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.
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.
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.
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.
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%.
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.
This produced $5.9 million in debit card interchange income, $600,000 more than last quarter.
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.
Yesterday, we announced the consolidation of 20% of our branches across our footprint into adjacent offices that will be completed by year-end.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
We have therefore, increased qualitative reserves held against consumer forbearances by $1.2 million in the second quarter.
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.
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%.
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.
As of June 30, we only had 27 relationships over $15 million.
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.

Summary:
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%.
Core earnings per share of $0.24 rebounded strongly from last quarter.
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.