Reminder, today's conference is being recorded. I would now like to introduce First Citizens conference call, Mr. Tom Heath, Director of Investor Relations. You may begin.
Thank you, Kevin. Good morning, and thank you all so much for joining us. It is my great pleasure this morning to introduce you to our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix. The two will provide an overview of the company and our second quarter results. Afterwards, we will be happy to take any questions you may have. We are also delighted to have several other members of the senior team with us, and they, too, will be available for Q&A. Our remarks today will reference an earnings presentation that is available at firstcitizens.com/earningspresentation.
I should note that the statements made during the call and statements included in the presentation materials may be forward-looking statements, and the factors that could cause actual results to differ materially from those statements are listed in the earnings press release, the presentation materials, and the company's SEC filings. And if any non-GAAP financial measures will be discussed on the call or included in the presentation materials, that reconciliations of those measures to the comparable GAAP measures are available in the presentation materials, which are posted on the website. And with that, I'm going to hand it over to Frank.
Thank you, Tom, and good morning, everyone. All of us have been through a challenging four-plus months now, and I wanna start by saying how proud I am of this organization for rising to the occasion and being the best it can be for our customers, communities, and associates. We like to think of First Citizens as showing its best in trying times, and I genuinely believe we're doing so. As we move into the presentation, we will give you some specific examples that speak to this point. Today represents the first time that we've conducted an earnings call. We concluded that as we've grown, have issued more securities into the market, and are getting a lot more attention from both analysts and investors, that all of our constituencies would benefit from the calls. So thank you again for joining us, and we're delighted to be here.
Prior to diving into our second quarter results, we thought it would be helpful to quickly review a few pages on who we are and what we think about ourselves, so we will briefly do so, and then move to the second quarter earnings commentary. Why don't we begin on page three? I'll note that First Citizens has operated since eighteen ninety-eight, and I've personally been, or I've had the good fortune to be a part of the organization since nineteen eighty-three. Over the past three decades, we've grown assets from approximately $3.5 billion to almost $48 billion today. With deposits of $41.5 billion as of June thirty, we now rank as approximately the 38th largest U.S. bank.
Our Chief Financial Officer, Craig Nix, will cover our second quarter financial performance later in the presentation, but despite a challenging environment, we've achieved a return on assets of close to 1% and a return on common equity of 11.40% in the first six months of 2020. The core of the franchise, the attractive markets of the Carolinas, represent 73% of our deposit base, with many adjacent markets in the greater Southeast, from Maryland to Florida. Beginning with my predecessor, however, we have from time to time expanded out of market as we saw opportunities. We will touch on this in more detail shortly, but we're pleased with all of our geographies, and to an extent, we are a national franchise. Our dense Carolinas footprint offers clients a full selection of retail, business, and commercial services.
Our fee-based lines of business are integrated into the client relationship and are focused on providing a holistic banking relationship. We take great pride in our Forever First brand, and for over a hundred years, customers have trusted First Citizens with their money and their financial futures. Outside the Carolinas markets, we operate more of a business and commercial-focused model that is located in high-growth MSAs that we find attractive. We have been in many of these markets now for over two decades and have been able to bring the same brand and style of banking that distinguishes First Citizens in the Carolinas. We've remained relatively profitable every year in modern history, and most importantly, we've remained purposefully grounded in the belief that delivering better banking, people will live better lives. We work very hard to consistently live up to this ideal.
Let's move on to the next page. I won't spend a lot of time on page four and our key drivers of long-term success, but suffice it to say that we are proud of all aspects of the organization, and we believe the attributes listed on this page have enabled us to deliver very good results for all our stakeholders consistently over time, and will continue to do so going forward. Advancing to page five. Our top 10 deposit markets are all within the core of our Southeast footprint. Relative to the broader U.S., these markets have very good underlying demographics. Our deposit numbers are from June 30, 2020, but the rankings are from June 30, 2019 FDIC data, given that the new rankings are not yet out.
You will note a lot of number four and number five market share rankings. Typically, it is the very large money center or regional banks in positions one, two, and three, and we're actually okay with this as it really distinguishes our high touch, build-to-market strategy, and leaves us lots of room to grow. Now let's look at page six. As you can see from our concentration by state on page six, the core of our franchise is in North and South Carolina. However, through both organic growth and acquisitions, we have been able to expand our loan and deposit concentrations in Georgia, Virginia, Florida, and California, and each of these four states have greater than a 5% share of both our total loan and deposit portfolios. Now, turning to page seven.
When you look at our loan book from on high with regulatory data, it may look like we're a concentrated CRE lender. We'd like to point out. What we'd like to point out is, that really, we're a small to mid-size C&I lender, as one-third of our book and close to three-fourths of our commercial real estate portfolio are actually loans secured by owner-occupied real estate that is essentially C&I in nature and supported by underlying cash flows from these businesses. As you can see from the credit quality metrics on the right-hand side of the page, our credit quality is very good, with low nonperforming asset and charge-off ratios, and that our allowance for credit losses covered the second quarter annualized charge-offs over eight times. Moving on to page eight. We know our business well and have been successful credit risk managers over time.
This page gives you a twenty-year snapshot of credit performance and comparative results. Suffice it to say that we are very confident in our credit risk management skills and our ability to weather economic downturns. Our net charge-off ratio has remained well below the U.S., well below the average of U.S. banks during good economic times, and in the last crisis, our peak was significantly less than the industry. Please turn to page nine. A significant benefit of our strategy is the exceptional deposit base that comes with it. It is low cost relative to the industry and has proven stable over time. Our recent deposit growth relative to peers is a testament to the success of our strategy. Moreover, many of our top customers have been with us twenty-plus years, which is a further testament to the fact that our strategy works longer term and over the cycles.
Turn to page ten. We believe we have a very attractive portfolio of fee businesses, and importantly, they are very much built around our core customer base and consistent with our strategy to serve them. Our wealth and mortgage businesses serve primarily our Carolinas and surrounding markets, whereas our merchant and card capabilities serve customers across our entire footprint. We are always considering ways to efficiently expand the full range of our products and services we offer to clients across our footprint, and we have recently expanded our wealth platform into Atlanta. In the quarterly discussion, we'll touch on the fact that some of these businesses saw lower volumes in Q2 with the shutdown, similar to the rest of the market.
Importantly, they are now rebounding, and each of these businesses are ones that we really like, are core to our strategy, and are integrated into our core relationship-based approach. And now to page 11. While our day-to-day strategy and culture focuses on organic growth, M&A has been an important component of growth for First Citizens. In the past decade alone, we've done more than 25 acquisitions. We believe this experience has given us a strong core competency, muscle memory, if you will, and has enhanced our company in many ways. We've had great consistency and tenure in our operational conversion team throughout these acquisitions, which has only reinforced our methodic and disciplined approach to converting acquired institutions. This team is second to none.
With the conversion of Entegra next month, they will have just three branch conversions left to do in November, and I believe that they're delighted to have a break. The majority of what we've done have been open market acquisitions, but we were quite active in the FDIC space. On these transactions, we believe we not only stepped in and assisted our regulatory partners, but we estimate that the net impact of these transactions for our shareholders resulted in over $1 billion in capital creation. Going to page twelve. Our capital levels have been consistent and strong over time.
While we have worked down our Tier 1 Common levels via acquisitions and buybacks to levels more in line with our peers, we have added capital via our March issuance of both preferred stock and subordinated debt. If you will, we balanced the capital stack as a means to optimize returns to our shareholders moving forward. We will continue to utilize our capital on opportunities that provide the best long-term value for our shareholders, which might come in the form of organic growth, M&A, and continued share repurchases. Please advance to page 13. We wanted to simply give you a snapshot of part of our team, being myself and 5 of my key partners. We all work exceptionally well together, and on average, we've been with First Citizens more than 26 years. In short, I believe we have a very successful partnership.
Now moving to page fourteen. I would be remiss if I didn't touch on how our strategy, culture, and financial goals all really become one. We revisit our goals each year, but in short, it revolves around our people and customers delivering our best to each other. When we do it right, it's a win-win for all. And while we pay attention to all the metrics indicative of how we're performing, in its simplest form, we focus on growing tangible book value, and we watch it with vigilance. And finally, turning to page fifteen, and as I've mentioned, we, we very much believe if you do it right, it's a win-win for all, and that the market will see this. Over time, the efforts of all our First Citizens associates have consistently translated into market-leading returns for our shareholders.
I hope this overview was helpful, and now I'd like to turn it over to Craig to walk you through our second quarter. Craig?
Okay, thank you, Frank, and good morning to you all. Continuing where Frank left off in the deck, I would like to briefly discuss our second quarter earnings results, which are included on page 17, and then I will move on to more specific pages that detail the drivers behind our results. For the second quarter, we earned nearly $154 million before preferred dividends and nearly $149 million after dividends. This represented a 24.8% increase in net income available to common shareholders over the second quarter of last year. Earnings translated to $14.74 per share, an ROA of 1.36%, and an ROE of 16.43%.
While we did post strong earnings during the quarter, we did face earnings headwinds that were reflective of the ongoing COVID pandemic and the low interest rate environment. However, we were able to largely offset declining net interest margin and a higher reserve build with positive fair market value adjustments on our equity portfolio and gains on sale in our AFS investment portfolio. In addition, we fully participated in the SBA PPP lending program, which contributed to growth in net interest income compared to the second quarter a year ago. Now I'll turn to pages eighteen and nineteen, where I will provide some insights into our net interest income and net interest margin. Consistent with most of the banking industry, the low interest rate environment is challenging for us.
However, as you can see on page 18, we are pleased that despite the impact of the rapid decline in interest rates during the first quarter, we were able to grow net interest income over the comparable quarter last year, and we're only slightly down from the first quarter. Although the Fed cut the federal funds rate by one hundred and fifty basis points during the first quarter, the impact of falling rates was more visible in our financial results during the second quarter. This led to a slight decline in net interest income compared to the first quarter, due to lower interest income on investment securities and overnight investments, partially offset by lower deposit interest expense and interest and fees on SBA PPP loans. On page 19, we lay out the dynamics surrounding our NIM compression since the first quarter and since the comparable quarter a year ago.
As the NIM roll forward at the top of the page shows, our NIM declined by 41 basis points in the second quarter, as earning asset yields were fully impacted by the interest rate reductions that occurred late in the first quarter and were only partially offset by lower deposit costs. As the roll forward at the bottom of the page shows, our NIM declined by 63 basis points from the same quarter a year ago, for mostly the same reasons impacting the linked quarter, quarter decline.... We do believe that NIM is nearing a trough, as we felt most of the impact of lower rates in the second quarter.
While we do project a further decrease in our earning asset yield in the third and fourth quarters, we believe that it will be largely offset by further decline in deposit costs, as well as declines in excess cash related to reciprocal SBA PPP deposit balances. Excluding SBA PPP loans, 69% of our loan portfolio is composed of fixed-rate loans. Of our variable-rate loans, 46% are tied to prime, 46 tied to LIBOR, with the remainder to U.S. Treasuries.
Therefore, while we believe that loan yields will decline in the third and fourth quarters, as a portion of our fixed-rate book matures or rolls off and is replaced with loans at lower rates, all of our variable rate loans have repriced, and the fixed-rate portion of the book serves as somewhat of a buffer for future declines in yields to the extent and magnitude we experienced in the second quarter. While our cost of deposits is already low at eighteen basis points, we do see it drifting back down to a single-digit basis points cost, similar to where it was during the 2006 to 2018 time frame, before the Fed rate hikes. Point to point, as you can see, we funded a lot of PPP loans.
Most of them were on the smaller end of the spectrum, with an average loan size of $138,000. Therefore, our weighted average origination fee was 3.65%. While we do not see these loans having a significant impact on our NIM moving forward, they will have a large positive impact on the absolute level of our interest income. To the extent the loans are forgiven and leave the balance sheet weighted towards the end of the third quarter and during the fourth quarter, with full early recognition of the origination fee flowing through the net interest income, they will have a positive impact on our NIM. To the extent loans go to full maturity, they will cause a slight drag on NIM.
To conclude, we expect both NIM and net interest income, ex-PPP impact, to be down, but that most of the decline is behind us, but if PPP forgiveness plays out as we expect, it will have a positive influence on both, so now I'll turn to page 20 and discuss second quarter non-interest income. The story on our non-interest income is twofold. First, as we noted in the current quarter, to linked quarter highlights, we did realize a significant increase in the fair value market adjustment on our equity portfolio. The increase during the quarter more than offset the previous quarter's decline in fair market value. To give you some background, beginning in two thousand and fifteen, and as an offshoot of our M&A strategy, we began accumulating a portfolio of bank stocks where we had a strategic interest and at points in the cycle where we saw value.
It's always our intention at the time of purchase of the equity securities to hold them for intermediate to long-term periods. The guidelines around the equity strategy are incorporated into our formal investment policies. While not significant to our overall investment portfolio strategy or as a percentage of our total investment portfolio, it has been a consistent and successful part of our portfolio. What we perceived in March was a severe dislocation in the market, where many bank market valuations descended well below one times tangible book value. Just as we viewed this dislocation as a good time to buy back our own stock, we equally saw opportunity to purchase stock at low valuations in some institutions where we were comfortable with the risk we took on. While we did not hit the bottom perfectly, we got close to it, and it worked.
We recognize that such opportunities are rare. As I referenced earlier, the overall equity portfolio felt the market dip at the end of the first quarter, and consequently, our first quarter results included a $51.4 million negative fair market value adjustment. During the second quarter, the stock prices of the securities rebounded. We sold the bulk of the securities for a realized gain of $37 million. In addition, we recorded a positive $27.5 million fair market value adjustment during the second quarter, bringing the total fair market value adjustment during the quarter to $64.5 million. This resulted in the $116 million increase in the fair market value adjustment on marketable equity securities highlighted on page 20.
So now on to the second part of our non-interest income story, and this relates to what we call our core fee-generating businesses. As Frank alluded to earlier, most of our non-interest income business lines are heavily integrated with our bank business and rely, at least in part, on branch referrals. In general, most of our income in these lines of business are stable and recurring, with growth dependent on further customer acquisition and expanding relationships with existing customers. As expected, we did see an impact on non-interest income from the COVID pandemic and the resulting stay-at-home orders, but as I will discuss, most of the core businesses are rebounding nicely.
The most pronounced negative impacts of the COVID pandemic during the second quarter were in deposit service charges, due to both excess deposit balances from the stimulus program and the fact that we worked with our customers on a local basis to help relieve pressure on overdraft fees. Deposit service charges were off by close to 50% in April and May, but by June, had returned to 80% of pre-COVID levels. Merchant income was also down by over 40% in the April timeframe, due to a drop in consumer spending, but returned to pre-COVID levels in June. We attribute the increase in June to the fact that a large part of our merchant income revenue stream comes from doctors and dentists, and many returned to their operations in June.
Cardholder income was negatively impacted by 15%-20% in the March and April timeframe, but returned fairly quickly to pre-COVID levels in May and June. Wealth management income was more heavily impacted in the brokerage area, as branch closures and stay-at-home orders impacted sales. However, revenues from our trust division held up well, and assets under management are only 3% off of the all-time high, due to both the return in market asset prices and as well as organic growth. Our mortgage division was a bright spot during the quarter, as higher originations and gain on sale drove overall mortgage income higher. Mortgage production increased by approximately 50% in the first half of 2020, compared to the first half of 2019.
In terms of the outlook for non-interest income moving forward, we are pleased by the end of June, in many of the most heavily impacted areas, levels returned closer to or at pre-COVID levels. Going forward, the level of non-interest income will depend on the extent to which economies remain open. However, all else equal, we could expect to see continued growth in the mid-single digits, which would be consistent with prior years' growth rates. Consistent with prior periods, we will also continue to assess opportunities to recognize gains in our AFS investment portfolio. Okay, so now moving on to page twenty-one, on non-interest expense. On this slide, we have broken it down for you into core components and provided some highlights and commentary to the right side of the page.
Given that we've provided a lot of breakdown here, I want to focus on what we see as the key takeaways. For starters, when you track our expenses over the last five quarters and consider both organic growth and acquisitions, we think we have done a good job of holding expenses in line. More expenses will be coming out of our recent acquisitions, and while COVID saved us in some expense categories, such as travel, and via a hiring freeze implemented at the outset of the pandemic, it also added expenses in other categories. In looking at current quarter expenses versus the same quarter a year ago, if we subtract out the impact of acquisitions on both quarters, expenses grew by 3.8%. So overall, we are pleased that we are being prudent in managing our expenses.
As we look forward, our baseline for expenses with savings from acquisitions realized, is somewhere in the range of $96 million-$97 million per month, so a modest increase. Areas where we intend to increase spending are in the digital space and the technology projects surrounding our operations, which are primarily efficiency plays. These projects have been well thought out, and the timing is right to do them. In effect, we are redeploying merger and hiring freeze savings into some of these positive investments. A moment ago, I used the term baseline on expenses, and I think that term is fair. We watch our expenses very closely, and this baseline is our current thinking, and we are comfortable at those levels. But keep in mind, we are continually looking at the expense levers we have and are constantly evaluating them.
For example, certain branch closures could be accelerated, and the hiring freeze could be extended. But the real takeaway I hope to impress upon you is that we believe we are being good stewards here, and expenses are continually monitored and reviewed. When you look at our efficiency ratio on the page, it was obviously impacted by the decline of our NIM. We have a very low deposit beta and benefit greatly from higher rates, but also note that our efficiency ratio typically remains a bit higher than peers by design. And that goes back to our high-touch, go-to-market strategy and the deposits and businesses that go with it. Lastly, it goes without saying that the rebound in our core fee businesses will also do its part to keep the efficiency ratio down. So next, turn to page 22, which highlights our balance sheet as of June thirtieth.
I won't spend much time on this page, as there is more detail on the line items in the pages to come. But I will point out that our total assets grew by over $10 billion, or by 27%, since the second quarter of last year. This growth, this growth was primarily funded by an $8.8 billion increase in deposits, of which approximately $3.5 billion related to reciprocal SBA PPP deposits and stimulus checks, and another $1.4 billion related to acquisitions. Therefore, organic deposit growth was quite good, representing over 44% of the year-over-year deposit growth and an 11.9% growth rate. This further reinforces the point Frank made earlier, that we are pleased with our bank's positioning in the market. Now I'll turn to page 23 to discuss the components of our loan portfolio.
When you look at our loan portfolio, excluding approximately $3.1 billion in net PPP loans, we are about two-thirds commercial and one-third consumer. On the commercial side, we do all types of small to mid-market banking. We excel in banking professionals, hence a lot of owner-occupied commercial real estate, and on the consumer side, look to bank those customers as well. In terms of consumer loans, they consist of residential mortgages, installment, direct and indirect loans, residential loans, and credit card loans. Organic loan growth was somewhat muted during the second quarter, growing at an annualized rate of 3.4%. Most of the growth was in commercial loans, with owner-occupied real estate loans having the most significant impact.
We do expect that loan growth will remain muted in the flat to low single-digit % growth area throughout the remainder of the year, given the uncertainty in the economy surrounding COVID. Turning to page 24, you've heard me reference SBA PPP loans several times. Our team did a fantastic job here for our customers in this time of ongoing uncertainty. As a testament to our associates and our market presence, we extended loans to more than 23,000 of our customers, totaling $3.2 billion. Our average loan size is 138,000, so definitely on the smaller end of the spectrum. 92% of the loan units and over 48% of the loan amount were extended to customers with a loan size under 350,000.
Under 1% of the loan units and 15.5% of the loan dollars were extended to customers with a loan size greater than $2 million. The geographic concentration of the loans was fairly in line with our commercial loan portfolio distribution, and in terms of industry concentration, the top five industries were medical, construction, professional services, dental, and service. We collected a weighted average origination fee of 3.65% and fees totaling $116.9 million. Based on what we know now, our expectation is for a significant portion of these loans to be forgiven toward the end of the third quarter, and in the fourth quarter will spill over into the first quarter of next year. With forgiveness, the fee income recognition will accelerate and flow through net interest income during those quarters.
At the end of the day, participation in this program took a ton of effort, work, and creativity of both our bankers and back office associates. It's been many days of long hours to get it done for our customers. We are very pleased that we can make such a big impact for thousands of our customers throughout our entire footprint. Next, I'll turn to page 25 and discuss our payment extension program. Extensions were initially made to performing customers on a 60- or 90-day basis. Currently, payment extensions are active on 5,781 accounts and on $2.1 billion in outstanding loans, which equates to approximately 6.5% of our total loan portfolio and represents payments of around $53 million.
This represents a 61% decline in the number of active extensions and a 63% decline in outstanding balances since June thirtieth. At their peak, we had payment extensions on 19,655 accounts, representing $6.9 billion in loans. So currently, active deferrals are down by 71% in terms of units and 70% in terms of outstanding balances. 93% of these accounts made their most recent payment, and the remainder are within 15 days of their payment due date. The past due rate, which represents balances 30 days or more past due, is low at 0.21%. Requests for further extensions are currently minimal. In June, less than 3% of loans with expiring payment extensions requested a second extension.
Payment extension requests peaked in late March, with about 5,000 requests per week and averaged around 200 per week in June. Next, I'll turn to page 26 and cover our allowance for credit losses at June thirtieth. I will refer to allowance for credit losses as ACL throughout my comments. The table on the left-hand side of the page walks forward our ACL at the end of 2019 to the ACL as of June thirtieth. Upon adoption of CECL on January 1 of this year, we reduced our ACL by a net amount of $37.9 million. This was composed of a $56.9 million reduction in the ACL related to non-PCD loans, partially offset by the $19 million reclassification of our PCI loan credit discount to the ACL.
The $56.9 million reduction in ACL on our non-PCD loans related to lower reserves allocated to our commercial loan portfolio, only partially offset by reserves allocated to our consumer portfolio. The reduction in reserves on commercial loans is related to those loans having relatively short lives and having experienced minimal historical losses, and therefore lower losses were projected over the forecast horizon. Conversely, the ACL for consumer the consumer portfolio increased due to higher loss projections and longer portfolio lives. The reserve for unfunded commitments increased by $8.9 million, primarily due to the inclusion of HELOC balances previously excluded from the reserve calculation.
The net impact of CECL adoption, net of deferred taxes, increased retained earnings by approximately $37 million, which is composed of, one, an increase of $43.8 million from lowering the ACL on non-PCD loans, and a decrease of $6.8 million from increasing the reserve on unfunded commitments. During the six-month period ended June thirtieth, 2020, we incurred net charge-offs totaling $14.9 million. For the same period, we took provision expense totaling $48.9 million, covering current year net charge-offs by a multiple of 3.3 times. Of the $48.9 million in provision expense recognized, $31.6 million related to the reserve build for uncertainty surrounding COVID. Our net charge-off ratio remained low at 10 basis points on a year-to-date and nine basis points on a quarter-to-date basis.
The ACL percentage, ex-PPP loans, of 0.76%, covered quarter-to-date annualized net charge-offs 8.2 times, and year-to-date annualized net charge-offs 7.6 times. These coverage ratios compare to a weighted average life of our loan portfolio of just under four years. In terms of our outlook, we expect that the net charge-off ratio will increase slightly as the positive temporary impact of SBA loan proceeds and payment extensions subside. The absolute level of net charge-offs and the magnitude of the increase, and thus future reserve builds, will be dependent on the economic recovery and the severity of COVID on it. At the present time, we expect future reserve builds. We expect that future reserve builds will not be at the pace of the previous two quarters. Now on to page 27.
As Frank covered in his comments, one of our keys to maintaining consistent profitability, regardless of the business cycle, is solid risk management around our credit portfolios. On page 27, I think you will see that our credit quality metrics support that our ACL is prudent and is adequate to absorb current estimated credit losses. You will notice on the bar graph at the lower left-hand side of the page that our NPAs are up since prior year-end. And as part of the adoption of CECL, loans transferred from performing PCI pools into non-accrual status contributed to $35.9 million of the increase in NPAs from December 31, 2019, to June 30, 2020. The remainder of the increase was primarily related to acquired loans. In general, we feel very good about our credit profile and quality metrics.
Turning to page 28, I will touch on our deposit base and our deposit growth. In addition to excellent credit quality, a hallmark of our bank is our stable, high quality, and low-cost deposit base. As the bar graph shows, excluding the estimated impact of PPP reciprocal deposits and of stimulus checks on second quarter demand deposit growth, demand deposits have represented anywhere between 38% and 42% of our total deposit base over the past five quarters. While we do acknowledge that our deposit growth during the second quarter was positively impacted by government stimulus for consumers and small businesses, we experienced strong organic growth on both a linked quarter and year-over-year basis. During the quarter, organic deposit growth was 31.9% on an annualized basis. On a year-over-year basis, organic deposits grew by 11.9%.
We attribute this organic growth to multiple factors, including, one, our day-to-day market strategy and relationship focus that Frank mentioned earlier in his comments. Two, a flight to quality in challenging economic times. Three, lower consumer spending. Four, broad market uncertainty, leading our commercial and business customers to hold more cash in their deposit accounts. And finally, five, tax payment deferrals from April to July. Overall, we are exceptionally pleased with our deposit base, and importantly, with the dedication of our bankers who make it happen every day. As far as our outlook for deposit growth during the remainder of the year, we expect a decline in the current growth rate as our customers continue to utilize their PPP loan and stimulus check proceeds.
Turning to page 29, our funding mix, shown in the table at the top left-hand side of the page, illustrates our deposit base's strong role in funding earning asset growth. At the end of the second quarter, deposits represented over 95% of our funding mix, compared to just over 97% a year earlier. The decline in the percentage was due to an increase in FHLB advances and the issuance of subordinated debt during the first quarter. However, deposits composition is expected to continue to remain in the mid to high nineties as a percentage of our funding mix moving forward. During the quarter, we did see deposit rates begin to catch up with falling rates as our cost of deposits fell by 10 basis points. As I mentioned earlier, we expect the cost of deposits to fall to single digits basis points over the coming quarters.
Okay, now turning to page 30, all of our capital ratios are walked forward from December, December 31, 2019, and I will focus my comments on the significant items impacting the changes in those ratios. Our total risk-based capital ratio ended June 30 at 13.63%, which was up 251 basis points over the prior year end. Sub-debt and preferred stock issued during the first quarter added 224 basis points, and year-to-date net income added 68 basis points. The more significant items offsetting these increases were stock repurchases, which subtracted 92 basis points, and an increase in risk-weighted assets, which subtracted 44 basis points. Our Tier One risk-based capital ratio increased for similar reasons, with the exception of the sub-debt issue, which does not count as Tier One capital.
Our Common Equity Tier 1 capital ratio declined by 54 basis points, as the impact of stock repurchases and the increase in risk-weighted assets was not offset by the positive impact of net income. Our Tier 1 leverage ratio declined by 74 basis points. The negative impact of share repurchases, growth, and average assets, the SBA PPP program, and acquisitions were not fully offset by the positive impacts of year-to-date earnings in the first quarter preferred stock issuance. The takeaway here is that our capital position remains strong, providing sufficient capacity for us to grow organically or through acquisition. And finally, I'll close with page 31, which includes a recap of our outlook for several items that I highlighted as I made my comments on our financial results today.
We do thank all of you for your interest in us and joining us on the call today. I hope it is clear to you that we are very proud of our associates and their contribution to our performance this year, especially given the challenging external environment. Our focus and strategy have remained consistent, and they have been proven by our financial results over time. We believe we are very well positioned to face the challenging times and deliver good results for all of our stakeholders moving forward. And with that said, I will turn it over to Frank.
Craig, thank you. We're pleased with the quarter and excited about our opportunities going forward. We welcome any questions you may have.
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. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. We'll pause for a moment to compile our Q&A roster. Our first question comes from Josh Reitler with Reinhart Partners.
Hello. Just want to start by saying we've been shareholders for going on seven years now, and we really appreciate you taking this step to open up more communication with investors and put more information out. We think you have a unique and a compelling story, so we appreciate this step forward. Just wanted to ask about if we are in a lower rate environment for a longer period of time here, and NIM is kind of structurally lower, are there significant cost takeouts that you can execute? And maybe you can touch on, is there an intention to get your efficiency ratio more in line with peers, maybe somewhere in the fifties?
This is Craig Nix here. I'll take the first part of that, and I'll let Elliott Howard, our Director of Financial Strategy, amplify my comment there. I think just as I've referenced in my comments, our efficiency ratio is higher, a bit by design, given our go-to-market strategy. The payoff for that is a very low cost of funds. In times like this, we are likely to operate in a range of efficiency ratio between 67% and 70%. In better business cycles or normal business cycles, we're comfortable in the 62% to 65% range. I will tell you that we are very diligent about lowering our expenses, but we have a lot of focus also on the denominator side of that, the revenue side, as well.
But I will let Elliot Howard, our Director of Financial Strategy, talk about some of the costs that will be removed for both acquisitions, and as we convert those, and also talk about a little bit of the impact of this hiring freeze that we've instituted.
That's correct. Thank you, Craig. So we look forward, I think the thing we have on the horizon, most immediately, is the conversions of Entegra in August and Gwinnett. We think compared to where our run rates have been on those acquisitions this year, it'll save $18 million out of our cost base on an annualized basis. You know, as we look to branch closures, we've been diligent about looking at our branch network. We've closed over 100 branches since 2015, for an estimated annualized impact of $27 million. And we'll continue that process, with the least impact to our communities and places where it makes sense. The one thing we are committed to is our technology and digital spend. We really see this as something we've committed fully to over the past few years and continue to do so.
So as we move forward, outside of the conversion expense, the hiring freeze, we think will have a $15 million positive impact on the following year compared to what the run rate would have been previously. And we're going to also continue to assess our branch network in terms of how we staff, how we work hours, and how we serve our clients, because I think that's one of the positive impacts of the COVID-19 experience, is that we've learned a little bit more about our customer base, some of their habits, and how we can serve them better with the altered branch strategy.
... Okay. You touched on your acquisition strategy a fair bit. Can you talk more about the trade-off of looking at new geographies, new markets, versus the higher profitability that you would get from building density around your core markets? And also, if you could touch on just how you think about return hurdles in general for acquisitions.
Sure. This is, Elliot again. So, you know, when we look at, acquisitions in general, I, I think we consider a few things. You know, first and mostly, is the market attractive, and can you grow there? Can we sustain the business? Can we control the credit issues? Can we generate low-cost deposits in the market? What type of talent is going to come along with that acquisition? And this is a cultural fit. You know, I think overall, we're extremely focused on Tangible Book Value growth. With that comes, in an acquisition standpoint, that most often in-market acquisitions serve that best. And so I think more generally, you see us pursue in-market acquisitions. We will pursue adjacent or out-of-market acquisitions when the financial case is compelling.
You know, from the financial metrics, we really look at a shortened tangible dilution period and payback. We look at, you know, the earnings per share accretion, as well as what the internal rate of return is on the acquisition. For acquisitions that are outside of our market, that might present a little bit higher risk. We're obviously going to look for a higher rate of return when we look at that acquisition.
Are you likely to do any deal that's much larger in size than what we've seen you do, which is a lot of smaller deals in recent years? Is that something that's on the table?
Yeah, I think in this current environment, where valuations are, I think there's a lot of compelling reasons with earnings compression, with NIM compression, to consider larger deals. I think, you know, we're constantly on the lookout for the value for our shareholders, and if we found an opportunity that we really look forward to that created a stronger institution, created better capabilities for our customers, we'd certainly consider it.
Okay. In regards to the loan portfolio, I think medical and dental loans are roughly 18% of the total. Can you talk more about the composition of that portfolio and how you expect it to perform from a credit standpoint, contrasting with 2008, 2009, where I think losses were minuscule, but dentist offices face some unique challenges to operating this time with the virus?
Okay, Jim Bryan, our chief credit officer, will answer that question.
Thank you for the question. We do have a good concentration in the dental activity. What we are seeing is that, if you recall, our dentist professionals were asked to stand down in the early stages of the pandemic, and now they are back at work, and their offices are open. If you look at the detail of the deferral activity, we have seen a dramatic decrease in deferral activity, with a very modest 1% asking for a second deferral. They have gone back to payment. They are open. We do not anticipate material deterioration in that portfolio at all.
Is that book mostly dental, or is it a mix of medical and dental?
We do have a strong medical book as well. The one I just referenced is the dental portfolio. But we don't anticipate heightened risk issues in either of those portfolios. But both are back at work and accepting patients and working at or near levels prior to COVID.
In 2008, 2009, and 2010, were the losses in that portfolio below average losses across your C&I book?
Yes, they were.
Okay, and you would expect similar performance this time?
We do.
Your organic loan growth this quarter was good, I think 2.8% sequentially, driven by CRE. Most banks are seeing flat or declines organically outside of PPP. Are you taking share in your markets, or are your markets just outperforming the overall economy, and what do you expect to hear for the next few quarters?
We had a good start in the first quarter of this year, and I think what has happened is that this has been continuation of that activity. You know, there is disruption in the market with the merger of BB&T, and also with the issues that Wells Fargo has been dealing with in North Carolina, the old Wachovia client. That's an opportunity for us. So I think that disruption in the market has helped us with our growth strategy.
and the other side of it, too, is that even though we were actively engaged in PPP, our bankers continued to try to attempt to develop business in those sectors that we thought would come through this well, and one of those is medical and dental, which is a big part of our focus.
Okay. You've bought back a fair amount of stock in the last few years, particularly the last few quarters. I think that's relatively new for your organization. Can you talk about your strategy there and if that's something that we should expect to continue?
Okay, I will, I will ask Tom Eklund, our treasurer, to touch on that.
Yeah. So, we look at our share purchases as a way to return excess capital to shareholders, increase future earnings per share and return on equity. And we've been fortunate enough to have earnings growth outpacing asset growth, which has led to excess capital. And when we can't fill that void with mergers and acquisitions, we look to share purchases as a viable option. They're obviously looked at in combination with internal asset growth and M&A opportunities. So essentially, it is a way for us to efficiently manage our capital.
Okay, so something we can expect to continue here for the medium term?
I would say that we made the decision in the current quarter to suspend repurchases of shares, just to be consistent with the rest of the market. I would tell you that we will reassess that at the end of the third quarter. Not trying to send a message we have capital concerns, because our capital ratios are certainly on the upper end of the ranges.
Right.
-that we target, but we are, just to be prudent and consistent with the industry, we are suspending for the third quarter. Look for us to reassess that, in the fourth quarter.
Okay, and then lastly - I'm sorry?
It was Craig Nix, by the way. I transitioned from Tom, just wanted to let you know.
Okay, appreciate that. And lastly for me, did I hear right in your discussion on non-interest income? You have an actively managed portfolio of publicly traded bank stocks, and that's what contributed to the big gains?
Tom Eklund, Treasurer, will address that question.
Yeah, so, we have had, Craig mentioned earlier, since two thousand and fifteen, we have added, positions in, bank stocks, where we look for, quality bank holding companies or banks. We consider those purchases to be intermediate to long-term in nature, and recognize that many of them, not all of them necessarily, are candidates for acquisition by us or another financial institution at a premium. We had activity during the quarter. As you saw in the financials, we had, at the high point, that equity portfolio, which we had for the first quarter, it hit a percentage of CET1 of 9.64%, and as a percentage of total assets, it was 76 basis points and 3.6% of our total investment securities.
During the first quarter, or during the second quarter, we sold out of it, realizing gains of $37 million and additional fair market value adjustments of approximately $27 million on top of that.
So is this portfolio mostly larger banks? Banks you find in, you know, the S&P 500, that type of thing? Or is it private placements, OTC stocks, small banks? What's the composition like?
It's a little bit of both, but it's not really larger banks. It's mostly, I would say, smaller to community bank size and-
Okay.
Okay.
Interesting. Well, that's good for me. Thanks again, appreciate you doing the call.
Thanks for your questions.
I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.
Thank you very much for joining us, and if you have any questions or as you think about it further, by all means, give us a call. Thank you.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.