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Text: Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported financial results in accordance with GAAP.
We were generally pleased with the second quarter results with net income of $23.9 million, earnings per share of $0.24, a pre-tax pre-provision ROA of 1.61% and the core efficiency ratio of 57.2%.
First, provision expense fell to $6.9 million from $31 million in the first quarter, as three non-performing loans were resolved.
The second quarter reserve increased from $2 million to $81 million or 1.28% of total loans, excluding PPP loans as we added another $5.5 million in qualitative reserves to reflect the economy and our COVID overlay.
We believe that ratio compares favorably to other incurred banks, although our second quarter reserve of $81 million was calculated using the incurred loss model.
Adding our previously disclosed day-one CECL increase would put reserves into the mid $90 million range.
That would put the reserve coverage in the mid-150s, which we believe would compare favorably with CECL banks our size, even with no further reserve build.
That's all because of the strong reserve build we did in the first quarter.
Our first quarter loan deferral figure of $1.1 billion or 17.6% of total loans fell all the way $186 million or 2.7% of total loans as of July 24.
Most of our deferrals were 90 days and our approach to customers, consumers, and businesses in March and early April shifted from accommodative and customer service oriented to a more credit-oriented approach in May and June.
The team is exercising extraordinary oversight with regard to credit.
This is warranted particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or two, and as the impact of the initial shorter-term government stimulus dissipates.
In the second quarter, our credit and banking teams did a name-by-name commercial loan review and spoke with some 1,600 clients in total.
Brian Karrip, our Chief Credit Officer will provide more credit commentary shortly.
Second, the team helped roughly 5,000 local businesses, preserve roughly 80,000 jobs at a median loan size of only $32,000 through the Payroll Protection Program.
Excluding $571 million of PPP loans, our portfolio grew 2.7% annualized, driven by record mortgage volumes, strong indirect loan originations and corporate banking growth.
Our Ohio markets accounted for all of the net new loan growth in the second quarter, further validating our Ohio expansion over the past few years.
As an aside, over $20 million in PPP loan fees were wired to First Commonwealth in June from the SBA and will accrete into income in the second half of the year, as we expect that the majority of our PPP loans will be forgiven.
Third, the net interest margin of 3.29% fell as expected.
But after adjusting for the dilutive effects of the PPP loans at 1% and an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%.
Jim Reske, our CFO, will provide commentary on margin expenses and other important items.
Fourth, non-interest income of $21.8 million in the second quarter increased some $2.5 million as the company set quarterly records in both mortgage originations and debit card interchange income.
Regarding the former, some $203 million in mortgage originations, increased gain on sale income from $1.7 million to $4.2 million.
On the latter, we added 10% more debit cards with our Santander branch acquisition last year.
And in the second quarter, consumer debit card swipes were up as retailers had a strong preference for cards versus cash.
This produced $5.9 million in debit card interchange income, $600,000 more than last quarter.
Fifth, our capital levels remained strong.
We have over $200 million of excess capital and together with our ALLL, this would allow us to absorb losses equal to roughly 5% of the entire loan portfolio at once, and still remain well capitalized.
Jim Reske will elaborate on this as well, but we want to enter 2021 and sustain through the year of $51 million to $52 million quarterly non-interest expense run rate.
At the onset of the COVID pandemic and after the first Federal Reserve cuts in March, the Executive team started a broad-based initiative dubbed, Project THRIVE, as we focused on one growth, expense and efficiency, NIM, and capital, with the expressed goal of emerging on the other side of the pandemic stronger than ever.
We now have two dozen initiatives, some small, some large in the works.
Yesterday, we announced the consolidation of 20% of our branches across our footprint into adjacent offices that will be completed by year-end.
This comes at a time that we are setting quarterly company records with online mobile account opening, mobile deposit activity and debit card activity with our new contactless cards.
In the ensuing months, we expect to launch our third generation of P2P payments and the fourth generation of an integrated mobile online banking platform after the successful launch of a new treasury management platform for our commercial clients in June.
Customer preferences continue to change meaningfully and the COVID crisis has pushed all things digital, well past traditional servicing.
Just one example; in the second quarter, we opened 992 deposit accounts via our mobile online platform, some three times our first quarter figure, which by the way was not bad.
Our investment in digital leaves us well prepared for the future.
Lastly, the First Commonwealth team will remain focused on a handful of items that will simply make us a better bank, namely accentuating opportunities to grow our core business and geographies as we continue to build the first Commonwealth brand.
Second, realizing efficiencies at a time when margins are compressed and could remain there for the foreseeable future.
Third, executing a handful of key digital initiatives in the ensuing months and continuing to build competitive advantage on that front.
And lastly, navigating the COVID environment to deliver good, through the cycle credit and net interest margin outcomes for our shareholders.
I'd like to now turn the time over to Jim Reske.
Core earnings per share of $0.24 rebounded strongly from last quarter.
This brings our trailing four quarter non-core earnings per share average to $0.21, well in excess of our current dividend of $0.11 per share.
Second quarter results were driven by relatively positive credit experience and the net interest margin.
Brian will discuss credit in detail in a moment, so my remarks will be focused on margin, expenses and changes in our loan deferrals.
The net interest margin fell from 3.65% last quarter to 3.29%.
The primary driver of NIM compression was, not surprisingly, rate resets on the bank's variable-rate loans following the Fed's 150 basis points of rate cuts.
However, there was also a pronounced effect on NIM from the addition of low rate PPP loans and the excess cash on the balance sheet as these loans were mostly disbursed in the customer deposit accounts.
We also saw inflows from other sources such as federal stimulus checks.
As a result, we had quarter-over-quarter growth in average deposits of $758 million.
Non-interest-bearing deposits alone increased by $537 million to 29.4% of total deposits, up from 25.3% last quarter.
This strong deposit growth resulted in an average of $212 million of excess cash in the quarter.
In fact, excess cash peaked at over $480 million in mid-July or nearly 5% of total assets.
This of course had a suppressive effect on the NIM.
We estimate that the impact of PPP loans and the like amount of associated deposits on NIM to be approximately 12 basis points in the second quarter, which would imply a core NIM of 3.41% for the quarter.
That represents 24 basis points of NIM compression, which is within the range of previous guidance, albeit at the higher.
Our ability to lower deposit costs in the second quarter, helped to blunt the impact of downward rates.
For example, the average rate on interest-bearing demand in saving deposits, which had over $4 billion, is our largest deposit category, was cut in half in the quarter from 48 basis points to 24 basis points.
Looking forward, we still have nearly $800 million of time deposits, at an average rate of 1.51%, which will reprice downward over time and should help offset the impact of negative loan replacement yields, though not completely.
As a result, even though we expect some further NIM compression, we believe the pace of compression should slow.
Adjusting for the impact on NIM from PPP loans and excess cash, we expect the core NIM to drift down to 325 to 335 by year-end.
To offset the impact of the low rate environment, we remain firmly focused on continuing our long and successful track record of controlling expenses.
The quarter-over-quarter increase of $2.5 million in non-interest expense was strongly affected by the unfunded commitment reserve, which was a negative $2.5 million last quarter but a positive $0.9 million this quarter for a $3.4 million negative quarter-over-quarter swing.
The other notable event in NAIE [Phonetic] was about $419,000 of COVID-related expense in the second quarter.
Going forward, we expect significant expense reductions from the branch consolidation project, Mike discussed earlier.
We expect this and other contemplated expense containment initiatives to enable us to maintain a non-interest expense run rate of between $51 million to $52 million per quarter for the foreseeable future.
Now, let me provide a few general remarks on our loans and deferrals and how they are trending.
Last quarter, we reported that deferrals totaled $1.1 billion or 17.6% of total loans as of April 24, the Friday before our first quarter earnings call.
Deferrals peaked during the quarter at approximately $1.4 billion.
We would note that most of our deferrals were for 90-day periods that began in the last week of March and continued through April.
As such, the initial 90-day period for most of these loans has been coming to an end only in the last few weeks.
But we would encourage caution in drawing conclusions from what is only early experience.
However, as Mike mentioned, as of July 24, last Friday, they remained $186.3 million of loans in deferral status or 2.7% of total loans.
While that reduction is an early positive sign, we firmly believe that it's too early to draw any conclusions until we see more evidence of actual payment history on these loans.
We have therefore, increased qualitative reserves held against consumer forbearances by $1.2 million in the second quarter.
Last quarter, volatility in forecast model gave us pause as to the efficacy of those models, and now volatility continues with the current debate over V, W, U and swoosh recoveries.
As I mentioned last quarter, we saw no advantage in CECL adoption at the time and we continue to believe that's the case.
So, we have, in fact, allowed us to observe the various industry approach of CECL adoption and refine our models accordingly.
However, even though we are on incurred, as shown on Page 6 of our supplement, we did a significant reserve build in the first half of this year, resulting in a coverage ratio that we believe compares favorably with incurred banks as well as many CECL adopters, and we continue to build qualitative reserves in the second quarter.
Although we're in the early innings of the economic recession, we're pleased with our asset quality trends for the second quarter.
Our NPLs decreased approximately $3.1 million, improving from 0.93% of total loans in Q1 to 0.88%, excluding PPP.
Reserve coverage of NPLs rose from 133.53% to 145%.
NPAs decreased $4.5 million from 0.74 of total assets in Q1 to 0.66.
Classified loans as a percentage of total loans excluding PPP decreased from 1.42% to 1.21%.
These improving trends form the backdrop of our approach for loan loss reserve in the second quarter.
We continue to build reserves under the incurred loss model by approximately $2.4 million.
Our allowance of total loans grew to 1.28%.
Provision for the quarter was $6.9 million, driven by modest loan growth and overall decrease in NPLs of approximately $3.1 million.
The decrease in specific reserves of approximately $2.9 million [Technical Issues] changes in our qualitative reserves.
Our standard qualitatives increased by $3.4 million quarter-over-quarter, reflecting the economic conditions.
As Jim mentioned, our COVID qualitative overlay increased by $2.1 million to $9.9 million.
Recall, from the last quarter, we developed a framework to capture the incremental risk of loss due to COVID.
The framework included eight higher risk commercial portfolios.
Additionally, we developed consumer overlay based on our internal PD/LGD models to address the risk associated with consumer forbearances.
We attribute our solid performance in the quarter to our continued adherence to our credit principles.
Over the past several years, we've managed concentration risk in both levels, creating granularity in our commercial loan portfolios.
As of June 30, we only had 27 relationships over $15 million.
To better identify portfolio risk, we have prepared internal industry studies for each commercial real estate segment as well as certain C&I segments, including dealer floor plan and energy.
Our industry study is a valuable tool to identify and vantage certain portfolio risk.
Additionally, we use our industry studies to manage our geographic diversification and diversification with industry sectors.
One of our great strengths is that we use our size, speed, and flexibility to our advantage.
For example, over the course of the second quarter, we performed a comprehensive loan review, covering approximately 1,600 borrowers and $3.6 billion in commercial loans.
We reviewed commercial credits as small as $350,000, so as to better understand COVID-related impacts on our commercial clients and small businesses.
The review is founded on the notion that, in this current economic environment, financial statements look at customers through the rearview mirror.
And we want to look through the windshield.
During our loan reviews, we relied on our experience and customer knowledge to evaluate the health of our borrowers on a name-by-name basis.
These loan reviews helped us to identify potential risk and to adjust risk ratings accordingly.

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first commonwealth declares quarterly dividend.
q2 earnings per share $0.24.
compname reports q2 earnings per share $0.24.

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