LegacyTexas Financial Group, Inc. Reports First Quarter 2018 Earnings

PLANO, Texas, April 17, 2018 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $25.8 million for the first quarter of 2018, an increase of $11.1 million from the fourth quarter of 2017 and $7.6 million from the first quarter of 2017.  Net income for the fourth quarter of 2017 included a $13.5 million income tax adjustment to the Company's deferred tax asset related to the December 22, 2017 enactment of the Tax Cuts and Jobs Act, with no comparable charge in the 2018 period.

"The LegacyTexas team of bankers continues to execute on our strategies and grow our customer relationships on both the loan and deposit sides of our business," said President and CEO Kevin Hanigan.  "I am particularly pleased with our improved asset quality and the continued growth in non-interest-bearing deposits.  These improvements are paramount to accelerating our already strong earnings power."

First Quarter 2018 Performance Highlights

• Company assets of $8.87 billion generated basic earnings per share for the first quarter of 2018 of $0.55 on a GAAP basis and $0.52 on a core (non-GAAP) basis.
• Gross loans held for investment at March 31, 2018, excluding Warehouse Purchase Program loans, grew $85.9 million from December 31, 2017, which includes linked-quarter increases in commercial real estate, commercial and industrial and consumer real estate loans.
• Non-performing loans declined by $44.6 million, or 47.2%, from December 31, 2017, totaling $49.8 million at March 31, 2018.
• The Company's efforts to grow non-interest-bearing demand deposits resulted in a linked-quarter increase in these deposits of $45.4 million to $1.68 billion at March 31, 2018. Non-interest-bearing deposits totaled 24.2% of total deposits at March 31, 2018.
• Return on average assets for the quarter ended March 31, 2018 was 1.19%, compared to 0.66% for the quarter ended December 31, 2017, while core (non-GAAP) return on average assets for the quarter ended March 31, 2018 was 1.13%, compared to 1.27% for the quarter ended December 31, 2017.

Core (non-GAAP) net income (which is net income adjusted for the impact of infrequent or non-recurring items) totaled $24.5 million for the quarter ended March 31, 2018, down $3.6 million from the fourth quarter of 2017 and up $7.2 million from the first quarter of 2017.  Basic earnings per share for the quarter ended March 31, 2018 was $0.55, an increase of $0.24 from the fourth quarter of 2017 and $0.16 from the first quarter of 2017.  Basic core (non-GAAP) earnings per share for the first quarter of 2018 was $0.52, down $0.08 from the fourth quarter of 2017 and up $0.15 from the first quarter of 2017.  The reconciliation of non-GAAP measures, which the Company believes facilitates the assessment of its banking operations and peer comparability, is included in tabular form at the end of this release.

Net interest income for the quarter ended March 31, 2018 was $78.6 million, a $1.6 million decrease from the fourth quarter of 2017 and a $2.1 million increase from the first quarter of 2017.  The commercial real estate, Warehouse Purchase Program, commercial and industrial and construction and land loan portfolios were negatively impacted by the first quarter of 2018 having 90 days in the period compared to 92 days in the fourth quarter of 2017.  A $39.8 million increase in the average balance of the commercial and industrial loan portfolio to $1.90 billion from the fourth quarter of 2017 partially offset linked-quarter average balance declines in the commercial real estate and construction and land portfolios of $37.8 million and $17.1 million, respectively.  The average yield earned on the commercial and industrial portfolio for the quarter ended March 31, 2018 was positively impacted by a 25 basis point increase in the Fed Funds rate in December 2017, as well as the resolution of three non-performing energy relationships, which converted non-performing loans to earning assets.  Interest income earned on commercial and industrial loans increased by $1.8 million for the quarter ended March 31, 2018 compared to the fourth quarter of 2017, while interest income earned on the commercial real estate portfolio declined by $1.0 million for the same period.  The average balance of consumer real estate loans increased by $21.2 million to $1.23 billion from the fourth quarter of 2017, resulting in a $290,000 increase in interest income, while interest income earned on construction and land loans declined by $201,000 for the same period. 

Interest income earned on Warehouse Purchase Program loans decreased by $1.5 million from the fourth quarter of 2017, as a 28 basis point increase in the average yield partially offset a $197.6 million decrease in the average balance compared to the linked quarter.  Interest income on loans for the first quarter of 2018 included $513,000 in accretion of purchase accounting fair value adjustments on acquired loans, which included $237,000 on acquired commercial real estate loans, $67,000 on acquired commercial and industrial loans, $8,000 on acquired construction and land loans and $201,000 on acquired consumer loans.

The $2.1 million increase in net interest income compared to the first quarter of 2017 was primarily due to a $7.5 million increase in interest income on loans, which was driven by increased volume in all loan portfolios with the exception of construction and land and other consumer loans, as well as higher yields earned on the commercial real estate, Warehouse Purchase Program, consumer real estate and other consumer loan portfolios.  The average balance of commercial real estate loans increased by $268.9 million from the first quarter of 2017, resulting in a $3.6 million increase in interest income, while the average balance of consumer real estate loans increased by $136.9 million for the same period, which led to a $1.6 million increase in interest income.  Although the average balance of commercial and industrial loans increased by $55.7 million from the first quarter of 2017, the average yield earned on this portfolio decreased by 25 basis points for the same period, resulting in a $429,000 decrease in interest income.  The average yield earned on commercial and industrial loans for the first quarter of 2017 included the amortization of a $4.7 million discount on a purchased energy loan, which positively impacted the average yield on commercial and industrial loans for the first quarter of 2017 by 96 basis points, an impact that was not repeated in the first quarter of 2018.  The average balance of Warehouse Purchase Program loans increased by $147.1 million from the first quarter of 2017, while the average yield earned on this portfolio increased by 73 basis points, resulting in a $3.0 million increase in interest income.

Interest expense for the quarter ended March 31, 2018 increased by $1.1 million compared to the linked quarter, which was primarily due to higher average deposit and borrowing rates, as well as increases of $79.8 million and $45.5 million in the average balances of time and interest-bearing demand deposits, respectively, compared to the fourth quarter of 2017.  A $130.2 million decrease in the average balance of borrowings was offset by a 37 basis point increase in the average rate paid for borrowings, resulting in a $63,000 linked-quarter increase in interest expense on borrowed funds.

Compared to the first quarter of 2017, interest expense for the quarter ended March 31, 2018 increased by $6.1 million, primarily due to higher average deposit and borrowing rates, as well as increases of $118.7 million, $115.9 million and $92.3 million in the average balances of time, interest-bearing demand and savings and money market deposits, respectively, compared to the first quarter of 2017.  A $163.3 million decrease in the average balance of borrowings from the first quarter of 2017 was offset by an 81 basis point increase in the average rate, resulting in a $1.1 million year-over-year increase in interest expense on borrowed funds.

The net interest margin for the first quarter of 2018 was 3.85%, a seven basis point increase from the fourth quarter of 2017 and a 15 basis point decrease from the first quarter of 2017.  Approximately 24 basis points of the net interest margin for the quarter ended March 31, 2017 was related to the amortization of the purchased loan discount discussed above.  The average yield on earning assets for the first quarter of 2018 was 4.69%, a 16 basis point increase from the fourth quarter of 2017 and an 11 basis point increase from the first quarter of 2017.  The cost of deposits for the first quarter of 2018 was 0.73%, up nine basis points from the linked quarter and up 26 basis points from the first quarter of 2017.

Non-interest Income

Non-interest income for the first quarter of 2018 was $12.9 million, a $6.0 million increase from the fourth quarter of 2017 and a $768,000 increase from the first quarter of 2017.  Gain (loss) on sale and disposition of assets for the first quarter of 2018 included $2.3 million in proceeds resulting from an insurance settlement related to a misappropriation of approximately $2.5 million in vault cash from one of the former LegacyTexas Bank branches it acquired in 2015, while gain (loss) on sale and disposition of assets for the fourth quarter of 2017 included a $3.9 million write-down on a foreclosed property.  The $359,000 increase in other non-interest income from the fourth quarter of 2017 was primarily caused by a $402,000 yield maintenance fee on a bond pre-payment received in the first quarter of 2018.  Service charges and other fees decreased by $197,000 from the fourth quarter of 2017, which was primarily due to a $294,000 decrease in Warehouse Purchase Program fee income, a $167,000 decrease in insufficient funds fees, and a $149,000 decrease in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees).  These declines in service charges and other fees compared to the linked quarter were partially offset by a $329,000 increase in title premiums compared to the fourth quarter of 2017.  The Company recognized $1.8 million in net gains on the sale of mortgage loans held for sale during the first quarter of 2018, which included gains recognized on $49.1 million of one-to four-family mortgage loans that were sold or committed for sale during the first quarter of 2018 and fair value changes on mortgage derivatives and mortgage fees collected, compared to $1.6 million in comparable net gains recorded during the fourth quarter of 2017 on $46.7 million of one-to four-family mortgage loans sold or committed for sale.

The $768,000 increase in non-interest income from the first quarter of 2017 was primarily due to an $814,000 increase in gain (loss) on sale and disposition of assets due to the above-mentioned insurance settlement proceeds received in the first quarter of 2018, while gain (loss) on sale and disposition of assets for the first quarter of 2017 included a $1.3 million gain on the sale of a parcel of land.  Service charges and other fees decreased by $504,000, which was driven by a $397,000 decrease in title premiums and a $263,000 decrease in brokerage income after the Company discontinued its brokerage services in the third quarter of 2017.  These declines in service charges and other fees compared to the 2017 period were partially offset by a $217,000 increase in debit card interchange income.  Other non-interest income for the first quarter of 2018 included the above-mentioned yield maintenance fee on a bond prepayment, which drove the $361,000 increase from the first quarter of 2017. Net gains on the sale of mortgage loans held for sale during the first quarter of 2018 increased by $181,000 compared to the first quarter of 2017, which included gains recognized on $39.6 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 2017 period, compared to $49.1 million for the first quarter of 2018.

Non-interest Expenses

Non-interest expense for the quarter ended March 31, 2018 was $43.9 million, a $3.2 million increase from the fourth quarter of 2017 and a $4.1 million increase from the first quarter of 2017.  Salaries and employee benefits expense increased by $4.0 million from the fourth quarter of 2017, driven by a $1.1 million increase in payroll taxes related to Social Security wage base limits starting over at the beginning of the year, as well as higher salary costs attributable to merit increases granted in the first quarter of 2018.  Performance incentive accruals were also higher during the 2018 period, as these accruals were reduced in the fourth quarter of 2017 related to higher levels of non-performing loans.  In connection with the enactment of the Tax Cuts and Jobs Act, in the first quarter of 2018, the Company awarded all full-time employees whose salary was under $100,000 a $1,000 bonus, which resulted in $679,000 of additional salary expense, and increased the Company's minimum wage to $15 from $11 per hour for all non-commission-based employees.  The linked-quarter increase in salaries and employee benefits expense was partially offset by lower advertising expense of $514,000 due to a lower number of events and sponsorships compared to the linked quarter, as well as lower other non-interest expense of $327,000 primarily due to lower lending expenses.

The $4.1 million increase in non-interest expense from the first quarter of 2017 was primarily due to a $2.6 million increase in salaries and employee benefits expense, which was driven by higher performance incentive accruals, payroll taxes, share-based compensation expense and merit increases in the 2018 period, as well as the above-mentioned bonus and minimum wage increase related to tax reform.   A reduction in full-time equivalent employees in the technology area partially offset the $808,000 increase in data processing expense compared to the first quarter of 2017, as the Company has outsourced certain segments of its data processing operations.

Financial Condition - Loans

Gross loans held for investment at March 31, 2018, excluding Warehouse Purchase Program loans, grew $85.9 million from December 31, 2017, which included growth in commercial real estate, commercial and industrial and consumer real estate loans.  Commercial real estate, commercial and industrial and consumer real estate loans at March 31, 2018 increased by $34.4 million, $40.4 million and $39.0 million, respectively, from December 31, 2017.  These increases were partially offset by a $25.7 million decline in construction and land loans and a $2.2 million decline in other consumer loans.  Included at all dates presented is a reclassification of three Warehouse relationships from the commercial and industrial category to the Warehouse Purchase Program category.  At March 31, 2018, December 31, 2017 and March 31, 2017, these reclassified relationships totaled $144.3 million, $166.3 million and $197.7 million, respectively. 

Compared to March 31, 2017, gross loans held for investment, excluding Warehouse Purchase Program loans, grew $501.5 million, which included growth in commercial real estate, commercial and industrial and consumer real estate loans.  On a year-over-year basis, commercial real estate, commercial and industrial and consumer real estate loans increased by $267.3 million, $136.8 million and $143.0 million, respectively.  These year-over-year increases were partially offset by declines of $38.0 million and $7.4 million in construction and land and other consumer loans, respectively. 

At March 31, 2018, Warehouse Purchase Program loans decreased by $301.0 million compared to December 31, 2017 and by $24.8 million compared to March 31, 2017.  These amounts include the above-mentioned balance reclassification from the commercial and industrial loan category.

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 $524.1 million at March 31, 2018, down $7.6 million from $531.7 million at December 31, 2017 and up $20.1 million from $504.0 million at March 31, 2017.  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, 2018, "Midstream and Other" loans had a total outstanding balance of $23.2 million, up $7.8 million from $15.4 million at December 31, 2017 and down $19.9 million from $43.1 million at March 31, 2017.

Financial Condition - Deposits

Total deposits at March 31, 2018 increased by $186.7 million from December 31, 2017, which included growth of $202.2 million in time deposits and $45.4 million in non-interest-bearing demand deposits.  These increases were partially offset by declines from December 31, 2017 of $32.6 million and $28.3 million in interest-bearing demand and savings and money market balances, respectively.

Compared to March 31, 2017, total deposits increased by $574.8 million, which included growth in all deposit categories. Non-interest-bearing demand and interest-bearing demand deposits increased by $231.4 million and $123.7 million, respectively, while time and savings and money market deposits increased by $192.2 million and $27.5 million, respectively, from March 31, 2017.

The Company recorded a provision for credit losses of $15.7 million for the quarter ended March 31, 2018, an increase of $11.9 million from the quarter ended December 31, 2017 and a decrease of $6.6 million from the quarter ended March 31, 2017.  The increase in provision expense on a linked-quarter basis was primarily related to a $10.5 million charge-off recorded during the first quarter of 2018 in connection with the resolution of a $36.7 million reserve-based energy relationship, classified as non-performing and impaired in the prior period, through a new loan to a new borrower, which was a classified performing loan at March 31, 2018.  Additionally, the allowance for loan losses allocated to the Company's $38.8 million corporate healthcare finance portfolio increased to $10.9 million at March 31, 2018, up $7.5 million from December 31, 2017.  The decrease in provision expense on a year-over-year basis was primarily due to a $16.4 million charge-off recorded during the first quarter of 2017 related to a corporate healthcare finance relationship.  At March 31, 2018, the allowance for loan losses allocated to the Company's $547.3 million energy loan portfolio totaled $17.0 million.

The below table shows criticized (rated "special mention") and classified (rated "substandard" or "doubtful") loans at March 31, 2018, December 31, 2017 and March 31, 2017. 

Conference Call

The Company will host an investor conference call to review the results on Wednesday, April 18, 2018 at 8 a.m. Central Time. Participants may pre-register for the call by visiting http://dpregister.com/10118915 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 #10118915.  This replay will be available until May 18, 2018.

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 43 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, you should keep in mind these risks and uncertainties. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. You should refer to our 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.