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Text: 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 Tim Timanus, 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, Jamie.
Before we begin, let me make the usual disclaimers.
We are pleased with our second quarter 2020 results and with completing the operational integration of Legacy on schedule in early June.
The team members from Legacy, now Prosperity, have been excellent and we could not have achieved such a smooth integration without their commitment and efforts.
We remain excited about the combination and look forward to continuing to build the best bank anywhere.
For the second quarter of 2020, we showed impressive returns on average tangible common equity of 19.98% annualized and on average assets of 1.61%.
Our earnings were $130.9 million in the second quarter of 2020 compared with $82 million for the same period in 2019, an increase of $48.6 million or 59.1%.
Our diluted earnings per share were $1.41 for the second quarter of 2020 compared with the $1.18 for the same period in 2019, an increase of 19.5%.
The second quarter 2020 earnings per share of $1.41 includes a $0.22 income tax benefit, a $0.06 charge for merger related expenses and a $0.03 charge for the writedown of fixed assets related to the merger and some CRA funds.
In summary, it was $0.22 in benefit to earnings and $0.09 in inductions mostly related to the merger.
Loans at June 30, 2020 were $21.025 billion, an increase of $10.4 billion or 98.6% compared with $10.587 billion at June 30, 2019.
Our linked quarter loans increased $1.898 billion or 9.9% from the $19.127 billion at 31, 2020, of which $1.392 billion were SBA Paycheck Protection Program, sometimes referred to as PPP loans.
Mortgage warehouse loans also increased $843 million in the second quarter 2020 compared to the first quarter.
Our core loans, excluding held for sale and the warehouse purchase program and the PPP loans, decreased $311 million.
However, a portion of this decrease resulted from loans that were intentionally removed that were identified in our due diligence of Legacy.
We saw strong loan growth in the first part of the second quarter but that slowed as business shut down or reduced operations in response to various government orders.
Our deposits at June 30, 2020 were $26.153 billion, an increase of $9.265 billion or 54.9% compared with $16.888 billion at June 30, 2019.
Our linked quarter deposits increased $2.326 billion or 9.8% from the $23.826 billion at March 31, 2020.
Historically, our deposits are lower in the second quarter of the year compared with the first quarter and then begin to increase in the third and fourth quarters for us.
But this year, second quarter deposits are higher.
A large portion is from the PPP loans as well as reduction in customer spending and customer saving [Phonetic] right now.
With regard to asset quality, it's always been one of the primary focuses of our bank and always will be.
I have always said you will like us in the good times but love us in the bad times, and this is playing out to be true again during this pandemic and oil price downturn.
Nonperforming assets totaled $77.9 million or 28 basis points of quarterly average interest earning assets at June 30, 2020.
We continue to provide relief to our loan customers through loan extensions and deferrals when possible.
For the second quarter of 2020, net charge-offs were $13 million.
Of these charge-offs, $12.4 million were related to PCD loans with specific reserves of $28.5 million that we acquired in the merger.
So far, $16.1 million in specific reserves were released to the general reserve in addition to the $10 million provision for loan losses for the second quarter.
M&A activity has subsided during this pandemic.
Although there are -- there are some conversations and probably a few deals working, we believe that the M&A activity will start to pick up as businesses reopen and economic activity increases.
Size does seem to matter now, especially with lower net interest margins, the need for increased technology and the potential for additional regulatory burden if there is a change in the administration.
An example is the increased volume at our customer call center, with many older customers wanting to set up online and mobile banking that have previously not been interested in doing so.
The Blue Chip consensus forecast estimates that fourth quarter 2020 GDP will end at a negative 5.6% compared with the fourth quarter of 2019.
However, they're forecasting a positive 4.8% GDP for the fourth quarter of 2021 compared with the fourth quarter of 2020.
They are also forecasting an unemployment rate of 9.4% for the fourth quarter of 2020 compared with unemployment rate of 6.9% for the fourth quarter of 2021.
Based on these estimates, 2021 looks bright.
We are positive about our Company's future.
While our operating environment and economy are changing frequently, we remain focused on addressing whatever comes our way and taking care of our customers and associates.
Prosperity continues to focus on building core relationships, maintaining sound asset quality and operating the bank in efficient manner while investing in ever-changing technology and product distribution channels.
We intend to continue to grow the Company both organically and through mergers and acquisitions.
We want to develop people to be the next generation of leaders, make every customer experience easy and enjoyable and operate in a safe and sound manner.
Let me turn over our discussion to Asylbek, 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, 2020 was $259 million compared to $154.8 million for the same period in 2019, an increase of $104.1 million or 67.2%.
The increase was primarily due to the merger with LegacyTexas in November 2019 and loan discount accretion of $24.3 million in the second quarter 2020.
The net interest margin on a tax equivalent basis was 3.69% for the three months ended June 30, 2020 compared to 3.16% for the same period in 2019 and 3.81% for the quarter ended March 31, 2020.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended June 30, 2020 was 3.33% compared to 3.14% for the same period in 2019 and 3.36% for the quarter ended March 31, 2020.
Non-interest income was $25.7 million for the three months ended June 30, 2020 compared to $30 million for the same period in 2019.
The current quarter non-interest income was affected by $3.9 million in writedown of certain assets and general impacts of COVID-19 pandemic.
Non-interest expense for the three months ended June 30, 2020 was $134.4 million compared to $80.8 million for the same period in 2019.
The increase was primarily due to the merger with LegacyTexas and one-time merger related expenses of $7.5 million due to the core system conversion that occurred in June.
In addition to this merger-related expenses, the second quarter results reflected elevated expenses related to increased mortgage activities.
With the core system conversion and operational integration process behind us, we do not anticipate any significant merger related expenses going forward, and we expect to start realizing the remaining cost savings beginning in the third quarter of 2020.
We expect this additional savings to be about $7 million to $9 million per quarter.
This, combined with the savings realized in the first and second quarter, will be in line with our previously stated 25% cost savings in non-interest expense.
The efficiency ratio was 46.56% for the three months ended June 30, 2020 compared to 43.74% for the same period in 2019 and 42.9% for the three months ended March 31, 2020.
Excluding merger related expenses of $7.5 million, the efficiency ratio was 43.97% for the three months ended June 30, 2020.
The bond portfolio metrics at 6/30/2020 showed a weighted average life of 2.69 years and projected annual cash flows of approximately $2.3 billion.
Our nonperforming assets at quarter-end June 30, 2020 totaled $77,942,000 or 37 basis points of loans and other real estate.
The June 30, 2020 non-performing assets total was made up of $71,595,000 in loans, $187,000 in repossessed assets and $6,160,000 in other real estate.
Of the $77,942,000 in nonperforming assets, $12,173,000 or 16% are energy credits, $12,73,000 of which are service company credits and $100,000 are production company credits.
Since June 30, 2020, $15,786,000 has been removed from the nonperforming assets list through the sale of collateral.
This represents 20% of the nonperforming assets dollars.
Net charge-offs for the three months ended June 30, 2020 were $13,01,000.
$10 million was added to the allowance for credit losses during the quarter ended June 30, 2020.
The average monthly new loan production for the quarter ended June 30, 2020 was $871 million.
This includes a total of $1.430 billion in PPP loans booked during the quarter.
Loans outstanding at June 30, 2020 were $21.025 billion.
The June 30, 2020 loan total is made up of 39% fixed rate loans, 36% floating rate loans and 25% loans resetting at specific intervals.
The fixed rate percentage increased somewhat due to the inclusion of the PPP loans.
Jamie, can you please assist us with questions?

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prosperity bancshares, inc q2 earnings per share $1.41.
q2 earnings per share $1.41.
loans increased $1.898 billion or 9.9% during q2 2020.
qtrly net interest income before provision for credit losses was $259.0 million compared with $154.8 million.

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