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Text: Hope you're all well.
I'll start with a brief comment on earnings and Joe will provide more detail.
The quarter was about as we expected with the reported earnings strength, driven by a reserve release.
Beyond that, the margin continues to be a headwind but credit [Phonetic], overall deposit fees and the strength of our financial services businesses are tailwinds.
From a business line perspective, commercial is flat, ex-PPP and muni loans, but the pipeline is growing back post-COVID quicker than we expected; that's good news.
The mortgage business is strong with the biggest pipeline we've ever had.
The payoffs are elevated also.
So the book is growing more slowly than it might otherwise.
The indirect lending business had a great Q2 with outstandings up 8% over Q1.
Deposit service fees continue to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020.
And like the entire industry, deposits are up.
Our financial services businesses were the star performers of the quarter with combined revenues up 14% and pre-tax earnings of 25% over 2020.
We are also pleased to announce, earlier this month, the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement plan administration and consulting services with offices in Minneapolis and South Dakota.
The benefits space is very active right now in terms of opportunities and we expect more to come.
The benefits of a diversified revenue model have never been so apparent.
As we announced last week, our Board has approved a $0.01 per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases and we think a validation of our disciplined and diversified business model.
As we announced in March, we have appointed Dimitar Karaivanov as our Executive Vice President for Financial Services and Corporate Development and he began in this role in June.
He joined us from Lazard, where he was a Managing Director in the Financial Institutions Group and has over a dozen years of experience in investment banking, serving clients in the banking benefits and FinTech space.
I've known and worked with Dimitar for nearly his entire career and am thrilled to have him on board supporting our growth initiatives.
Looking ahead, we will be doing our best to manage the changing winds.
We have the headwind in margin pressure but growth, credit, the momentum of our financial services businesses and liquidity deployment are all tailwinds.
As Mark noted, the second quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.88.
The GAAP earnings results were $0.22 per share or 33.3% higher than the second quarter of 2020 GAAP earnings results, and $0.12 per share or 15.8% better on an operating basis.
The improvement in earnings per share was led by lower credit-related costs and a significant increase in non-interest revenues, particularly in the company's non-banking businesses.
Comparatively the company recorded GAAP earnings and operating earnings per share of $0.97 in the linked first quarter of 2021.
The company reported total revenues of $151.6 million in the second quarter of 2021 a $6.7 million or 4.6% increase over the prior year's second quarter revenues of $144.9 million.
The increase in total revenues between the periods was driven by a $5.3 million or 13.7% increase in financial services business revenues and a $1.2 million or 8.6% increase in banking-related non-interest revenues.
Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter 2020 results.
Total revenues were down $0.9 million or 0.6% from the linked quarter first quarter driven by a $1.9 million decrease in net interest income, offset in part by higher non-interest revenues.
Although net interest income was up slightly over the same quarter last year, the results were achieved on a lower net interest margin outcome.
The company's tax equivalent net interest margin for the second quarter of 2021 was 2.79%.
This compares to 3.03% in the first quarter of 2021 and 3.37% one year prior.
Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low-yield cash equivalents we maintain on the company's balance sheet.
The tax equivalent yield on earning assets was 2.89% in the second quarter of 2021 as compared to 3.15% in the linked first quarter and 3.56% one year prior.
During the second quarter, the company recognized $3.9 million of PPP-related interest income, including $2.9 million of net deferred loan fees.
This compares to $6.9 million of PPP-related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees.
The company's total cost of deposits remained low, averaging 10 basis points during the second quarter of 2021.
Employee benefit services revenues were up $3.4 million or 14.2% over the prior year's second quarter, driven by increases in employee benefit trust and custodial fees.
Wealth management revenues were also up $1.9 million or 29.2%, driven by a higher investment management advisory and trust services revenues.
Insurance services revenues were consistent with prior year's results.
The increase in banking-related non-interest revenues was driven by a $2.3 million or 17.6% increase in deposit service and other banking fees, offset in part by a $1 million decrease in mortgage banking income.
During the second quarter of 2021, the company reported a net benefit in the provision for credit losses of $4.3 million.
This compares to a $9.8 million provision for credit losses reported in the second quarter of 2020, $3.2 million of which was due to the acquisition of Steuben Trust Corporation with the remaining $6.6 million largely driven by pandemic-related factors.
During the second quarter of 2021, the company reported 3 basis points of net loan recoveries and the post-vaccine economic outlook remain positive.
In addition, at the end of the second quarter, there were only 12 borrowers representing $2.4 million in loans outstanding and that remained in the pandemic-related forbearance.
This compares to 47 borrowers in pandemic-related forbearance representing $75.6 million at the end of the first quarter, and 3,700 borrowers with approximately $700 million of loans outstanding one year earlier.
These factors drove down the expected loan losses resulting in the recording of a net benefit in the provision of credit losses for the quarter.
The company recorded $93.5 million in total operating expenses in the second quarter of 2021 as compared to $87.5 million in the second quarter of 2020, excluding $3.4 million of acquisition-related expenses.
The $6 million or 6.9% increase in operating expenses was attributable to a $3.2 million or 5.8% increase in salaries and employee benefits, a $1.9 million or 17.8% increase in data processing and communications expenses, and a $0.7 million or 7.7% increase in other expenses and a $0.5 million or 5.3% increase in occupancy and equipment expense, offset, in part, by a $0.3 million or 7.9% decrease in the amortization of intangible assets.
The increase in salaries and employee benefits expense was driven by increases in merit-related employee wages, higher payroll taxes, including increases in the state-related unemployment taxes, higher employee benefit-related expenses and the Steuben acquisition.
Other expenses were up due to the general decrease in the level of business activities, including increases in business development and marketing expenses.
The increase in data processing and communications expenses was due to the second quarter 2020 Steuben acquisition and the company's implementation of new customer-facing digital technologies and back office systems between the comparable periods.
The increase in occupancy and equipment expenses was driven by the Steuben acquisition.
In comparison, the company recorded $93.2 million of total operating expenses in the first quarter of 2021, $0.3 million or 0.3% lower than the second quarter 2021 total operating expenses.
The effective tax rate for the second quarter of 2021 was 23.1%, up from 20.3% in the second quarter of 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021.
The company closed the second quarter of 2021 with total assets of $14.8 billion.
This was up $181.1 million or 1.2% from the end of the linked first quarter and up $1.36 billion or 10.1% from a year earlier.
Average interest earning assets for the second quarter of 2021 of $13.37 billion were up $680.6 million or 5.4% from the linked first quarter of 2021, and up $2.27 billion, or 20.4% from one year prior.
The very large increases in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben and margin flows of government stimulus-related deposit funding PPP originations.
The company's ending loan balances of $7.24 billion were down $124.2 million or 1.7% from the end of the first quarter.
Excluding the net decrease in PPP loans of $126.1 million and the seasonal decrease in municipal loans totaling $41.2 million, ending loans increased $43.1 million or 0.6%.
As of June 30, 2021, the company's business lending portfolio included 317 first draw PPP loans with a total balance of $72.5 million and 2,254 second draw PPP loans with a total balance $212.3 million.
The company expects to recognize, through interest income, the majority of its remaining first draw net deferred PPP fees totaling $0.9 million during the third quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $9.2 million over the next few quarters.
On a linked quarter basis, the average book value of the investment securities portfolio increased $290.2 million or 7.9% from $3.67 billion during the first quarter to $3.96 billion during the second quarter.
With this said, the company has largely remained on the sidelines with respect to deploying excess liquidity and for market interest rates to become more attractive.
During the second quarter, the company's average cash equivalents of $2.07 billion represented approximately 16% of the company's average earning assets.
This compares to $1.67 billion in average cash equivalents during the first quarter of 2021 and $823 million in the second quarter of 2020.
The $408 million or 24.5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds and the origination of second draw PPP loans and first draw PPP loan forgiveness.
The company's capital reserves remained strong in the second quarter.
The company's net tangible equity to net tangible assets ratio was 9.02% at June 30, 2021.
This was down from 10.08% a year earlier, but up 8.48% at the end of the first quarter.
The company's Tier 1 leverage ratio was 9.36% at June 30, 2021, which is nearly 2 times the well-capitalized regulatory standard of 5%.
The company has an abundance of liquidity with the combination of company's cash and cash equivalents.
Borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available-for-sale investment securities portfolio provides the company with over $6.1 billion of immediately available sources of liquidity.
At June 30, 2021, the company's allowance for credit losses totaled $51.8 million or 0.71% of of loans outstanding.
This compares to $55.1 million or 0.75% of total loans outstanding at the end of the first quarter of 2021 and $64.4 million or 0.86% of total loans outstanding at June 30, 2020.
The decrease in the allowance for credit losses is reflective of an improving economic outlook, the very low levels of net charge-offs and a decrease in delinquent loans and loans on on pandemic-related forbearance.
Non-performing loans decreased in the second quarter to $70.2 million or 0.97% of loans outstanding, down from $75.5 million or 1.02% of loans outstanding at the end of the linked first quarter of 2021, but up from $26.8 million or 0.36% of loans outstanding at the end of the second quarter of 2020 due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non-accrual status between the periods.
The specifically identified reserves held against the company's non-performing loans totaled only $2.8 million at June 30, 2021.
Loans 30 to 89 days delinquent totaled 0.25% of loans outstanding at June 30, 2021.
This compares to 0.37% one year prior and 0.27% at the end of the linked first quarter.
Management believes the low levels of delinquent loans and charge-offs has been supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.
We remain focused on new loan origination and we'll continue to monitor market conditions to seek the right opportunities to deploy excess liquidity.
Our pipeline -- loan pipelines increased considerably during the second quarter and asset quality remains very strong.
We also expect net interest margin pressures to persist and remain well below our pre-pandemic levels but also believe our abundance of cash equivalents represent a significant future earnings opportunity.
We're also fortunate and pleased to have a strong non-banking businesses that supported and diversified our streams of non-interest revenue.

user
compname posts q2 2021 net income of $0.88 per fully-diluted share.
q2 revenue $151.6 million versus refinitiv ibes estimate of $151.7 million.
q2 2021 net income of $0.88 per fully-diluted share.
net interest income of $92.1 million in q2 of 2021 versus $92.0 million of net interest income recorded in q2 of 2020.

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