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Text: I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
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, Tom.
Before we begin, let me make the usual disclaimers.
Prosperity reported some of the best results in our history.
Much of the success is attributed to the dedicated associates of Prosperity and LegacyTexas who helped make our combination with LegacyTexas so successful.
Our annualized return on average assets, average common equity and average tangible common equity for the three months ending December 31, 2020 were: we made 1.63% on average assets; we made 8.98% return on average common equity, and we made a 19.5% return on average tangible common equity.
Respectively, Prosperity's efficiency ratio, net gains -- excluding the net gains and losses on the sale or writedown of assets and taxes was 40.7% for the three months ended December 30, 2020.
Our net income was $137 million for the three months ended December 31, 2020, compared with $86 million for the same period in 2019.
However, the net income for the fourth quarter of 2019 included a $46.4 million of merger-related expenses.
Our earnings per diluted common share were $1.48 for the three months ended December 31, 2020, compared with $1.01 for the same period in 2019 and were impacted by the merger-related expenses of $46.4 million or $0.43 per diluted common share in the fourth quarter of 2019.
Our loans at December 31, 2020 were $20.2 billion, an increase of $1.4 billion or 7.4% compared with $18.8 billion at December 31, 2019.
Our linked quarter loans decreased $548 million or 2.6% from $20.7 billion at September 30, 2020, primarily due to a $430 million decrease in PPP loans.
In addition, we continue reduce loans identified at LegacyTexas that we determined to exit.
At December 31, 2020, the company had $963 million of PPP loans outstanding.
Our deposits at December 31, 2020 were $27.3 billion, an increase of $3.1 billion or 13% compared with $24.2 billion at December 31, 2019.
Linked-quarter deposits increased $901 million or 3.4% from $26.4 billion at September 30, 2020.
We continue to see increased deposit balances.
Some of the money is from stimulus payments and some from increased savings given the unknowns in the economy.
This may begin to change as vaccinations increase and we return to a more normalized daily life.
Our asset quality, the non-performing assets decreased $2 million or 14.3% from the quarter ended September 30, 2020.
Our non-performing assets totaled $59 million or 20 basis points of quarterly average interest earning assets at December 31, 2020 compared with $62 million or 25 basis points of quarterly average interest earning assets at December 31, 2019, and as mentioned, $69 million or 24 basis points of quarterly average interest earning assets as of September 30, 2020.
With regard to acquisitions, as mentioned in prior conference calls, we believe that the M&A activity will increase.
And we saw PNC's acquisition of BBVA announced last quarter as well as two other large transactions.
Bank stock prices have risen, which results in sellers being more active.
Further, most banks are facing lower net interest margins and higher operating costs due to technology and other operational investments.
We believe that these factors, combined with the unknown regulatory burden going forward, may cause more bankers to explore the strategic alternatives including a sale.
We are open to exploring acquisition transaction if it makes sense for our shareholders and is appropriately accretive to earnings.
With regard to the economy, Texas and Oklahoma continue to benefit from a pro-business attitude.
Companies continue to move to Texas with HP and Oracle announcing their headquarters move and other companies such as Tesla announcing a major expansion into Texas.
Also, Samsung recently mentioned a $10 billion plant expansion in the Austin area.
The Federal Reserve Bank of Dallas has projected achieving a nationwide 5% GDP growth by year-end 2021 and an unemployment rate of 4.5% noting the first half of the year will be slower with an expected increase in the second half of the year.
We believe Texas will have a higher growth rate and outperform other states over the next several years.
We expect that we will face several challenges over the next few years such as higher tax rates that will affect income and continued lower interest rates that will affect our net interest margin.
However, a steeper yield curve could help to mitigate both issues.
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 December 31, 2020 was $257.6 million compared to $232 million for the same period in 2019, an increase of $25.6 million or 11%.
The increase was primarily due to three months of combined bank earnings for the fourth quarter 2020, resulting from the Legacy merger on November 1, 2019 and reduced cost of funds partially offset by the decrease in loan discount accretion of $7.7 million.
The net interest margin on a tax equivalent basis was 3.49% for the three months ended December 31, 2020 compared to 3.66% for the same period in 2019 and 3.57% for the quarter ended, September 30, 2020.
Excluding purchase accounting adjustments, the core net interest margin for the quarter ended December 31, 2020 was 3.26% compared to 3.26% for the same period in 2019 and 3.25% for the quarter ended September 30, 2020.
Noninterest income was $36.5 million for the three months ended December 31, 2020 compared to $35.5 million for the same period in 2019 and $34.9 million for the quarter ended September 30, 2020.
Non-interest expense for the three months ended December 31, 2020 was $120.2 million compared to $156.5 million for the same period in 2019, which included $46.4 million in the merger-related expenses.
On a linked quarter basis, non-interest expense increased $2.3 million primarily due to salaries and benefits.
For the first quarter 2021, we expect non-interest expense of $118 million to $120 million, which includes elevated employment-related taxes for vested restricted stock.
The efficiency ratio was 40.8% for the three months ended December 31, 2020 compared to 58.1% for the same period in 2019, which included $46.4 million in merger-related expenses and 48.2% for the three months ended September 30, 2020.
We estimate fair value loan income for the first quarter 2021 to be around $7 million to $10 million based on the current fair value discount for each loan amortized over its remaining loan life.
This does not account for additional discount accretion income that may occur due to early loan pay downs or payoffs, which cannot be accurately estimated.
In the fourth quarter of 2020, we recognized $10 million from the fair value loan amortization and additional $6 million from early payoffs for a total of $16.1 million in fair value loan income.
The bond portfolio metrics at 12/31/2020 showed a weighted average life of 2.8 years and projected annual cash flows of approximately $2.4 billion.
Our non-performing assets at quarter end December 31, 2020 totaled $59,570,000, a 29 basis points of loans and other real estate compared to $69,542,000 or 33 basis points at September 30, 2020.
This represents approximately a 14% decline.
The December 31, 2020 non-performing asset total was made up of $48,884,000 in loans, $93,000 in repossessed assets and $10,593,000 in other real estate.
Of the $59,570,000 in non-performing assets, $10,682,000 or 18% are energy credits, $10,147,000 of which are service company credits and $535,000 are production credits.
Since December 31, 2020, $2,715,000 in non-performing assets have been put under contract for sale.
This represents approximately 5% of the non-performing assets.
Net charge-offs for the three months ended December 31, 2020 were $7,567,000 compared to $10,570,000 for the quarter ended September 30, 2020.
No dollars were added to the allowance for credit losses during the quarter ended December 31, 2020.
The average monthly new loan production for the quarter ended December 31, 2020 was $439 million.
Loans outstanding at December 31, 2020 were $20.2 billion, which includes $963.2 million in PPP loans.
The December 31, 2020 loan total is made up of 38% fixed rate loans, 38% floating rate loans, and 24% resetting at specific intervals.
Tom, can you please assist us with questions?

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q4 earnings per share $1.48.
net interest income before provision for credit losses for three months ended december 31, 2020 was $257.6 million.

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