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Text: First, I will provide a short review of the second quarter financial results.
Then I'll cover recent performance trends of our key business model before turning the call over to Gary and Vince for their remarks.
F.N.B. second quarter earnings per share totaled $0.31, representing an 11% increase on a linked-quarter basis.
Operating net income reached a record $101 million and total revenue increased to $308.
Our performance resulted in a return on tangible common equity of 16% and growth in tangible book value per share to $8.20, an increase of $0.19 or 2%.
The quarter's efficiency ratio of 56.8% improved due to the benefit of increased revenue and continued expense discipline as we achieved the 2021 operating cost savings floor of $20 million.
Our company remains well capitalized with an estimated CET1 ratio of 10.02% for the second quarter.
Second quarter revenues, supported by record wealth management revenues and strong contributions across a number of segments, including insurance, mortgage banking, capital markets and SBA lending.
Many of these areas have continued to benefit from our expansion into higher growth markets.
On a year-to-date basis, wealth management revenues increased over 6 million, as total wealth management and insurance revenues increased 26% and 8% respectively.
Looking at the balance sheet, on an annualized linked-quarter basis, F.N.B. demonstrated strong fundamental performance as we saw a pickup in lending activity that translated into a significant spot loan growth of 9% when excluding the impact of PPP loan.
On a spot basis, total deposits were flat with seasonal outflows and a decline in time deposit balance.
Non-interest bearing deposits grew to $10.2 billion at June 30 and now comprise a third of total deposits.
This brings our loan-to-deposit ratio to 82.4% providing F.N.B. with ample liquidity and a favorable funding mix moving forward.
Diving deeper into the Wholesale Bank's performance this quarter, we are encouraged that commercial loan activity has begun to pick up across the footprint and pipelines are healthy entering the second half of the year.
We have significant opportunities within the commercial pipelines in the Carolinas.
Pittsburgh and Mid-Atlantic markets, which reached the highest level in the last two years.
Additionally, strength in the total near-term pipeline, give us optimism for strong second half for commercial loan origination.
Consistent with our comments on the April call, activity levels around commercial pipelines, as well as consumers are encouraging given our goal to reach mid single-digit loan growth on a spot basis by the end of the year.
However, I'll note that commercial line utilization rate remain well below historical level.
We are optimistic that utilization rates could move higher in the second half of this year as remaining PPP loans are processed through the forgiveness period and the U.S. economy begins to accelerate as the supply chain for many industries improves.
As we discussed on the prior call, our mortgage banking business continues to see near record production volumes; however, gain on sale margins contracted across the industry during the quarter were reflecting the current market conditions.
In addition to mortgage banking, the overall consumer pipelines have grown significantly since the beginning of the year.
We have begun to experience lending growth across the consumer product set.
As economic activity has begun to pick up, we are experiencing increased loan demand in commercial and consumer banking and favorable credit trends.
Our results for the second quarter were favorable and we are very pleased with our credit portfolios position moving into the second half of the year.
Delinquency and non-performing levels decreased meaningfully during the quarter and our net losses remained low.
Positive momentum of the broader economy and continued reopening of businesses have further contributed to the favorable results for the quarter, particularly as some borrowers in the more sensitive industries and asset classes begin to show signs of recovery.
I'll cover that in greater detail later in my remarks.
But first, let's walk through our credit results for the second quarter and review some of those highlights.
The level of delinquency excluding PPP balances ended June at 80 bps, a 9 basis point improvement linked quarter, which was driven by broad improvements across all portfolios, notably commercial and [Indecipherable].
The level of NPLs and OREO also improved to end the quarter at 58 basis points, representing a 14 basis point decrease from the prior quarter's ex-PPP level.
Our NPLs decreased meaningfully down nearly $30 million during the quarter, which was driven primarily by a $21 million reduction in the commercial portfolio, including the resolution of a credit that was previously reserved for.
Net charge-offs for the quarter were very low at $3.8 million or 6 basis points annualized.
While year-to-date net charge-offs remained at a very solid 9 bps annualized.
Non-GAAP net charge-offs excluding PPP balances were 7 bps and 10 bps for the quarter and year respectively.
We recognized a $1.1 million net benefit in provision this quarter following broadly improving economic activity and positive credit quality results through June, resulting in a stable reserve position at 1.42% while the ex-PPP reserve stands at 1.51%.
NPL coverage also remains very favorable at 278% due to reduced NPL levels during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totals 1.58%.
I'd now like to provide some additional color on our loan portfolio and give an overview of our approach to underwriting and managing risk as lending markets remain highly competitive.
I think quickly on loan deferrals, we ended June at a level of 0.7% of our core loan portfolio with these levels continuing to decline as new requests have essentially ceased and borrowers returned to contractual payment schedules.
Our banking teams have also remained actively engaged with our commercial customers to stay apprised of how the broader economy and emerging trends are affecting their operations, including the impact of supply chain disruptions, labor shortages and the general future outlook for their respective industries.
These factors are all taken into careful consideration during our underwriting and credit approval processes, which is consistent with our overall credit philosophy.
We were successful in closing a number of high-quality lending opportunities in the quarter with strong borrowers that fit within our desired credit profile and we will continue to approach transactions in this manner to help us meet our growth targets, while maintaining our desired risk profile.
In closing, we had a successful quarter marked by solid credit results and low losses, which has us favorably positioned moving into the second half of the year.
We made significant progress working down rated credits as indicated by a 15% reduction in classifieds, reflecting the tireless efforts put forth by our work out teams to reduce exposure to more sensitive industries and take risk off the table as economic conditions continue to improve.
As we look ahead to new lending opportunities, our core credit principles that have served us well throughout economic cycles remains front and center in all credit decisions we make including consistent and disciplined underwriting across the footprint, attentive and timely management of risk, and proactive portfolio management to further position us for the quarters ahead.
Today, I will discuss our financial results and current expectations.
As noted on Slide 5, first quarter earnings per share increased to $0.31,, up significantly from the prior and year ago quarters.
Looking at highlights for the quarter, on an operating basis, net income available to common stockholders increased $18.3 million or 22% to a record $101.5 million as total revenue increased $2.1 million or 0.7%.
Operating expenses were well controlled, down $5 million linked quarter.
We saw a negative provision for credit losses due to the improved credit metrics that Gary just discussed.
Linked quarter growth and operating PPNR of $7 million or 6% reflects the company's strong performance in the quarter even without provision benefit.
Now turning to Slide 7 to review the balance sheet.
Period-end loan balances excluding PPP increased $515 million or 9.1% annualized on a linked quarter basis.
Through organic growth with strong contributions from both commercial and consumer segments, the economy continues to rebound.
On an average balance basis, total loans decreased $56 million reflecting accelerated PPP forgiveness during the second quarter.
On the deposit side, average deposits increased $1.1 billion or 3.9% to over $30 billion, a record high with non-interest bearing deposits comprising 33% of total deposits.
On a spot basis, deposits were relatively flat, even the managed decline in higher cost time deposits.
Focusing on Slide 8.
Net interest income increased $5 million to $227.9 million as the PPP contribution increased $2.2 million -- $25 million [Phonetic], which was offset by $1.9 million decreased contribution of purchase accounting accretion to $5.0 million.
The underlying net interest income trends improved due to a more favorable balance sheet mix and our continued focus on reducing deposit costs in the lower interest rate environment was evidenced by our total cost of interest bearing deposits declining 7 basis points to 24 basis points.
Reported net interest margin decreased 5 basis points to 2.70% as earning asset yield declined 9 basis points, which was partially offset by the 6 basis point reduction in the cost of funds.
The yield on total loans and leases remain stable at 3.51%.
When excluding the higher cash balances, purchase accounting accretion and PPP impacts, the underlying net interest margin would be 2.71%, representing a 1 basis point increase compared to the first quarter 2021 and the second quarter in a row of improving underlying net interest margin.
Let's now look at non-interest income and expense on Slides 9 and 10.
Non-interest income totaled $80 million decreasing $3 million from record levels last quarter.
We achieved record wealth management revenue of $15 million through contributions across the geographic footprint and positive market impacts on assets under management.
SBA volume and average size of transactions increased during the quarter, driving SBA premium revenues to $2.6 million almost double the prior quarter.
Pipelines in this business remain solid and we expect near-term SBA premium revenues to be strong.
Mortgage banking operations income decreased $8.3 million as gain on sale margins tightened meaningfully in the second quarter 2021 throughout the industry.
Held for sale pipeline declined significantly elevated levels and the benefit for mortgage servicing rights impairment valuation recovery was $2.2 million lower than last quarter.
Non-interest expense decreased $2.4 million linked quarter on a reported basis.
When excluding $2.6 million of branch consolidation costs in the quarter, non-interest expense decreased $5 million or 2.7%.
On an operating basis, salaries and employee benefits decreased %5.3 million or 4.9%, primarily related to the timing of normal annual long-term stock awards recognized in the first quarter each year.
Outside services expenses increased $1.8 million reflecting increases from third-party technology providers, legal costs and other consulting engagements.
We are very pleased with this quarter's results with record operating net income, accelerating sequential loan growth, strong revenue growth, solid credit quality metrics, continued growth in tangible book value per share, increasing $0.19 per share to $8.20.
Now turning to our outlook for the third quarter of 2021.
Excluding PPP contribution, we would expect net interest income to be up slightly in the third quarter compared to the second quarter.
The level of PPP contribution will be a direct function of the modest forgiveness process during the quarter.
Our current thinking is that we will see around $500 million of forgiveness in the third quarter, which would translate into a $79 million reduction in net interest income contribution from PPP loans.
However, if the SBA approves forgiveness closer to second quarter levels, the reduction in PPP contribution would be smaller.
We expect non-interest income to be in the high $70 million area given the diversified nature of our non-interest income revenue streams.
We expect non-interest expense to be flattish compared to operating expenses in the second quarter.
Our provision for loan losses remains dependent on the level of loan origination activity and we are encouraged by the favorable credit trends observed during the first half of 2021.
Regarding our full year assumptions, our loan growth, total revenue and non-interest expense assumptions remain unchanged with current deposit growth reflecting the benefit of additional government stimulus as we continue to see increased liquidity and a loan-to-deposit ratio below historical levels.
I'd like to provide an update on the pending Howard acquisition.
We are excited to begin the integration process with the Howard team.
We are confident that our established leadership in the Mid-Atlantic market will work well with the talented bankers at Howard.
We share a deep culture of client and community service, which should allow for a seamless transition in the coming months for all of our stakeholders.
We also expect the conversion and integration to run smoothly as both organizations operate on common core system.
As discussed previously, our decision to selectively enter higher growth markets through a combination of de novo locations, loan production offices and strategic acquisitions has F.N.B well positioned today.
With the Howard merger, we will grow to the number 6 deposit share in the Baltimore MSA, while adding meaningful customer density to the Mid-Atlantic region, which covers Maryland, Washington DC and Northern Virginia.
Our long-term strategy is to best position our company in the markets where we have the ability to grow loans, low cost deposits and fee income organically through increasing our market share over the long term and expanding the universe of clients and prospects.
If you look at our market expansion strategy in the Mid-Atlantic, our four acquisitions since 2013 came in a lower relative acquisition cost with a weighted average price to tangible book of 1.5 times.
Our growth strategy in the Mid-Atlantic region provided access to a population of 10 million and more than 300,000 businesses with revenue greater than 100,000.
Since the end of 2015, our compounded annual organic loan growth for F.N.B in Maryland is 15%.
Furthermore, as a company overall, we have nearly doubled our annual non-interest income since 2015 from $162 million to $294 million, most of which has to do with our investment in products and services, but also bringing those capabilities into our expansion markets and broadening our client relationships.
Therefore, we are very excited about our long-term potential for growth as we offer our deep product suite to Howard's customer base.
Looking specifically at some of the transaction highlights.
The Howard franchise increases F.N.B. Baltimore deposits by $1.7 billion to $3.5 billion on a pro forma basis, while creating a combined organization of more than $41 billion in total assets.
Additionally, the transaction carries lower execution risk given the end market synergies.
We view the transaction as financially attractive with a 4% earnings per share accretion with fully phased-in cost savings and enhanced pro forma profitability metrics, which included 200 basis point improvement in the efficiency ratio and an internal rate of return greater than 25%.
Consistent with our approach to capital management, the transaction is expected to be neutral to CET1 at closing and includes minimal tangible book value dilution of 2%.
As I noted earlier, our TBV growth this quarter alone was 2%, essentially earning the TBV dilution back in one quarter.
Our M&A strategy hasn't changed from what we said in the last couple of quarters.
First and foremost, our focus is on organic growth.
But if opportunities arise, where the target is in market, has potential for significant cost saves and carries low execution risk with minimal tangible book value dilution, the potential acquisition becomes worthy of evaluation.
We are excited about the opportunities in front of us as our organization continues to flourish and evolve as a more diversified financial institution.
Last month, we were honored to be named as the Top Workplace in Northeast Ohio for the 7th consecutive year and our 30th Workplace recognition overall, which are based solely on employee feedback.
In closing, we are focused on continuing our commitment to advance our market position by gaining scale and operational efficiency and by cultivating a great culture and meaningful lasting relationships with our clients and communities while simultaneously creating value for our shareholders.

user
compname reports q2 revenue $308 mln.
q2 non-gaap earnings per share $0.31 excluding items.
q2 revenue $308 million versus refinitiv ibes estimate of $305.2 million.
corp quarterly net interest income $227.9 million versus $227.96 million.

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