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Text: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
Tim Timanus, our Chairman, is unable to join us today.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Randy Hester, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Sean.
Before we begin, let me make the usual disclaimers.
For the second quarter of 2021, Prosperity had strong earnings, core loan growth, deposit growth, continued sound asset quality, impressive cost controls, our return on average tangible common equity of 17.49% and remains well reserved.
Prosperity Bank has been ranked as the number two Best Bank in America for 2021 and has been in the top 10 of Forbes America's Best Banks since 2010.
The unemployment rates continue to increase and GDP growth continues at a high level as forecasted last year with the reopening of the economy.
We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies.
Further, businesses and individuals continue to move to Texas for lower tax rates and a better quality of life.
Our earnings were $130.6 million in the second quarter for 2021 and compared with $130.9 million for the same period in 2020.
The second quarter of 2020 included a tax benefit for net operating losses of $20.1 million or $0.22 per diluted common share as a result of the enactment of the CARES Act.
Diluted earnings per share were $1.41 for the second quarter of 2021 and for the same period in 2020.
Earnings per share for the second quarter of 2020, included the $0.22 tax benefit, partially offset by a $0.06 charge merger-related expense and a $0.03 charge for the write-down of fixed assets related to the merger and some CRA investment funds.
The net effect was a positive $0.13 in earnings per share for the second quarter of 2021, a 10.2% increase after considering the adjustments in the second quarter of 2020.
Loans on June 30, 2021, were $19.2 billion, a decrease of $1.7 billion or 8.4% compared with $21 billion on June 30, 2020.
Our linked quarter loans decreased $387 million or 2% from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans.
On June 30, 2021, the company had $780 million of PPP loans compared with $1.4 billion of the PPP loans on June 30, 2020, and $1.1 billion of PPP loans on March 31, 2021.
The linked quarter loans, excluding the Warehouse Purchase Program and PPP loans increased $148 million or nine basis points, 3.7% annualized from the $16.2 billion on March 31, 2021.
Our deposits on June 30, 2021, were $29.1 billion, an increase of $2.9 billion or 11.3% compared with $26.1 billion on June 30, 2020.
Our linked quarter deposits increased $347 million or 1.2%, 4.8% annualized from the $28.7 billion on March 31, 2021.
We believe that the deposit inflows are starting to normalize as people are spending money again and stimulus payments have been reduced.
However, the child tax credit payments should again add deposits to the banks.
Our asset quality has always been one of the primary focuses of our bank.
Our nonperforming assets totaled $33.7 million or 11 basis points of quarterly average interest-earning assets as of June 30, 2021, compared with $77.9 million or 28 basis points of quarterly average interest earning assets as of June 30, 2020, a 56.8% decrease from last year.
Nonperforming assets were $44.2 million or 15 basis points of quarterly average interest-earning assets as of March 31, 2021.
M&A seems to be regaining momentum.
We've had more conversations with bankers considering opportunities this quarter.
The continued net interest margin pressure, the higher technology costs, the salary increases, loan competition, succession planning concerns, and increased regulatory burden, all point to a continued consolidation.
As mentioned in my opening comments, we believe the U.S. economy is starting to normalize, which has helped reduce unemployment and cause above normal growth rates in GDP.
We are seeing higher prices for gas and groceries, labor shortages, inventory shortages and more.
We believe that Prosperity is well positioned to grow along with the Texas and Oklahoma economies.
We have a deep bench of associates with a passion to help Prosperity and our customers succeed.
Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.
We continue to grow the economy, both -- we intend to continue to grow the company both organically and through mergers and acquisitions.
We're helping to make it the success it has become.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended June 30, 2021, was $245.4 million compared to $259 million for the same period in 2020, a decrease of $13.6 million or 5.2%.
The current quarter net interest income includes $12.2 million in fair value loan income compared to $24.3 million in the second quarter 2020, a decrease of $12.1 million.
Net interest income also continues to be impacted by the Paycheck Protection Program and Warehouse Purchase Program.
The second quarter 2021 net interest income, excluding the impacts of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the first quarter 2021.
The net interest margin on a tax equivalent basis was 3.11% for the three months ended June 30, 2021, compared to 3.69% for the same period in 2020 and 3.41% for the quarter ended March 31, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2021, was 2.96% compared to 3.33% for the same period in 2020, and 3.19% for the quarter ended March 31, 2021.
The decrease was primarily due to a change in the mix of interest-earning assets and excess liquidity.
Noninterest income was $35.6 million for the three months ended June 30, 2021, compared to $25.7 million for the same period in 2020 and $34 million for the quarter ended March 31, 2021.
Noninterest expense for the three months ended June 30, 2021, was $115.2 million compared to $134.4 million for the same period in 2020.
On a linked-quarter basis, noninterest expense decreased $3.9 million from $119.1 million for the quarter ended March 31, 2021.
The current quarter benefited from gains on sale of ORE assets of $1.8 million and a decrease in salary and benefits.
The decrease in salary and benefits is primarily due to lower employment-related taxes for restricted stock vested during the first quarter 2021 and lower discretionary incentives.
For the third quarter 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio was 41% for the three months ended June 30, 2021, compared to 46.6% in for the same period in 2020, which included $7.5 million in merger-related expenses and 41.3% for the three months ended March 31, 2021.
During the second quarter 2021, we recognized $12.2 million in fair value loan income.
This amount includes $4.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $7.9 million from early payoffs.
We estimate fair values -- sorry, we estimate fair value loan income for the third quarter of 2021 to be around $3 million to $4 million.
This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs.
Looking forward, we expect the income from early paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCD loans with large discounts.
The remaining discount balance is $25 million.
Also, during the second quarter 2021, we recognized $10.3 million in fee income from PPP loans.
As of June 30, 2021, PPP loans had a remaining deferred fee balance of $28.3 million.
The bond portfolio metrics at 6/30/2021, showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion.
Our NPAs at quarter end June 30, '21 totaled $33,664,000 or 0.17% of loans and ORE compared to $44,162,000 or 0.22% at March 31, '21.
This represents approximately a 24% decline in NPAs.
The June 30, '21 NPA total was comprised of $33,210,000 in loans, $310,000 in repossessed assets and only $144,000 in ORE.
Of the $33,664,000 in NPAs, $8,378,000 or 25% are energy credits, all of which are service company credits.
Since June 30, '21, 1,448 -- I'm sorry, $1,448,000 in NPAs have been put under contract for sale.
It doesn't necessarily mean they're guaranteed to close, but they are under contract and expected to close.
Net charge-offs for the three months ended June 30, '21 were $4,326,000 compared to $8,858,000 for the quarter ended March 31, '21.
No dollars were added to the allowance for credit losses during the quarter ended June 30, '21, nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended June 30, '21, was $641,000.
This includes a total of $73.8 million in PPP loans booked during the second quarter.
Loans outstanding at June 30, '21 were approximately $19.3 billion, which includes approximately $780 million in PPP loans.
The June 30, '21 loan total is made up of 39% fixed-rate loans, 36% floating and 25% variable resetting at specific intervals.
Sean, can you please assist us with questions?

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prosperity bancshares q2 earnings per share $1.41.
q2 earnings per share $1.41.
qtrly net interest income before provision for credit losses $245.4 million versus $259.0 million.

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