Earnings Call Transcript - FCNCA Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares' Second Quarter 2022 Earnings Conference Call. 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.

Deanna Hart, Senior Vice President of Investor Relations

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.

Frank Holding, Chairman and Chief Executive Officer

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 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 plan, 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 hardworking 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 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 Bristow, President

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 two 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 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 undue 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. FCB's 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 apparent 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.

Marisa Harney, Chief Credit Officer

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. 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. 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 leveraged 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. 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?

Craig Nix, Chief Financial Officer

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. We are excited to resume our share repurchase program, which has been suspended since the third quarter of 2020. We believe that share repurchases will enable us to return to more optimal capital levels while allowing for organic growth, delivering higher returns on capital and earnings per share, and providing capital to our shareholders in the most cost-effective manner. Pre-provision net revenue growth continues to be a highlight, with PPNR adjusted for notable items growing by 17.1% over the linked quarter and by 38.5% compared to 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 outpaced expense growth significantly in both periods. The key contributor to PPNR growth was a 7.9% increase in net interest income over the linked quarter and a 14.4% increase compared to the previous year's second quarter. Net interest margin expanded by 31 basis points from 2.73% to 3.04% during the second quarter. We are also pleased with our expense management, especially in light of inflation pressures. Our efficiency ratio improved to 57.55% during the quarter, driven by strong net revenue growth and continued recognition of merger cost savings that Frank referenced earlier. We saw a provision build during the quarter after several quarters of reversals as COVID-related reserves were released. This build increased provision expense from the linked quarter by $91 million, primarily due to a deterioration in the CECL macroeconomic forecast used for the ACL, along with maintenance reserves to account for net charge-offs and loan growth. Despite this provision build, the ACL remains fairly stable in dollar terms, with the ACL ratio declining 3 basis points from 1.29% to 1.26%. Credit quality remains excellent, with the net charge-off ratio remaining below historic norms at 13 basis points and the nonaccrual ratio declining to 0.76%. Loan growth exceeded expectations this quarter, growing at an annualized rate of 13.5% and by 14.3% excluding PPP. Growth was strong across both the Commercial and General Bank segments. Total deposits declined during the quarter as higher-cost acquired deposits were diminished, but this was partially offset by strong growth in noninterest-bearing deposits within our branch network. Now, turning to Page 14, I will highlight the financial results for the quarter. Note that our GAAP results are presented in the appendix on Pages 36 through 38. My comments today will focus on supplemental reporting, which combines legacy BancShares and legacy CIT for historical periods with adjustments for notable items like merger-related gains and expenses, and other nonrecurring non-core items. GAAP net income for the second quarter was $255 million, or $14.86 per share. On an adjusted basis, net income was $287 million, or $16.86 per share, resulting in an annualized ROE of 11.9% and an ROA of 1.07%. On Page 15, we present two condensed income statements. The top statement presents our reported GAAP results for the first and second quarters of 2022, while the second summarizes the impact of notable items to derive the adjusted results at the bottom. Page 17 lists notable items impacting the quarter and year-to-date periods along with their effects on line items and diluted earnings per share. Focusing on 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 last year. The decline for both periods was due to increases in provisions for credit losses of $91 million and $136 million, respectively, as reserves were built in the current quarter and released in the comparable quarters. However, this 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 faster than expenses. Page 16 provides a view of our year-to-date results on the same basis for your reference. Page 17 details notable items for the relative quarterly and year-to-date periods. During the second quarter, these adjusted results had a minimal net impact of adding $2 to GAAP EPS. Starting on Page 18, I'll discuss major trends affecting our operating results. Note that historical financial trends on upcoming pages are consolidated as if the merger occurred 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 rise in net interest income was driven by 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, while the cost of interest-bearing liabilities remained stable, declining by 1 basis point primarily due to the debt redemption, 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 is included on Page 18 for reference. Now onto Page 19, where we highlight the drivers of 31 and 48 basis points margin expansion from the linked and comparable prior year quarters, respectively. We continue to benefit from the debt redemption in February, which allowed us to eliminate a higher-cost funding channel and rebalance our earning asset mix. This, coupled with strong loan growth and a reduction in interest-bearing deposits, helped eliminate excess liquidity that had been present on our balance sheet since the pandemic began. The 31 basis point increase in margin from the linked quarter was due to higher loan yields and strong loan growth, the debt redemption's impact, and expansion in yields on investment securities and overnight investments, though slightly offset by a minor decline in SBA-PPP income and slightly higher interest-bearing deposit costs. Regarding earning asset yields, the loan yield increased by 13 basis points over the linked quarter as we began to benefit from recent rate increases. The impact of purchase accounting and PPP income on the loan yield was minimal, and we expect loan yields to continue rising as we realize the full benefits of rate increases since many of our variable rate loans did not reset until the start of the third quarter due to embedded floors. The yield on our investment securities portfolio increased by 14 basis points during the quarter, and we expect continued improvement throughout the year. This improvement 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 increased in the comparable quarter by 48 basis points, similar to earlier comments in the linked quarter, except for the timing deposit rate and higher investment securities balance, both of which further contributed to the 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 rise, we anticipate interest income will grow at a faster rate, leading to continued growth in net interest income over the coming quarters. Currently, we expect earning asset yields to increase more rapidly than funding costs, which should lead to sustained expansion of net interest margin. Turning to Page 20, the line graph on the left indicates we are still asset-sensitive, albeit slightly less than in previous quarters due to a reduction in rate-sensitive assets. We have been operating with liquidity above normal levels for several quarters and managed to optimize our asset mix in the second quarter. We will continue to approach interest and market rate risk management carefully to position our balance sheet to benefit from higher interest rates while also protecting against potential rate declines in the future. We estimate that a 100 basis point shock in rates would increase net interest income by 5.2%, and a 100 basis point ramp would further increase it by 2% over the next 12 months. The primary drivers of our asset sensitivity are our variable rate loan portfolios, which make up 43% of total loans, our cash position, and expected modest deposit betas given our strong core deposit base. Our blended deposit beta is modeled at 20% to 25%, consistent with historical experience in a rising rate environment. Moving to Page 21, core noninterest income increased by $3 million over the linked quarter, or by 1.1%. This increase is chiefly due to higher capital markets and wealth management income, though somewhat offset by a decline in net rental income from operating leases due to increased depreciation and maintenance expenses, despite growth in gross rental income. Although net operating lease income was lower than the previous quarter, we are encouraged by the ongoing growth in gross operating lease income, reflecting increased rail utilization from 96% this quarter, compared to 95.5% last quarter and 90% last year. We see potential for further growth here as repricing rates reached 114% of first quarter prices. The higher depreciation expense was linked to updates on salvage values and operating leases. Looking forward, we expect quarterly depreciation to align with average experiences from the first two quarters of this year. The rise in maintenance expense was anticipated due to a higher percentage of cars renewing leases and inflation's impact. Although maintenance expense can vary, we expect it to remain in line with second-quarter experiences moving forward. The wealth management income increase was largely driven by our broker channel, which helped cushion some of the effects from declines in trust revenue stemming from broad market decreases. In brokerage, income was positively influenced by modest increases in production across both annuities and structured products, which were significantly higher in the second quarter. We foresee momentum in this area in the second half, which will help bridge the gap from declining asset values. Our assets under management fell to $31.7 billion in the second quarter from $32.2 billion in the previous quarter; however, they are up $1.4 billion compared to the same period last year due to ongoing client acquisition and the expansion of our wealth management sales teams. In capital markets fees, we noted a $4 million increase from the prior quarter with a modestly higher number of total deals. Although quarter-over-quarter performance was positive, the outlook remains subdued as industry-wide issuance is down year-over-year and is anticipated to continue this trend amid the current rate environment. Core noninterest income increased by $37 million from the second quarter of last year, primarily spurred by growth in net rental income on operating leases, service charges on deposits, and wealth management income, partially offset by a drop in mortgage income. Net rental income increased because of better utilization, as previously discussed. In wealth management, growth was fueled by activity in workers and trust. The rise in service charges came from both commercial and individual contributions, with commercial being driven by pricing increases and client acquisition efforts and individual charges rising above previous levels owing to consumer stimulus. As we look towards the rest of 2022, we anticipate sustained growth in our wealth, merchant, card, and income-generating businesses. Even as service charges may decline due to the NSFOD policy changes implemented at the beginning of the third quarter, we project a high single-digit percentage increase in adjusted noninterest income year-over-year. Regarding lost fee income from NSFOD fees, we seek opportunities to offset this by expanding customer relationships to include product offerings that add value, such as cards, merchant services, wealth management, and treasury payment services. Turning to Page 22, noninterest expense adjusted for depreciation and maintenance on operating leases was $609 million, reflecting a $77 million reduction from the linked quarter and a $55 million rise over the second quarter last year. The $77 million drop from the linked quarter was due to a $101 million decrease in merger-related expenses, partially offset by a $27 million expense reversal from the first quarter tied to the termination of two legacy retiree benefit plans and a $6 million decline in core noninterest expense. The decline in merger-related expenses stemmed from significant deal-related change in control, retention, and severance payments, alongside legal and consulting costs in the first quarter. We still estimate one-time merger expenses to align with the $445 million guidance provided at the start of the year. The $6 million drop in core noninterest expense from the linked quarter mainly relates to an $11 million reduction in personnel costs due to lower benefit expenses, decreased incentive compensation, and greater deferred origination costs, though offset by increased salaries from annual merit raises and net personnel additions. Personnel expenses are particularly where we encounter the most significant inflationary pressures, particularly with new hires, but the new hires' impact was somewhat softened this quarter due to continued recognition of cost savings. Analysis for comparable quarters and year-to-date periods is included on Page 22 for your reference. Before I finish discussing noninterest expenses, it's essential to note that our efficiency ratio improved to 57.55% during the quarter, as core net revenue growth outpaced core expense growth across both comparable periods. After we initially announced the merger, we anticipated achieving a mid-50s efficiency ratio once fully synergized, and this quarter's improvements align with that expectation. As mentioned by Frank, we expect to realize positive operating leverage from expanding net interest income while managing muted expense growth through cost-saving measures, allowing the efficiency ratio to trend down to the mid-50s in coming quarters. On inflation, we are experiencing pressure in wages, professional services, and various operational costs. However, we also anticipate removing another $30 million from our expense base this year, which should help counterbalance natural noninterest expense growth, expected to be in the mid-single-digit range this year. Previously, our noninterest expense growth was around 3%; currently, we estimate it to be around 5% to 6% due to inflationary pressures. We foresee low single-digit percentage growth in adjusted noninterest expenses year-over-year. Looking at merger-related expenses going forward, we expect them to fall within the range observed in the second quarter. We have pie graphs on Page 23 that illustrate the breakdown of our core noninterest income and expenses. Page 24 provides balance sheet highlights and key ratios, while I will address significant components on subsequent pages. Turning to Page 25, we observe a bright spot: total loans increased by $2.2 billion over the linked quarter, equivalent to a 13.5% annualized rate, surpassing our mid-single-digit guidance last quarter as our teams achieved higher production levels and experienced reduced prepayments due to rising interest rates. Within the General Bank, we achieved an 18.4% annualized growth rate, primarily driven by our branch network, with growth mainly in business and commercial loans. We continue to add bankers to our commercial business teams, and the second quarter's growth stemmed from successful business development efforts and borrowers pulling in loans ahead of anticipated rate hikes. Furthermore, we observed growth in residential mortgage loans this quarter, even as overall mortgage production declined, with lower prepayments and a shift to adjustable-rate mortgage products contributing to this growth. We remain optimistic about growth in the General Bank as we expand into higher-growth markets and maintain relevance in our established areas. Elaborating on Peter's earlier comments, the commercial bank experienced loan growth at an annualized rate of 8.4%, led by robust activity across several industry verticals, including middle-market banking and business capital. Nevertheless, growth was somewhat offset by a decline in real estate finance loans due to ongoing elevated prepayments. However, we are satisfied with our current new production levels in real estate finance, refraining from ramping up production to compensate for the higher-than-expected runoff considering the current economic cycles. Year-over-year, loans increased by $1.3 billion or 2%; excluding the effects of purchase accounting adjustments and PPP runoffs, loans rose by $2.8 billion or 4.3%. The growth in the previous year was attributed to similar areas as noted for the linked quarter. In our outlook, while we anticipate continued loan momentum in the third quarter, we expect the growth rate to moderate compared to the second quarter. We attribute this moderation to the rising rate environment, as well as the booking of several larger loans in the second quarter. If we exceed these growth expectations, it would be seen positively as we pursue quality credit aligned with our risk appetite, with increased rates in line with market trends anticipated to bolster our bank's earnings. We have pie graphs included on Page 26 showing loan composition by type and segment. Regarding Page 27, deposits fell by $2.3 billion or 9.9% on an annualized basis, translating to a 2.5% quarter-to-quarter decline. The primary driver for this decline was a $3 billion decrease in interest-bearing deposits, resulting from reductions in money market and time deposits as we observed our most rate-sensitive customers moving funds in response to recent Fed rate hikes. These reductions occurred predominantly in acquired higher-cost channels, including the direct bank and legacy One West branches. However, these declines were partially offset by an increase in noninterest-bearing deposits of $747 million, representing an annualized growth rate of 11.6%, mainly from our branch network. We are encouraged by the sustained double-digit growth in noninterest-bearing deposits from our branches, attributed to our focus on building client relationships that encompass not only lending services but also banking needs. Our cost of deposits remained flat at 19 basis points, stable compared to the linked quarter and down 8 basis points from the second quarter last year. We maintain a cautious outlook regarding absolute deposit growth in 2022 as the interest rate environment continues to shift and the Fed modifies liquidity within the system by deleveraging its balance sheet. We expect the declines in interest-bearing deposits to moderate in the coming months, continuing to be offset by growth in demand deposit accounts and checking accounts. For reference, we have pie graphs on Page 28 depicting deposit composition by type and segment. Moving to Page 29, our balance sheet remains predominantly funded by core deposits, with total deposits accounting for over 95% of our funding base by the end of the quarter. Continuing on Page 30, credit quality remains strong. The net charge-off ratio was 13 basis points, significantly below historical norms, despite a deterioration in the CECL macroeconomic forecast that partially offset improved credit quality, resulting in a $42 million provision for credit losses compared to a $49 million benefit last quarter. The non-accrual ratio improved from 82 basis points to 76 basis points. Despite the positive provision expense, the ACL ratio dropped by 3 basis points. Transitioning to Page 31, we provide a walk forward of the ACL from Q1 to Q2. The ACL increased by $2 million to $850 million, with net charge-offs totaling $22 million this quarter. Credit metrics held steady, with a $19 million reduction in ACL due to shifts in portfolio mix toward lower loss rate loans. While the macroeconomic forecast indicates some deterioration, it led to a $26 million increase in ACL, while actual performance remained strong, with portfolio growth adding $34 million. The ACL at quarter end covered annualized net charge-offs by 9.6 times. On Page 32, our capital position remains robust, with all ratios at or near the upper end of our target ranges. By the end of the second quarter, our CET1 ratio was 11.34%, and our total risk-based capital ratio was 14.46%. Despite strong loan growth increasing our risk-weighted assets, we were able to slightly improve capital ratios due to the strength of our core earnings. In the second quarter, tangible book value per share rose modestly from $574 to $579, with strong earnings being partially offset by negative AOCI adjustments. The AOCI adjustment for tangible book value per share fell by about $30 or 7%, but was greatly outweighed by a $170 or 41% positive impact from the CIT acquisition. Turning to Page 34, I will conclude by outlining our financial outlook for the third quarter and the remainder of the year. Page 34 presents our second quarter 2022 and full fiscal year 2021 adjusted actuals for relevant metrics or balance sheet items. The numbers in these columns have been adjusted for notable items to arrive at core noninterest income and expense. Column two offers our guidance for the third quarter, while column four provides projections for the full fiscal year 2022. Regarding loan growth, we expect it to be in the mid-single-digit percentage range for the third quarter and in the mid-to-high single-digit range for the year. While we foresee continued mid to high single-digit growth in our branch network, we still feel some impact on the real estate financing portfolio due to quicker prepayments. Although we observed strong loan growth in the second quarter, the overall increase in interest rates could reduce our customers' willingness to borrow, leading to moderate growth rates closer to mid-single-digits in the third quarter. While mortgage production pipelines are anticipated to continue declining due to the rate environment, the resulting decrease in prepayments and the transition of production to ARM products held on our balance sheet should support mortgage loan growth moving forward. We will actively continue hiring bankers in our wealth management, middle market banking, and major metro branch network to facilitate loan growth. Our combined cost of funds will allow us to remain competitive in high credit rate opportunities in the large commercial space that may not have been profitable prior to the merger. Collaborative efforts between our general and commercial banking teams will enhance referral activities and contribute to increased loan volumes. As for deposits, we expect to see ongoing attrition among some of our higher-priced accounts in the third quarter. Nonetheless, we anticipate that the rate of deposit runoff will slow compared to the second quarter. We are continuously ensuring competitive rate offerings in our branches and the direct bank, while monitoring the global effects of the Fed's balance sheet reduction on system-wide deposits. For the full year, we expect a slight negative decline in deposits, possibly in the low to mid-single-digit range, influenced by both the rising rate environment and our strategy to optimize deposit growth while maintaining low beta. We expect continued mid-single-digit percentage growth in demand deposits. Regarding net charge-offs, we foresee a gradual return to pre-pandemic non-stressed levels, projecting net charge-offs to be between 15 to 25 basis points in the third quarter and 12 to 22 basis points for the full year. The anticipated rise in our net charge-off projections isn’t indicative of any stress in our portfolios; rather, it reflects how inflation and rising rates may lead losses to revert closer to historic norms, potentially reaching the 25 to 30 basis point range for the combined company. Our current forecast assumes the Fed will raise rates by 125 basis points in the third quarter—75 have already happened, leaving a further 50 ahead—capping at 2.75% to 3% in the third quarter, with 50 additional basis points in the fourth quarter, resulting in a range of 3.25% to 3.50%. In terms of net interest income, we expect increases in the high single-digits from the second quarter to the third quarter as we account for the full quarter's influence from second quarter loan growth alongside improving asset yields. The positive news is that we're observing new borrowing rates rising across all major products; for instance, commercial rates saw an approximate 40 basis point increase from the first quarter. Most of these rate increases started at the end of the quarter, meaning we hadn’t fully seen their effect on the margin yet. We expect net interest margin to expand again in the third quarter as the boost in earning asset yields outpaces the rise in our funding costs. For the entire year, we foresee high teens percentage growth in net interest income primarily attributed to debt redemption enhancements on earning asset yields and loan growth enhancing asset utilization. From a core noninterest income standpoint, we anticipate experiencing a negative mid to high single-digit decline compared to the second quarter, chiefly due to our NSFOD policy change effective July 1, which is projected to annually decrease NSFOD revenue by about $37 million. Other than changes in NSFOD policy, we expect wealth revenue to remain flat, considering our minimum brokerage policy, while a decline in overall markets during the second quarter may hinder trust revenue. We expect moderate declines in factoring, influenced mainly by seasonal dynamics. Annually, we project upper single-digit growth compared to the previous year, particularly driven by improvements in net operating lease, wealth, and card revenue offsetting the mid-year impact from NSFOD changes. For core noninterest expenses, we expect third quarter growth to remain flat to low single-digit above the second quarter due to persistent inflationary pressures being tempered by continued recognition of merger efficiencies. For the full year, we estimate low single-digit growth in noninterest expenses; this reflects the core expense growth rate influenced by inflationary pressures in the range of 5% to 6%, counterbalanced by an anticipated $100 million in additional cost savings through 2022. In terms of cost savings, we currently estimate $170 million in cost savings is in our run rate, projecting to reach $200 million in the run rate by the fourth quarter of this year, and $250 million by the fourth quarter of 2023. To summarize, we are very pleased with our second-quarter results, excited about our share repurchase plan, and commend our associates for their hard work. I will now turn the call back to the operator for Q&A.

Operator, Operator

Our first question comes from Stephen Scouten from Piper Sandler.

Stephen Scouten, Analyst

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

Craig Nix, Chief Financial Officer

We're planning August 1. Fairly immediately.

Stephen Scouten, Analyst

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 for this 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?

Craig Nix, Chief Financial Officer

The answer to the first question is that the decline in deposits during the second quarter was slightly higher than we had anticipated. Part of this is seasonal due to tax season. We are currently optimistic about our liquidity position. During the quarter, our earnings asset mix was optimized with overnight investments, investment securities, and loans all within our target range for earning assets. We actually have some capacity to grow loans and also to decrease cash. Therefore, we are satisfied and do not anticipate any liquidity issues in the future that would affect our ability to support loan and earning asset growth. Tom, would you like to add anything to that?

Tom Eklund, Executive

No, I think you did it.

Stephen Scouten, Analyst

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 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?

Craig Nix, Chief Financial Officer

At a high level, we were pleased with the strong loan growth across the board, which was broad-based. The main contributors were commercial and business loans through our branch network, which increased by $1.1 billion at a 17% annualized rate. Additionally, mortgage loans, mainly Adjustable Rate Mortgages, rose by $535 million, representing a 26.8% annualized increase. In the Commercial Bank, Peter noted that commercial finance loans climbed by $640 million, or 6.3% annualized. Our leasing line of business, business capital, saw a $233 million increase, which is 20% annualized. However, we did experience a $326 million decline in real estate finance, about a 21% annualized reduction, although production remains strong despite this decline. Within commercial finance, we observed strengthening in specific sectors, primarily energy, healthcare, and telecom. Middle-market banking also performed very well this quarter. Looking ahead, we are encouraged by the strength of our pipelines, as we are beginning to see referrals to the Commercial Bank from the legacy FCB lines of business. We anticipate continued loan growth going forward, albeit at a more moderate pace. Regarding the question about changes to our risk appetite, we are maintaining our current risk appetite. Marisa, do you have any additional comments on that?

Marisa Harney, Chief Credit Officer

I would say that the businesses Craig mentioned, particularly General Bank and the branch-originated business, align closely with the legacy of First Citizens. We're seeing growth on both the consumer and small business sides. In our commercial sectors, the energy group is performing well, especially in renewables, and our healthcare group continues to grow steadily. Real estate presents a different scenario, and we approach it with a different appetite compared to general commercial real estate. We remain committed to our established limits and do not prioritize growth through additional risks, especially in areas we identify as higher risk.

Operator, Operator

Our next question comes from Brady Gailey from KBW.

Brady Gailey, Analyst

So Craig, I heard your comments that accretable yield and PPP had minimal impacts this quarter, which is surprising, especially regarding accretable yield, since CIT wasn't closed that long ago. You mentioned that you had $33 million of accretable yield last quarter. Can you share the dollar amount of accretable yield that you realized in the second quarter?

Craig Nix, Chief Financial Officer

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 confidence-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.

Brady Gailey, Analyst

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.

Craig Nix, Chief Financial Officer

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

Brady Gailey, Analyst

I'll just find on the buyback, it's a nice buyback announcement this morning. How do you think about the buyback longer-term? I mean, just the next year, but beyond the next year, do you think that a buyback is something that you will always have in place? Or is this more of a one-time event, where you have a lot of excess capital, aiming to get common equity Tier 1 closer to 10%, and then you'll be done with the buyback? How do you think about it?

Craig Nix, Chief Financial Officer

Well, I mean, all things being equal, I think you would see us continue to 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.

Brady Gailey, Analyst

I wanted to ask about the future of the rail car business. It wasn't part of legacy First Citizens, but now that you've been involved for a couple of years, do you see rail cars being a long-term part of First Citizens? Or if selling that business made sense, would it pose an earnings challenge but provide a good boost to tangible book value? Is it a viable option to consider selling in the long run?

Craig Nix, Chief Financial Officer

Longer-term, I can't address that. 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 there are no plans to exit at this time.

Operator, Operator

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

Christopher Marinac, Analyst

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 trying to capture as much as you can, while the Fed is still tightening?

Tom Eklund, Executive

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.

Christopher Marinac, Analyst

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?

Craig Nix, Chief Financial Officer

I think it's very possible to be intact based on leading indicators. If we look at eight or nine just high-level credit quality indicators, and eight of the nine 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.

Operator, Operator

Our next question comes from Brian Foran from Autonomous Research.

Brian Foran, Analyst

I think you addressed many of my questions already. However, am I correct in my understanding of the buyback and capital situation? It appears you've been utilizing some of this capital, and by the middle of next year, you might be around the midpoint or slightly above the 9% to 11% CET1 range. I realize there are many variables at play, but do you have an estimate of where this buyback might position you in terms of CET1?

Craig Nix, Chief Financial Officer

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.

Brian Foran, Analyst

And then the noninterest-bearing deposit growth was definitely a standout 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 them almost every other bank's strength this quarter?

Craig Nix, Chief Financial Officer

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.

Operator, Operator

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.

Deanna Hart, Senior Vice President of Investor Relations

Thank you. And everyone, again, thank you for participating in our call today. We appreciate your ongoing interest in our company. 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.

Operator, Operator

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