LTXB - LegacyTexas Financial Group Inc. Reports First Quarter 2019 Earnings

PLANO, Texas, April 23, 2019 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $29.1 million for the first quarter of 2019, a decrease of $28.7 million from the fourth quarter of 2018 and an increase of $3.3 million from the first quarter of 2018.  Core (non-GAAP) net income totaled $29.1 million for the first quarter of 2019, down $13.6 million from the fourth quarter of 2018 and up $4.6 million from the first quarter of 2018.*

Net income for the fourth quarter of 2018 was positively impacted by a $15.3 million tax benefit related to tax rate changes and the favorable outcome of the Company's change in its tax method of accounting for its loan portfolio.  See "Supplemental Information- Non-GAAP Financial Measures" at the end of this document.

"We have reported another solid quarter and continue to serve our customers and expand our market share," said President and CEO Kevin Hanigan.  "We look forward to the remainder of the year and are confident we will continue to execute and perform for our customers and shareholders."

First Quarter 2019 Performance Highlights

• Assets of $9.35 billion generated basic earnings per share for the first quarter of 2019 of $0.61 on a GAAP basis and $0.62 on a core (non-GAAP) basis.*
• Gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $154.0 million, or 2.3%, from December 31, 2018, which includes linked-quarter increases in all loan portfolios.
• Total deposits at March 31, 2019 grew $235.7 million, or 3.4%, from December 31, 2018, which includes linked-quarter increases in interest-bearing demand, time and savings and money market deposits.
• GAAP and core (non-GAAP) return on average assets for the quarter ended March 31, 2019 was 1.31%, compared to GAAP return on average assets of 1.19% and core (non-GAAP) return on average assets of 1.13% for the quarter ended March 31, 2018.*
• GAAP and core (non-GAAP) efficiency ratio was 48.66% for the quarter ended March 31, 2019, compared to GAAP efficiency ratio of 47.95% and core (non-GAAP) efficiency ratio of 48.40% for the quarter ended March 31, 2018.*

*See the section labeled "Supplemental Information- Non-GAAP Financial Measures" at the end of this document.

Basic earnings per share for the quarter ended March 31, 2019 was $0.61, a decrease of $0.61 from the fourth quarter of 2018 and an increase of $0.06 from the first quarter of 2018.  Basic core (non-GAAP) earnings per share for the first quarter of 2019 was $0.62, a decrease of $0.29 from the fourth quarter of 2018 and an increase of $0.10 from the first quarter of 2018.

Net interest income for the quarter ended March 31, 2019 was $81.2 million, a $3.1 million, or 3.7%, decrease from the fourth quarter of 2018 and a $2.6 million, or 3.2%, increase from the first quarter of 2018.  The $3.1 million decrease from the fourth quarter of 2018 was primarily driven by a change in the mix of deposits, increased average rates on deposits and borrowings and decreased volume in the Warehouse Purchase Program loan portfolio compared to the linked quarter.  Yields earned and rates paid are calculated using the actual number of days in each month over the actual number of days in the year, with the exception of the securities portfolios and the consumer real estate and loans held for sale loan portfolios, which are calculated using 30 days in a month over 360 days in a year.  Accordingly, interest income on certain portfolios, such as the commercial real estate, commercial and industrial and Warehouse Purchase Program loan portfolios, was negatively impacted by the first quarter of 2019 having two fewer days than the fourth quarter of 2018.

Interest income earned on Warehouse Purchase Program loans decreased by $1.7 million from the fourth quarter of 2018, as the average balance decreased by $139.9 million, which was partially offset by increases in interest income earned on consumer real estate and commercial and industrial loans.  Interest income earned on the consumer real estate portfolio increased by $906,000, driven by a $76.4 million linked-quarter increase in the average balance.  The average balance of commercial and industrial loans increased by $63.4 million from the fourth quarter of 2018, resulting in a $185,000 increase in interest income.  A $70.2 million increase in the average balance of the commercial real estate portfolio from the fourth quarter of 2018 was offset by two less days of interest income in the first quarter of 2019, as well as a two basis point decrease in the average yield, resulting in a $92,000 decrease in interest income.

Interest income on loans for the first quarter of 2019 included $255,000 in accretion of purchase accounting fair value adjustments on acquired loans, which primarily consisted of $73,000 on acquired commercial real estate loans, $46,000 on acquired commercial and industrial loans and $135,000 on acquired consumer loans.

The $2.6 million increase in net interest income compared to the first quarter of 2018 was primarily due to a $9.7 million increase in interest income on loans, which was driven by higher yields earned on all loan portfolios, as well as increased volume in all loan portfolios with the exception of Warehouse Purchase Program loans and loans held for sale.  The average balance of commercial and industrial loans increased by $183.5 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 71 basis points for the same period, resulting in a $6.0 million increase in interest income.  The average yield earned on the commercial and industrial portfolio for the quarter ended March 31, 2019 was positively impacted by three increases in the Fed Funds rate totaling 75 basis points since March 31, 2018.  The average balance of consumer real estate loans increased by $176.7 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 25 basis points, which led to a $2.9 million increase in interest income.  A $55.1 million increase in the average balance of commercial real estate loans compared to the first quarter of 2018, as well as a nine basis point increase in the average yield, resulted in a $1.4 million increase in interest income.  The average balance of Warehouse Purchase Program loans decreased by $241.3 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 68 basis points, resulting in a $1.3 million decrease in interest income compared to the first quarter of 2018.

Interest expense for the quarter ended March 31, 2019 increased by $2.1 million, or 9.0%, compared to the linked quarter, which was primarily due to higher average deposit and borrowing rates, as well as increases of $73.4 million and $24.6 million in the average balances of time and interest-bearing demand deposits, respectively, compared to the fourth quarter of 2018.  An 11 basis point increase in the average rate paid on savings and money market deposits compared to the linked quarter offset a $44.9 million decrease in the average balance of these deposits.  Interest expense on borrowings increased by $480,000, due to a $31.0 million increase in the average balance of borrowings compared to the fourth quarter of 2018, as well as an 18 basis point increase in the average rate paid on borrowed funds.

Compared to the first quarter of 2018, interest expense for the quarter ended March 31, 2019 increased by $7.9 million, or 46.2%, primarily due to higher average savings, money market and time deposit and borrowing rates, as well as a $343.5 million increase in the average balance of time deposits.  A 38 basis point increase in the average rate paid on savings and money market deposits compared to the first quarter of 2018 offset a $257.4 million decrease in the average balance of these deposits.  A 77 basis point increase in the average rate paid on borrowings compared to the first quarter of 2018, as well as a $4.6 million increase in the average balance, resulted in a $1.7 million year-over-year increase in interest expense on borrowed funds.

The net interest margin for the first quarter of 2019 was 3.89%, a nine basis point decrease from the fourth quarter of 2018 and a four basis point increase from the first quarter of 2018.  The average yield on earning assets for the first quarter of 2019 was 5.09%, a three basis point increase from the fourth quarter of 2018 and a 40 basis point increase from the first quarter of 2018.  The cost of deposits for the first quarter of 2019 was 1.09%, up 12 basis points from the linked quarter and up 36 basis points from the first quarter of 2018.

Non-interest Income

Non-interest income for the first quarter of 2019 was $9.9 million, a $2.4 million, or 19.3%, decrease from the fourth quarter of 2018 and a $3.0 million, or 23.3%, decrease from the first quarter of 2018.  Service charges and other fees decreased by $2.7 million compared to the fourth quarter of 2018, primarily resulting from lower commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), as well as decreased debit card interchange, non-sufficient funds and Warehouse Purchase Program income.  Other non-interest income for the first quarter of 2019 included a $21,000 net increase in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds"), down from a $379,000 net increase in the CRA Funds for the fourth quarter of 2018, which was offset by a $366,000 interest payment received from the Internal Revenue Service in the first quarter of 2019 related to a prior year tax refund, as well as a $216,000 linked-quarter increase in interest rate swap fee income.

The $3.0 million decrease in non-interest income from the first quarter of 2018 was primarily due to a $2.2 million decrease in gain (loss) on sale and disposition of assets, primarily due to a $2.3 million insurance settlement received in the first quarter of 2018 related to a misappropriation of approximately $2.5 million in vault cash from one of the former LegacyTexas Bank branches it acquired in 2015.  Service charges and other fees decreased by $672,000 from the first quarter of 2018, which was driven by lower commercial loan fee income, as well as decreased title premium income and Warehouse Purchase Program income.  Net gains on the sale of mortgage loans held for sale during the first quarter of 2019 decreased by $284,000 compared to the same period in 2018, which included gains recognized on $49.1 million of one-to-four family mortgage loans that were sold or committed for sale and fair value changes on mortgage derivatives and mortgage fees collected during the 2018 period, compared to $32.6 million for the 2019 period.

Non-interest Expenses

Non-interest expense for the first quarter of 2019 was $44.3 million, up $1.4 million, or 3.4%, from the fourth quarter of 2018 and up $428,000, or 1.0%, from the first quarter of 2018.  Salaries and employee benefits expense increased by $3.1 million from the fourth quarter of 2018, which was driven by higher share-based compensation expense in the 2019 period related to fluctuations in the Company's share price, as well as increased payroll taxes related to Social Security wage base limits starting over at the beginning of the year and higher salary costs attributable to merit increases granted in the first quarter of 2019.  The linked-quarter increase in salaries and employee benefits expense was partially offset by a $736,000 decrease in outside professional services expense, primarily related to lower consulting costs recorded in the 2019 period.  Outside professional services expense for the fourth quarter of 2018 included $256,000 in expenses related to a $15.3 million one-time tax benefit recorded in the fourth quarter of 2018 stemming from the December 2017 enactment of the Tax Cuts and Jobs Act.  Advertising expense decreased by $398,000 from the fourth quarter of 2018, primarily due to a lower number of events and sponsorships in the first quarter of 2019, while regulatory assessments expense declined by $268,000 on a linked-quarter basis due to a notice of preliminary assessment credit received from the FDIC in the first quarter of 2019, which may reduce future FDIC assessment payments.

The $428,000 increase in non-interest expense from the first quarter of 2018 was primarily due to a $1.2 million increase in data processing expense due to system upgrades, technology refreshments and outsourcing certain segments of its data processing.  The year-over-year increase in data processing expense was partially offset by a $536,000 decline in regulatory assessments expense from the first quarter of 2018, due to the above-mentioned FDIC notice of preliminary assessment credit, as well as a lower assessment rate in the 2019 period.  Additionally, salaries and employee benefits expense decreased by $205,000 from the first quarter of 2018, as the 2018 period included a $1,000 bonus paid to all full-time employees whose salary was under $100,000 (awarded in connection with the enactment of the Tax Cuts and Jobs Act), which resulted in $679,000 of additional salary expense recorded in the first quarter of 2018.  This year-over-year decrease in salaries and employee benefits expense was partially offset by higher salary costs attributable to merit increases granted in the first quarter of 2019, as well as higher share-based compensation expense in the 2019 period related to fluctuations in the Company's share price.

Financial Condition - Loans

Gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $154.0 million from December 31, 2018, which included growth in all loan portfolios.  At March 31, 2019, commercial real estate and consumer real estate loans increased by $96.0 million and $32.7 million, respectively, from December 31, 2018, while commercial and industrial and construction and land loans increased by $12.9 million and $11.8 million, respectively, for the same period.

Compared to March 31, 2018, gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $375.6 million, which included growth in all loan portfolios.  Commercial and industrial and consumer real estate loans increased by $103.3 million and $170.7 million, respectively, at March 31, 2019, compared to March 31, 2018, while commercial real estate loans increased by $69.0 million for the same period.  Additionally, construction and land and other consumer loans increased by $30.3 million and $2.4 million, respectively, compared to March 31, 2018.

At March 31, 2019, Warehouse Purchase Program loans increased by $135.8 million compared to December 31, 2018 and by $76.3 million compared to March 31, 2018.

Reserve-based energy loans, which are secured by deeds of trust on properties containing proven oil and natural gas reserves and included in the Company's commercial and industrial loan portfolio, totaled $499.8 million at March 31, 2019, down $20.6 million from $520.4 million at December 31, 2018 and down $24.3 million from $524.1 million at March 31, 2018.  In addition to reserve-based energy loans, the Company has loans categorized as "Midstream and Other," which are typically related to the transmission of oil and natural gas and would only be indirectly impacted by declining commodity prices.  At March 31, 2019, "Midstream and Other" loans had a total outstanding balance of $22.1 million, down $16.0 million from $38.1 million at December 31, 2018 and down $1.1 million from $23.2 million at March 31, 2018.

Financial Condition - Deposits

Total deposits at March 31, 2019 increased by $235.7 million from December 31, 2018, which included growth of $57.7 million and $162.6 million in interest-bearing demand and time deposit balances, respectively.  Additionally, savings and money market deposits increased by $36.4 million from December 31, 2018, while non-interest-bearing demand deposits declined by $21.1 million.

Compared to March 31, 2018, total deposits increased by $123.0 million, which included growth in time and non-interest-bearing demand deposits of $378.5 million and $71.6 million, respectively, while savings and money market and interest-bearing demand deposits decreased by $214.8 million and $112.2 million, respectively.  At March 31, 2019, non-interest-bearing demand deposits totaled 24.8% of total deposits, compared to 24.2% of total deposits at March 31, 2018.

The Company recorded a provision for credit losses of $9.8 million for the quarter ended March 31, 2019, compared to $15.7 million for the quarter ended March 31, 2018.  The Company did not record a provision for credit losses for the quarter ended December 31, 2018.  The increase in provision expense on a linked-quarter basis was primarily due to a $38.6 million increase in non-performing loans from December 31, 2018, which included a $6.1 million increase in non-performing energy loans and the placement of the Company's only remaining corporate healthcare finance relationship totaling $19.3 million on non-accrual status during the first quarter of 2019.  The increase in non-performing loans from December 31, 2018 also included a $7.4 million personal loan to one of the owners of an energy company that was used to recapitalize the company.  This loan is collateralized by the borrower's stock in the energy company, as well as other personal assets, and was reported at March 31, 2019 as a non-performing loan in the commercial and industrial, excluding energy category.

The decrease in provision expense on a year-over-year basis was primarily due to decreased net charge-offs during the quarter ended March 31, 2019.  Net recoveries totaled $263,000 for the three months ended March 31, 2019, compared to net charge-offs totaling $12.4 million for the three months ended March 31, 2018.

The below table shows criticized (rated "special mention") and classified (rated "substandard" or "doubtful") loans at March 31, 2019, December 31, 2018 and March 31, 2018.

Conference Call

The Company will host an investor conference call to review the results on Wednesday, April 24, 2019 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10128898 and will receive a unique PIN, which can be used when dialing in for the call.  This will allow attendees to enter the call immediately.  Alternatively, participants may call (toll-free) 877-513-4119 at least five minutes prior to the call to be placed into the call by an operator.  International participants are asked to call 1-412-902-4148 and participants in Canada are asked to call (toll-free) 855-669-9657.

The call and corresponding presentation slides will be webcast live on the home page of the Company's website, www.LegacyTexasFinancialGroup.com.  An audio replay will be available one hour after the conclusion of the call at 877-344-7529, Conference #10128898.  This replay will be available until May 24, 2019.

About LegacyTexas Financial Group, Inc.

LegacyTexas Financial Group, Inc. is the holding company for LegacyTexas Bank, a commercially oriented community bank based in Plano, Texas. LegacyTexas Bank operates 42 banking offices in the Dallas/Fort Worth Metroplex and surrounding counties. For more information, please visit www.LegacyTexasFinancialGroup.com or www.LegacyTexas.com.

This document and other filings by LegacyTexas Financial Group, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), as well as press releases or other public or stockholder communications released by the Company, may contain forward-looking statements, including, but not limited to, (i) statements regarding the financial condition, results of operations and business of the Company, (ii) statements about the Company's plans, objectives, expectations and intentions and other statements that are not historical facts and (iii) other statements identified by the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions that are intended to identify "forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current beliefs and expectations of the Company's management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: the expected cost savings, synergies and other financial benefits from acquisition or disposition transactions might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters might be greater than expected; changes in economic conditions; legislative changes; changes in policies by regulatory agencies; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; the Company's ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in the Company's market area; fluctuations in the price of oil, natural gas and other commodities; competition; changes in management's business strategies; changes in the regulatory and tax environments in which the Company operates, including the impact of the "Tax Cuts and Jobs Act" (the "TCJA") on the Company's deferred tax asset, and the anticipated impact of the TCJA on the Company's future earnings; and other factors set forth in the Company's filings with the SEC.

The factors listed above could materially affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. When considering forward-looking statements, keep in mind these risks and uncertainties. Undue reliance should not be placed on any forward-looking statement, which speaks only as of the date made. Refer to the Company's periodic and current reports filed with the SEC for specific risks that could cause actual results to be significantly different from those expressed or implied by any forward-looking statements.