Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one on your telephone keypad. If you require operator assistance during the program, please press star then zero. As a reminder, today's conference call is being recorded. I would now like to introduce the host of this conference call, Miss 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 two 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 3rd, 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 three 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 rate increases, as well as an improved mix of earning assets driven by 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're excited about this opportunity to execute on the plan. Turning to page five 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 OneWest 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 by business segment have positioned us well for the future, which we're extremely excited about.
Turning to page six, I wanna provide a quick update on our cost savings initiative. 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, increasing 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 of the combined company. 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 here to speak with you today about the exciting opportunities we are seeing in our commercial bank. As Frank mentioned, we have been able to capture some of the synergies we knew existed between our two great companies early on. We are thrilled with how this merger has positioned us for long-term success. We have 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 businesses continue 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 the combined organization's 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's client 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 beginning 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 are 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 additional 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 the 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 habits could 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 remain 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 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% over 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 would not be possible without the experienced middle 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 multiyear 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. 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 a 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 aircraft operating leases and international equipment portfolios. 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.
With 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, we're executing well. We believe we're positioned 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 gonna start on page 13. I will begin with second quarter takeaways, which as Frank mentioned, point 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 that 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 273 to 304 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 remained fairly stable in terms of dollars and the ACL ratio declined three 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 14 basis points, and the non-accrual 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. Finally, total deposits declined during the quarter as higher cost acquired deposits ran off. However, the decline was partially offset by strong growth in non-interest-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 non-recurring 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, yielding an annualized ROE of 11.19% and an ROA of 1.87%.
On to page 15, we present two condensed income statements, the one at the top representing our reported GAAP results for the first and second quarters of 2022, and the results as if legacy FCB and CIT are combined for the second quarter of 2021. The section 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 each line item 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 declines for both periods were due to increases in provision for credit losses of $91 million and $136 million, respectively, as reserves were built in the current quarter and released 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 revenues grew at a faster pace than expenses. Page 16 provides a view of our year-to-date results on the same basis for your reference. Page 17 provides detail with respect to notable items for the relevant quarterly and year-to-date periods. During the second quarter, these adjustments had a minimal net impact of adding $2 to GAAP EPS. Starting on page 18, I'll touch on the major trends impacting our operating results. Unless noted otherwise, the historical financial trends on the upcoming pages are consolidated with the merger, 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 remained 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 period are presented on page 18 for your reference. Now turning to page 19, we highlight the drivers of the 31 basis point and 48 basis point margin expansion from the linked and comparable prior year quarters, respectively.
We continue to see positive impacts 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 and 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 yield 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 yield, 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 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 volume 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.
Similar themes exist that I discussed in the linked quarter, with the exception of the declining deposit rate and a higher investment securities balance, both of which provided for additional expansion, partially offset by $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. In addition, we expect that 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 indicates 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 with 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 would increase net interest income by 5.2%, and a 100 basis point ramp would increase it by 2% over the next 12 months. The main drivers of our asset sensitivity are our variable rate loan portfolio, 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 in a rising rate environment. Core non-interest income, turning to page 21, increased by $3 million over the linked quarter or by 1.1%.
The increase was primarily due to higher capital markets and wealth management income, partially offset by a decline in net rental income and 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 were encouraged by the continued growth this quarter in gross operating lease income, a further reflection of railcar 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 in salvage values on operating leases. Moving forward, we expect quarterly depreciation to be in the range of the average that we experienced for the first two quarters of this year.
The increase in maintenance expense was expected as a higher percentage of cars we lease 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 brokerage channel, which offset some of the pressure we felt in trust from broad-based equity and bond market declines. In brokerage, the income was driven by a flight to safety as production in both annuities and structured products was significantly up in the second quarter. We do expect further momentum in brokerage 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 2021, 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 market 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 is 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 non-interest 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 brokers and trust. The increase in service charges was split between commercial and individual, with commercial led by pricing increases in client acquisition and individual charges rising above depressed levels in the second quarter of 2021 as a result of consumer stimulus. Turning to the remainder of 2022, we expect continued momentum in our wealth, merchant, card, and royalty income producing businesses.
While service charges on deposits will decline as we enacted the NSF/OD policy changes at the beginning of the third quarter, we anticipate a high single-digit percentage increase in adjusted non-interest income year-over-year. With respect to the lost fee income from NSF/OD fees, we are looking for opportunities to offset it by broadening customer relationships through product offerings that will add value such as card, merchant, wealth, and treasury payment services. Now turning to page 22. Non-interest 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 two legacy retiree benefit plans and a $6 million decline in core non-interest 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 non-interest 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 personnel and origination costs, partially offset by higher salary expense due to annual merit increases and net staff additions. The net staff additions are the result of building out teams to support our move to large bank compliance as well as to 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 was somewhat muted in the quarter driven by the continued recognition of cost savings. Analysis for the comparable quarter and year-to-date periods are presented on page 22 for your reference.
Before I leave non-interest expense though, the big takeaway here is that our efficiency ratio improved to 57.55% during the quarter as 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 were 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 coming quarters. With respect to inflation, we are feeling pressure in wages, professional services, and contract 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 natural non-interest expense growth that exclusive of merger costs, savings will be closer to the mid-single digit range for this year. Prior to COVID, our non-interest expense growth was more naturally in the 3% range. However, the current inflationary pressures, we estimate this to be closer to the 5%-6% range. We expect a low single-digit percentage increase in adjusted non-interest 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 charts on page 23 showing the composition of our core non-interest income and expense.
Page 24 provides balance sheet highlights and key ratios, and I will cover the significant components on subsequent pages. Turning to page 25, another 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 mid-single digit guide last quarter as our teams generated production above target levels and prepayments were reduced due to increasing interest rates. Loans grew in the general bank at an annualized rate of 18.4%, led by the branch network. Growth is primarily concentrated in business and commercial loans.
We have continued to add bankers in our commercial and 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 volume pulling through ahead of the rising rate environment. Additionally, within the general bank, we saw growth in residential mortgage loans for the quarter, even though overall mortgage production was down. Lower prepayments and the shift in production to 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 continued 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 cycle. On a year-over-year basis, loans increased $1.3 billion, about 2%, and excluding the impact of purchase accounting adjustments and PPP runoff, loans increased by $2.8 billion or 4.3%.
The growth from the prior year quarter was in similar areas as I just noted for the linked quarter. As we will discuss 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 review 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. We would expect that growth to further enhance our bank, the bank's earnings.
For your reference, we've included a 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, with 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 saw the most rate-sensitive customers begin to move funds in response to recent Fed rate increases. The reductions were primarily concentrated in acquired higher cost channels, including the direct bank and legacy OneWest branches. These declines were partially offset by growth in non-interest-bearing deposits of $747 million or 11.6% annualized growth, primarily from our branch network.
We have been very encouraged by the continued double-digit percentage growth in non-interest-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 is flat compared to the linked quarter and down 8 basis points from the second quarter of 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 impacts liquidity in the system by de-leveraging its balance sheet. We do expect the 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 showing deposit composition by type and segment. Moving to page 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 is 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. 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 had the impact of reducing the ACL by $19 million. Portfolio mix had the impact by reducing the ACL by $17 million as loan composition shifted out of portfolios of higher loss rates into those with lower loss rates. While the go forward macroeconomic forecast shows some deterioration, which led to a $26 million increase in the ACL, actual performance remains strong, growth in the portfolio during the quarter added $34 million. The ACL at quarter end covered annualized net charge-offs 9.6 x. 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 rated assets, we were able to moderately grow 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 adjustments reduced tangible book value per share by almost $30 or by 7%, but was way overshadowed by a $170 or 41% positive impact due to the CIT acquisition. Turning to page 34. I will conclude by discussing our financial outlook for the third quarter and for the remaining six 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 metric or balance sheet item. The numbers in these columns are adjusted for notable items to arrive at core non-interest income and expense. Column two provides our guidance for the third quarter and column four 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- 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 in the real estate finance portfolio due to accelerated prepayments. While loan growth was robust in the second quarter, the absolute rise in interest rates may temper our customers' appetite to borrow, which could moderate overall loan growth from the levels we saw in the second quarter.
While mortgage pipelines and production are expected to continue to decline given the rate environment, the corresponding slowdown in prepayment and the shifting of production to ARM products, which we hold on balance sheet, should continue to prop up mortgage loan growth in the coming quarters. We will continue to proactively add bankers in our wealth middle market banking and large net worth 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 possible prior to the merger. The collaboration of our general and commercial banking leading teams sharing referrals to each other will help increase loan volumes. On deposits, we expect to see some continued attrition in some of our higher price 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 book, keeping our beta low. Our expectation is that demand deposit growth will continue at a mid single digits percentage growth rate. For net charge-offs, we expect a gradual return to pre-pandemic non-stress levels.
We expect net charge offs in the range of 15-25 basis points in the third quarter and 12-22 basis points for the full year. The increase in our net charge off projection is not due to any apparent stress in our portfolio. Rather, we think the impact of inflation and rising rates may result in our losses returning to more historic levels, which we peg closer to the 25-30 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 are already behind us, so 50 more moving forward, ending at a range in the third quarter of 275 to 300 and further 50 basis points of hike in the fourth quarter, ending a range of 325 to 350. 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 yield continue to improve. The good news is we are starting to see new borrowing rates increase in every major product. 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 a full year basis, we expect high teens percentage growth in net interest income, mainly due to the debt redemption, improving earning asset yield and loan growth, improving our asset utilization. From a core non-interest income perspective, we do anticipate a negative mid- to high single digits decline compared to the second quarter, mainly driven by the change in our NSF/OD policy that took place on July 1st. This change is expected to reduce annualized NSF/OD revenue by approximately $37 million on an annual basis.
Aside from NSF/OD changes, we expect wealth revenue to be flat as while we have momentum in 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 NSF/OD changes. From a core non-interest expense standpoint, we expect the third quarter to be flat to low single digits growth over the second quarter as continued inflationary pressures in the expense base are offset by further recognition of merger synergies.
For the year, we expect non-interest expense percentage growth to be low single digit, which represents the core expense growth rate is driven by inflationary pressures in the range of 5%-6% being offset by the $100 million in additional cost savings we estimate to be recognized throughout 2022. From a cost savings standpoint, we estimate that $170 million in cost savings is in the run rate currently and 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.
Thank you very much. Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. As a courtesy to others on the call, we ask that you limit yourself to one question and one follow-up, and then return to the call queue if you have additional questions. If your question has been answered and wish to remove yourself from the queue, please press the pound key. Our first question comes from Stephen Scouten from Piper Sandler. Stephen, your line is open.
Thanks. Just one quick clarifier first. I was curious when you expected to actually begin the share repurchase plan.
We're planning August 1st. Fairly immediately.
Okay, great. Super. Just as I look at the updates in the guidance, I guess the biggest delta or biggest change quarter- to- quarter was really in the deposit guidance to this now low to mid-single digit decline. Obviously we saw the higher cost deposits down pretty materially this quarter. I'm wondering, has that been a little bit faster exodus given the faster pace of rate hikes? Have there been any other changes that that's led to that change in the guidance? Just within that, 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, deposit run-off in the second quarter was slightly above what we would've projected. Some of that is seasonal due to tax season. We're feeling really good about our liquidity position right now. In fact, the earnings asset mix really optimized during the quarter with overnight investments, investment securities and loans within, you know, 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. We're pleased and don't foresee any liquidity issues moving forward in our ability to fund loan growth or earning asset growth. Tom, would you like to add anything to that?
No, I think you hit it.
Okay. 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. Maybe even as you guys kind of outlined in slide 11, if you could give us a feel for how that production and that strong growth this quarter kind of fell within that you know lower risk profile of the legacy platform to the higher to moderate risk segments as well, kind of from a composition perspective.
I would just say, high level, we were pleased that the loan growth was strong across the board. It was broad. The main drivers would be commercial and business loans in the branch network. They were up $1.1 billion on a 17% annualized. Residential mortgage, primarily ARM loans, they were up $535 million, 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. You did see a $326 million decline in real estate finance loans, about 21% annualized reduction.
Although production was pretty good there even though we had a decline. If you break it down within commercial finance, we saw, and I've alluded to strengthening verticals, and primarily that was concentrated in energy, healthcare, tech, media, telecom. Middle market banking also had a very good quarter. Just looking forward, we're encouraged that pipelines are strong, and we're beginning to see referrals to the commercial bank from the legacy SVB lines of business. We do see continued loan growth going forward, but somewhat muted. In terms of the, I think you had a question about did we change our risk appetite? We've stuck right with our risk appetite. Marisa, do you have any comments there to add to that?
Yeah, I would just say given the businesses that Craig referred to, the general bank and the branch-originated business really falls within that legacy First Citizens primarily green, if you wanna refer to, as you were 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.
Mm-hmm.
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. I would say that we're sticking to our knitting. There was not a emphasis to grow by taking additional risk, and certainly not in those areas that we would consider to be higher risk and in the red.
Okay, great. That's fantastic color. Thank you, Marisa. Thank you, Craig. Appreciate the time this morning.
Sure. Thank you.
Thank you.
Our next question comes from Brady Gailey from KBW. Brady, your line is open.
Hey, thank you. Good morning, guys. Craig, I heard-
Good morning.
I heard your comment that accretable yield and PPP had a minimal impact in the quarter, which is a little surprising, especially on the accretable yield side, given that, you know, CIT wasn't closed that long ago. I think you guys had $33 million of accretable yield last quarter. Maybe just what's the dollar amount of accretable yield that you realized in the second quarter?
In the second quarter, accretable yield recognized $22 million, you know, close to 60 for the year. It was additive. Net interest margin would've been 8 basis points lower in absolute terms during the current quarter without it, but it's our purchase accounting adjustment overall was very immaterial to the balance sheet. The $21.6 million representing only 3% of net interest income. It had 8 basis points impact on the NIM, and that was split 2 basis points on yield on earning assets accreted. It was really sort of neutral to loans. The 2 basis points primarily revolved around investment. It was 6 basis points favorable to the cost of interest-bearing liabilities. 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. Hopefully that straightens that out. We just don't expect that to have a material impact going forward.
Yeah, that's helpful. 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 a insignificant impact at this point in time. We're actually gonna stop talking about it next quarter, I think.
Okay. That's fine by me. All right. On the buyback, it was a nice buyback announcement this morning. How do you think about the buyback longer term? I mean, this one is over the next year. You know, 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 it's just more of a one-time, "Hey, we have a lot of excess capital. We're gonna get common equity tier one closer to 10%," and then you'll kind of be done with the buyback? How do you think about it?
I mean, all things being equal, I think you would see us continue the buyback. Obviously, we can't predict the future with a lot of accuracy. 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 can change with loan growth, that can change with economic situation, et cetera. Based on a steady state, we would continue to stay in plan.
All right. Finally, for me, I just wanted to ask a question about the future of the rail car business. You know, it's not something that, you know, legacy First Citizens was involved in. But, you know, as you've gotten to know it over the last couple years, do you think that rail car will be around longer term at First Citizens? Or do you think that, you know, that's a business that, you know, if it made sense to sell that business, it'd be a little bit of a earnings headwind, but it'd probably be a nice tangible book value gain. You know, is that a business that you could look to sell longer term?
Longer term, you know, I can't address longer term, but right now we're very pleased with rail. It's generating 27% of our non-interest income, performing well. We have good experienced teams there, so we like the business. No plans to exit at this time.
All right, great. Thanks for the color.
Thank you.
You're welcome.
Our next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open.
Thanks very much. Wanted to ask about the scenario about the margin, if the Fed were to stop raising rates or perhaps even go backwards. You know, 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?
Yeah, that's a great question. You know, we're looking at asset sensitivity on our balance sheet, going through our analysis there. We saw a decline slightly quarter-over-quarter effect of cash balance, decline. You know, we feel comfortable where we sit. You know, we're slightly asset sensitive, but we don't feel like we're overly positioned for rising or falling rates.
Okay, great. That's helpful. Just, I guess looking out, you know, beyond the charge-off guide for this year, do you see any signals that support any higher losses into 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 that it could be intact based on leading indicators. 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. There's really nothing indicating that we will return to historic norms, but that can change quickly as we all know. 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.
Great, Craig. Thank you very much for all the information this morning.
Thank you. Our next question comes from Brian Foran from Autonomous Research. Brian, your line is open.
Oh, hi. Thanks. I think you covered a lot of what I was gonna ask already. Maybe just am I thinking about the buyback and capital right? I mean, seems like even 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 pegging it to around 10.6, which will be 60 basis points over the high end of our CET1 range. My earlier comment 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, depending on price, should take us to 10.6 at its conclusion.
Perfect. You know, the non-interest bearing deposit growth was definitely a standout this quarter. You know, most other banks had pretty chunky declines there. I know you touched on it in the presentation, but you know, can you just maybe give us a little bit under the hood? Like, is it, you know, small and mid-sized businesses that you're growing or, you know, what do you think drove that kind of divergence where you were able to grow when almost every other bank shrank this quarter?
Well, about half of our DDA deposits are commercial. We do see a lot of growth there because that's our go-to-market strategy, sort of a no loan alone type approach there. It always has been an emphasis, and we continue to see double digit growth. That's really about all there is to it.
Great. Thank you for taking the questions.
Great. Thank you for taking the questions.
You're welcome.
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. 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.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Have a wonderful day ahead.