled $22 million during the quarter. Credit metrics held up well and the impact -- and had the impact of reducing the ACL by $19 million. Portfolio mix had the impact of reducing the ACL by $17 million of loan composition shifted out of portfolio as a higher loss rates into those with lower loss rates. While the go-forward macroeconomic forecast shows some deterioration, resulted in a $26 million increase in the ACL. Actual performance remained strong. Growth in the portfolio during the quarter added $34 million. The ACL at quarter end covered annualized net charge-offs 9.6x.

Turning to Page 32. Our capital position remains strong, with all ratios above or in the upper end of our target ranges. As of the end of the second quarter, our CET1 ratio was 11.34%, and our total risk-based capital ratio was 14.46%. While we had strong loan growth during the quarter, increasing our risk-weighted assets, we were able to moderately gain capital ratios, given the strength in our core earnings. During the second quarter, tangible book value per share grew modestly from $574 to $579, as strong earnings were partially offset by negative AOCI adjustments. AOCI adjustment for these tangible book value per share down about $30 or by 7%, but way overshadowed by $170 or 41% positive impact due to the CIT acquisition.

Turning to Page 34. I will conclude by assessing our financial outlook for the third quarter and for the remaining 6 months of the year. On Page 34, the first and third columns list our second quarter 2022 and full fiscal year 2021 adjusted actuals for the relevant metrics or balance sheet items. The number in these columns are adjusted for notable items to arrive at core noninterest income and expense. Column 2 provides our guidance for the third quarter and column 4 for the full fiscal year 2022.

From a loan growth perspective, we expect growth to be in the mid-single-digit percentage range in the third quarter and in the mid-single to high single-digit range for the year. While we foresee continued mid to high single-digit growth in our branch network, we do continue to feel some pressure on the real estate financing -- finance portfolio due to accelerated prepayments. And while loan growth was robust in the second quarter, the absolute rise in interest rates may temper our customers' appetite to borrow with a moderate overall loan growth from the levels we saw in the second quarter.

While mortgage pipelines on production are expected to continue to decline through the rate environment, the corresponding slowdown in prepayments and the shifting of production to ARM products, which we hold on balance sheet should continue to profit mortgage loan growth in the coming quarters. We will continue to proactively add bankers in our wealth, middle market banking and large metro branch network to support loan growth. Our combined cost of funds will continue to afford us opportunities to compete in the large commercial space on high credit rate opportunities that might not have been profitable prior to the merger and collaboration of our general and commercial banking leading teams seeing referrals to each other will help increase loan volumes.

On deposits, we expect to see some continued attrition in some of our higher-priced accounts in the third quarter. However, we expect the pace of deposit runoff to slow from the second quarter. We are continuing to take steps to ensure rate offerings in our branches and in the direct bank are competitive. We are also keeping an eye on the global impact of the Fed reducing its balance sheet and the systematic impact this will have on deposits in the system.

For the full year, we expect a negative low to mid-single-digits deposit decline, given both the rising rate environment as well as our intent to optimize the deposit growth, keeping our beta low. Our expectation is that demand deposit growth will continue at a mid-single-digit percentage growth rate. For net charge-offs, we expect a gradual return to pre-pandemic non-stressed levels. We expect net charge-offs in the range of 15 to 25 basis points in the third quarter and 12 to 22 basis points for the full year. The increase in our net charge-off projection is not due to any apparent stress in our portfolios, rather we think the impact on inflation and rising rates may result in our losses returning to more historic levels, which will take closer to the 25 to 30 basis points range for the combined company.

Our current forecast assumes that the Fed will raise rates by 125 basis points in the third quarter. 75 basis points already behind us, so 50 more moving forward, ending at a range in the third quarter, up 2.75% to 3%. And so with 50 basis points of hikes in the fourth quarter ending a range of 3.25% to 3.50%. For net interest income, we expect increases in the high single-digits from the second quarter to the third quarter as the full quarter impact of second quarter loan growth is recognized and asset yields continue to improve.

The good news is, we are starting to see new borrowing rates, increase in every major products, for example, commercial rates were up approximately 40 basis points compared to the first quarter. Most of these rate increases occurred at the end of the quarter, so we haven't seen that pull through completely to the margin yet. We expect net interest margin to expand again in the third quarter as the increase in earning asset yields outpace the increase in our funding costs.

On the full year basis, we expect high teens percentage growth in net interest income, mainly due to the debt redemption improving earning asset yields and loan growth, improving our asset utilization. From a core noninterest income perspective, we do anticipate a negative mid to high single-digit decline compared to the second quarter, mainly driven by the change in our NSFOD policy that took place on July 1. This change is expected to reduce annualized NSFOD revenue by approximately $37 million on an annual basis. Aside from NSFOD changes, we expect wealth revenue to be flat as while we have no minimum brokerage, the broad-based market declines that occurred in the second quarter may present a headwind for trust revenue.

We also expect flat to moderate declines in factoring, primarily given seasonal factors. On a full year basis, we expect upper single-digit growth compared to the prior year, mainly due to improvement in net operating lease, wealth and card income offsetting the mid-year impact of the NSFOD changes. From a core noninterest expense standpoint, we expect the third quarter to be flat to low single-digits growth over the second quarter, as continued inflationary pressures and the expense base were offset by several recognition of the merger synergies.

For the year, we expect noninterest expense percentage growth to be low single-digits, this represents the core expense growth rate is driven by inflationary pressures in the range of 5% to 6% being offset by the $100 million in additional cost saves, we estimate to be recognized throughout 2022. From a cost savings standpoint, we estimate that $170 million in cost saves is in the run rate currently and we project $200 million to be in the run rate by the fourth quarter of this year. In 2023, we expect $250 million to be in our run rate by the fourth quarter.

To close, we are very pleased with our second quarter results, excited about the share repurchase plan, and the hard work put in by our associates to make all of this happen.

With that, I will turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question comes from Stephen Scouten from Piper Sandler.

Just one quick clarifier first. I was curious when you expect it to actually begin the share repurchase plan?

We're planning August 1. Fairly immediately.

Great. And then just as I look at the updates in the guidance, I guess the biggest delta or the biggest change quarter-over-quarter was really in the deposit guidance to this now low to mid-single-digit decline. And obviously, we saw the higher cost deposits down pretty materially this quarter. So I'm wondering, has that been a little bit faster exodus given the faster pace of rate hikes? Or have there been any other changes that's led to that change in the guidance? And then just within that, I wanted to confirm that you felt like you've reached kind of your efficient mix on your balance sheet and wouldn't expect to see further liquidity reductions from here?

The answer to the first question, deposits run off in the second quarter was slightly above what we would have projected. Some of that is seasonal due to tax season. We're feeling really good about our liquidity position right now. And in fact, the earnings asset mix really optimized during the quarter with overnight investments, investment securities and loans within our desired target range of earning assets. In fact, we have a little bit more room to grow in loans and a little bit more room to reduce cash, quite frankly.

So we're pleased -- and don't foresee any liquidity issues moving forward and our ability to fund loan growth, earning asset growth. Tom, would you like to add anything to that?

No, I think you did it.

Okay. And then, I guess just my follow-up question would be maybe around the loan growth and kind of where you saw that from a legacy markets versus new markets? And then maybe even as you guys kind of outlined on Slide 11, if you could give us a feel for how that production and that strong growth this quarter kind of fell within that lower risk profile of the legacy platform to the higher to moderate risk segments as well kind of from a composition perspective?

Okay. I would just say at a high level, we were pleased that the loan growth was strong across the board, it's broad. The main drivers would be commercial and business loans and the branch network, they were up $1.1 billion and a 17% annualized. As mentioned, mortgage, primarily ARM loans, they were up $535 million, a 26.8% annualized. Commercial finance within the Commercial Bank, Peter alluded to, loans were up $640 million, 6.3% annualized. Business capital, our leasing line of business were up $233 million, which is 20% annualized. We did see a $326 million decline in real estate finance line, it's about 21%, it's an annualized reduction, although production is pretty good there, even though we had a decline.

If you break it down within commercial finance, we saw -- as alluded to strengthening the verticals. And primarily, that was concentrated in energy, healthcare, telecom. And middle-market banking also had a very good quarter. Just looking forward, we're encouraged that pipelines are strong. They're beginning to see referrals to the Commercial Bank from the legacy FCB lines of business. So we do see continued loan growth going forward, but somewhat muted.

And in terms of -- I think you had a question about when we change our risk appetite, we stuck right with our risk appetite. Marisa, do you have any comments there to add to that?

Well, I'd just say, given the businesses that Craig referred to, with General Bank and the branch originated business really falls within that legacy First Citizens primarily green, if you want to refer to -- as you're referring to Page 11. The growth in -- and that's true on the consumer side and on the small business side. The growth in the commercial verticals, our energy group is very strong in renewables, and our healthcare group has been growing strong in healthcare, real estate, a little different, and we treat that a little bit differently in terms of our appetite versus commercial -- general, commercial real estate.

So I would say that we're sticking to our netting. There was not an emphasis to grow by taking additional risk and certainly not in those areas that we would consider to be higher risk given the red.

Our next question comes from Brady Gailey from KBW.

So Craig, I heard your comments that accretable yield and PPP added minimal impacts in the quarter, which is a little surprising, especially on the accretable yield side, given CIT wasn't closed that long ago. I think you guys had $33 million of accretable yield last quarter. So what -- maybe just what's the dollar amount of accretable yield that you realized in the second quarter?

So in the second quarter, accretable yield recognized is $22 million, so close to $60 million for the year. It is additive, so net interest margin would have been 8 basis points lower in absolute terms during the current quarter around it. But our purchase accounting investments overall were very immaterial to the balance sheet. The $21.6 million, representing only 3% of net interest income. So it had 8 basis points impact on the NIM, and that was 2 basis points on yield on earning assets accreted. So it was really sort of neutral to loans, 2 basis points primarily evolved around investment. And it was 6 basis points favorable to the confidences bearing liabilities.

So that's the component of it. We don't really talk much about it, because it is so immaterial, but that's a good question. And hopefully, that straightens that out. We just don't expect that to have a material impact going forward.

And I'm guessing as the PPP winds down, the PPP impact was fairly minimal in the second quarter. I think it was about $9.5 million last quarter. I'm guessing it's down from that this quarter.

Yes. It has an insignificant impact at this point in time. We're actually going to stop talking about it. Next quarter...

Okay. I'll just find on the -- all right. And then on the buyback, it's a nice buyback announcement this morning. How do you think about the buyback longer-term? I mean (inaudible) over the next year. But beyond the next year, I mean, do you think that a buyback is just kind of always something that you guys will have in place? Or is this more of a one-time, "hey, we have a lot of excess capital. We're going to get common equity Tier 1 closer to 10%, and then you'll kind of be done with the buyback." How do you think about it?

Well, I mean, all things being equal, I think you would see us continue the buy back, obviously, we can't predict the future with a lot of accuracy, but based on where we believe that we will land on our CET1 ratio with respect to this particular plan, we do believe that we will have excess capacity to continue. Obviously, that contains loan growth, that contains with economic situation, et cetera. But they saw on a steady state, we would continue to kind of stay in plan.

All right. And then finally for me, I just wanted to ask a question on the picture of the rail car business. It's not something that legacy First Citizens was involved in. But as you've gotten to know it over the last couple of years, do you think that rail car will be around longer-term at First Citizens? Or do you think that that's a business that -- if it made sense to sell that business, it'd be a little bit of an earnings headwind, but it'd probably be a nice tangible book value gain. Is that a business that you could look to sell longer-term?

Longer-term, I can't address longer-term. But right now, we're very pleased with the rail. It's generating 27% of our noninterest income, performing well, we have good experience teams there. So we like the business. And they plan to exit at this time.

Our next question comes from Christopher Marinac from Janney Montgomery Scott.

I wanted to ask about the scenario about the margin, if the Fed were to stop raising rates or perhaps you can go backwards. Is that something that you think about protecting? Is there sort of a window of kind of trying to capture as much as you can, while the Fed is still tightening?

Yes, that's a great question. We're looking at asset sensitivity on our balance sheets, going through our analysis. So you saw a decline slightly quarter-over-quarter cash balance at the time there. We feel comfortable when we see it, we're slightly asset sensitive, but we don't feel like we're overly positioned for rising or falling rates.

And then just I guess looking out beyond the charge-offs guide before this year, do you see any signal that support any higher losses in the next year? Or at this juncture, would it be fair to think that the loss pace could kind of be intact as we head into the beginning part of next year?

I think it's very possible to be intact based on leading indicators. If we look at 8 or 9 just high-level credit quality indicators and 8 of the 9 are better or much better than they were pre-pandemic. So there's really nothing indicating that we will return to the historic norms, but that continues quickly as we all know. So we might have a bit of conservatism in that charge-off ratio as it relates to the remainder of this year, and potentially into next year.

Our next question comes from Brian Foran from Autonomous Research.

I think you covered a lot of what I was going to ask already. Maybe just -- am I thinking about the buyback and capital, right? I mean, it seems like you've been using up this, you'd still probably be maybe at the midpoint to slightly above the kind of 9% or 11% CET1 range by middle of next year. I know there's a lot of moving parts. But do you have a sense of where you think this buyback will take you to on a CET1 basis?

Yes. We're hedging it to around 10.6%, this will be 60 basis points over the high end of our CET1 range. So now we're talking about excess capital, all things being equal. We're very encouraged by that, although we would certainly like to have a more optimal capital level. This particular repurchase is depending on price to take us to 10.6% at its conclusion.

And then the noninterest-bearing deposit growth was definitely a stand out this quarter. Most other banks had pretty chunky declines there. I know you touched on it in the presentation, but can you just maybe give us a little bit under the hood? Like, is it small and midsized businesses that you're growing? Or what do you think drove that kind of divergence where you were able to grow than almost every other bank strength this quarter?

Well, about half of our DDA deposits are commercial. And we do see a lot of growth there, because that's our go-to-market strategy, sort of a move alone loan type approach there, and it always has been an emphasis. And we continue to see double-digit growth, that's really about all the ways to it.

Thank you. I am not showing any further questions at this time. Therefore, I'd like to turn the call back over to our host, Deanna Hart for any closing remarks. Deanna, Please go ahead.

Thank you. And everyone, again, thank you for participating in our call today. We appreciate your ongoing interest in our company. And if you have any further questions or need additional information, please feel free to reach out to the Investor Relations team through our website. I hope you have a great day.

Ladies and gentlemen, this concludes today's conference call. You may all disconnect. Have a wonderful day ahead.