LegacyTexas Financial Group, Inc. Reports Second Quarter 2019 Earnings

PLANO, Texas, July 24, 2019 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $27.0 million for the second quarter of 2019, a decrease of $2.1 million from the first quarter of 2019 and a decrease of $854,000 from the second quarter of 2018.  Core (non-GAAP) net income totaled $28.8 million for the second quarter of 2019, down $231,000 from the first quarter of 2019 and up $886,000 from the second quarter of 2018.  See "Supplemental Information- Non-GAAP Financial Measures" at the end of this document.

On June 17, 2019, the Company and Prosperity Bancshares, Inc.^® ("Prosperity") jointly announced the signing of a definitive merger agreement pursuant to which the Company will merge with Prosperity.  Under the terms of the merger agreement, shareholders of the Company will receive 0.5280 shares of Prosperity common stock and $6.28 cash for each share of Company common stock.  The completion of the transaction is subject to certain conditions, including the approval by the Company shareholders and Prosperity shareholders and customary regulatory approvals.  For additional information regarding the Company's proposed merger with Prosperity, see the Company's Current Report filed on Form 8-K with the SEC on June 17, 2019.

"We continue to grow our franchise and serve our customers and communities," said President and CEO Kevin Hanigan.  "We grew loans by $581.9 million (including Warehouse Purchase Program) in the second quarter, while our non-interest-bearing deposits grew by $94.5 million.  Additionally, the talented bankers at both LegacyTexas and Prosperity Bank have begun the process of preparing for the merger of the two banks, which we hope to consummate in the fourth quarter of 2019."

Second Quarter 2019 Performance Highlights

• Assets of $9.94 billion generated basic earnings per share for the second quarter of 2019 of $0.57 on a GAAP basis and $0.61 on a core (non-GAAP) basis.*
• Gross loans held for investment at June 30, 2019, excluding Warehouse Purchase Program loans, grew $135.3 million, or 1.9%, from March 31, 2019, which includes linked-quarter increases in all loan portfolios.
• Warehouse Purchase Program loans at June 30, 2019 grew $446.5 million, or 40.7%, from March 31, 2019.
• The balance of non-interest-bearing demand deposits at June 30, 2019 increased by $94.5 million, or 5.4%, from March 31, 2019, while the average balance of these deposits for the second quarter of 2019 grew by $123.1 million, or 7.3%, compared to the linked quarter.
• Net interest income totaled $85.6 million for the second quarter of 2019, an increase of $4.4 million, or 5.4%, from the quarter ended March 31, 2019.

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

Basic earnings per share for the quarter ended June 30, 2019 was $0.57, a decrease of $0.04 from the first quarter of 2019 and a decrease of $0.02 from the second quarter of 2018.  Basic core (non-GAAP) earnings per share for the second quarter of 2019 was $0.61, a decrease of $0.01 from the first quarter of 2019 and an increase of $0.02 from the second quarter of 2018.

Net interest income for the quarter ended June 30, 2019 was $85.6 million, a $4.4 million, or 5.4%, increase from the first quarter of 2019 and a $1.6 million, or 1.9%, increase from the second quarter of 2018.  The $4.4 million increase from the first quarter of 2019 was primarily driven by increased volume in Warehouse Purchase Program and commercial real estate loans compared to the linked quarter.  Interest income earned on Warehouse Purchase Program loans increased by $6.2 million from the first quarter of 2019, as the average balance increased by $529.2 million, which was partially offset by a 13 basis point decrease in the average yield earned compared to the first quarter of 2019.  A $71.1 million increase in the average balance of the commercial real estate portfolio from the first quarter of 2019, as well as a three basis point increase in the average yield, resulted in a $1.6 million increase in interest income.  Interest income earned on the construction and land portfolio increased by $254,000 from the first quarter of 2019, as the average balance increased by $9.5 million and the average yield increased by ten basis points, while interest income earned on the consumer real estate portfolio increased by $234,000, driven by a $30.5 million linked-quarter increase in the average balance.  The average balance of commercial and industrial loans decreased by $2.2 million from the first quarter of 2019, resulting in a $573,000 decrease in interest income.  Interest income on loans for the second quarter of 2019 included $237,000 in accretion of purchase accounting fair value adjustments on acquired loans, which primarily consisted of $61,000 on acquired commercial real estate loans, $43,000 on acquired commercial and industrial loans and $133,000 on acquired consumer loans.

The $1.6 million increase in net interest income compared to the second quarter of 2018 was primarily due to a $9.6 million increase in interest income on loans, which was driven by higher yields earned on all loan portfolios, with the exception of the other consumer loan portfolio and loans held for sale, as well as increased volume in all loan portfolios.  The average balance of Warehouse Purchase Program loans increased by $178.0 million from the second quarter of 2018, while the average yield earned on this portfolio increased by 25 basis points, resulting in a $2.8 million increase in interest income compared to the second quarter of 2018.  The average balance of consumer real estate loans increased by $169.1 million from the second quarter of 2018, while the average yield earned on this portfolio increased by 11 basis points, which led to a $2.4 million increase in interest income.   A $64.0 million increase in the average balance of commercial real estate loans compared to the second quarter of 2018, as well as a 12 basis point increase in the average yield, resulted in a $1.8 million increase in interest income. The average balance of commercial and industrial loans increased by $83.3 million from the second quarter of 2018, while the average yield earned on this portfolio increased by ten basis points from the same period, resulting in a $1.7 million increase in interest income.

Interest expense for the quarter ended June 30, 2019 increased by $3.6 million, or 14.4%, compared to the linked quarter, which was primarily due to increases of $108.4 million and $94.0 million in the average balances of time and savings and money market deposits, respectively, compared to the first quarter of 2019, as well as an increase of $219.5 million in the average balance of borrowings.  Additionally, higher average rates paid on savings, money market and time deposits also contributed to the linked-quarter increase in interest expense. A five basis point decrease in the average rate paid on interest-bearing demand deposits compared to the linked quarter partially offset a $55.4 million increase in the average balance of interest-bearing demand deposits.  The average rate paid on borrowings decreased by 15 basis points from the first quarter of 2019, which partially offset the linked-quarter increase in interest expense related to the increase in average borrowing balances.

Compared to the second quarter of 2018, interest expense for the quarter ended June 30, 2019 increased by $8.5 million, or 42.2%, primarily due to higher average savings and money market, time deposit, and borrowing rates, as well as a $252.5 million increase in the average balance of time deposits.   A 17 basis point decrease in the average rate paid on interest-bearing demand deposits compared to the second quarter of 2018, as well as a $99.0 million decrease in the average balance of these deposits, partially offset these year-over-year increases in interest expense.  A 45 basis point increase in the average rate paid on borrowings compared to the second quarter of 2018, as well as an $82.6 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 second quarter of 2019 was 3.77%, a 12 basis point decrease from the first quarter of 2019 and a 16 basis point decrease from the second quarter of 2018.  The average yield on earning assets for the second quarter of 2019 was 5.03%, a six basis point decrease from the first quarter of 2019 and a 16 basis point increase from the second quarter of 2018.  The cost of deposits for the second quarter of 2019 was 1.15%, up six basis points from the linked quarter and up 35 basis points from the second quarter of 2018.

Non-interest Income

Non-interest income for the second quarter of 2019 was $12.2 million, a $2.3 million, or 23.6%, increase from the first quarter of 2019 and a $1.4 million, or 12.7%, increase from the second quarter of 2018.  Service charges and other fees increased by $2.6 million compared to the first quarter of 2019, primarily resulting from higher title company income and commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), as well as increased debit card interchange and Warehouse Purchase Program income.  Net gains on the sale of mortgage loans held for sale during the second quarter of 2019 increased by $1.4 million compared to the linked quarter, which included gains recognized on $74.8 million of consumer real estate loans that were sold or committed for sale, fair value changes on mortgage derivatives and mortgage fees collected during the second quarter of 2019, compared to $32.6 million for the first quarter of 2019.  Other non-interest income for the second quarter of 2019 included a $1.2 million net decrease in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds"), down from a $21,000 net increase in the CRA Funds for the first quarter of 2019, as well as a $366,000 interest payment received from the Internal Revenue Service in the first quarter of 2019 related to a prior year tax refund, with no comparable payment received in the second quarter of 2019.

The $1.4 million increase in non-interest income from the second quarter of 2018 was primarily due to a $1.2 million increase in net gains on the sale of mortgage loans held for sale, related to $74.8 million of consumer real estate loans that were sold or committed for sale, fair value changes on mortgage derivatives and mortgage fees collected during the 2019 period, compared to $50.8 million for the 2018 period.  Service charges and other fees increased by $1.0 million from the second quarter of 2018, which was driven by higher title company income and commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), as well as increased debit card interchange income.  Other non-interest income for the second quarter of 2019 included a $1.2 million net decrease in the CRA Funds, down from a $15,000 net decrease in the CRA Funds for the second quarter of 2018.

Non-interest Expenses

Non-interest expense for the second quarter of 2019 was $47.5 million, up $3.2 million, or 7.3%, from the first quarter of 2019 and up $5.3 million, or 12.6%, from the second quarter of 2018.  The second quarter of 2019 included $2.4 million in merger costs with no comparable charges in the first quarter of 2019, related to the proposed merger with Prosperity, which was announced on June 17, 2019.  Outside professional services expense for the second quarter of 2019  increased by $389,000 from the first quarter of 2019, primarily due to higher legal expenses, while other non-interest expense increased by $371,000 from the linked quarter, primarily due to higher lending and recruiting expenses.  These linked-quarter increases in non-interest expense were partially offset by a $285,000 decline in salaries and employee benefits expense from the first quarter of 2019, which was driven by lower share-based compensation expense in the second quarter of 2019 related to fluctuations in the Company's share price, as well as decreased payroll taxes related to Social Security wage base limits starting over at the beginning of the year, which increased salary expense in the first quarter of 2019.  Additionally, in the second quarter of 2019, deferred salary costs related to loan originations that will be accounted for over the lives of the related loans increased compared to the linked quarter, which lowered salary expense for the current period.

The $5.3 million increase in non-interest expense from the second quarter of 2018 was primarily due to $2.4 million in merger costs with no comparable charges in the second quarter of 2018, related to the above-mentioned proposed merger with Prosperity, as well as a $2.3 million increase in salaries and employee benefits expense, which was primarily related to higher mortgage commissions paid in the 2019 period attributable to increased mortgage loan production, as well as higher share-based compensation expense in the 2019 period related to fluctuations in the Company's share price.  Additionally, merit increases granted in the 2019 period also contributed to the increased salary expense compared to the second quarter of 2018.  Data processing expense increased by $594,000 from the second quarter of 2018 due to system upgrades, technology refreshments and outsourcing certain segments of its data processing. These increases in non-interest expense compared to the 2018 period were partially offset by a $376,000 decrease in advertising expense, primarily due to a lower number of events, media advertisements and sponsorships in the second quarter of 2019.

Financial Condition - Loans

Gross loans held for investment at June 30, 2019, excluding Warehouse Purchase Program loans, grew $135.3 million from March 31, 2019, which included growth in all loan portfolios.  At June 30, 2019, commercial real estate and consumer real estate loans increased by $57.9 million and $37.3 million, respectively, from March 31, 2019, while commercial and industrial and construction and land loans increased by $32.2 million and $6.0 million, respectively, for the same period.

Compared to June 30, 2018, gross loans held for investment at June 30, 2019, excluding Warehouse Purchase Program loans, grew $408.9 million, which included growth in all loan portfolios.  Consumer real estate and commercial real estate loans increased by $172.7 million and $159.4 million, respectively, at June 30, 2019, compared to June 30, 2018, while commercial and industrial loans increased by $51.0 million from the same date.  Additionally, construction and land and other consumer loans increased by $22.7 million and $3.1 million, respectively, compared to June 30, 2018.

At June 30, 2019, Warehouse Purchase Program loans increased by $446.5 million compared to March 31, 2019 and by $251.6 million compared to June 30, 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 $518.6 million at June 30, 2019, up $18.8 million from $499.8 million at March 31, 2019 and up $31.8 million from $486.8 million at June 30, 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 June 30, 2019, "Midstream and Other" loans had a total outstanding balance of $20.6 million, down $1.5 million from $22.1 million at March 31, 2019 and down $8.1 million from $28.7 million at June 30, 2018.

Financial Condition - Deposits

Total deposits at June 30, 2019 decreased by $21.6 million from March 31, 2019.  The growth in non-interest-bearing demand and savings and money market deposits of $94.5 million and $56.7 million, respectively, was more than offset by declines in time and interest-bearing demand deposits of $143.4 million and $29.5 million, respectively.

Compared to June 30, 2018, total deposits increased by $174.4 million, which included growth in non-interest-bearing demand and time deposits of $125.8 million and $91.9 million, respectively, while savings and money market and interest-bearing demand deposits decreased by $31.1 million and $12.3 million, respectively.  At June 30, 2019, non-interest-bearing demand deposits totaled 26.2% of total deposits, compared to 25.0% of total deposits at June 30, 2018.

The Company recorded a provision for credit losses of $16.1 million for the quarter ended June 30, 2019, compared to $9.8 million for the quarter ended March 31, 2019 and $17.5 million for the quarter ended June 30, 2018.  The increase in provision expense on a linked-quarter basis was primarily due to increased specific reserves allocated to the Company's one remaining corporate healthcare finance relationship, which totaled $19.9 million at June 30, 2019, and the Company's impaired energy loans, which totaled $19.9 million at June 30, 2019.  These impaired corporate healthcare finance and energy loans have been included in the estimated pre-tax gross credit mark of $175.0 million that was disclosed as an assumption in the merger with Prosperity, as reported in the Company's investor presentation filed under a Current Report on Form 8-K with the SEC on June 17, 2019.

The decrease in provision expense on a year-over-year basis was primarily due to decreased net charge-offs during the quarter ended June 30, 2019.  Net charge-offs totaled $1.4 million for the three months ended June 30, 2019, compared to net charge-offs totaling $27.7 million for the three months ended June 30, 2018.

The below table shows criticized (rated "special mention") and classified (rated "substandard" or "doubtful") loans at June 30, 2019, March 31, 2019 and June 30, 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 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 our proposed merger with Prosperity 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; the requisite shareholder and regulatory approvals and other closing conditions for the proposed merger of the Company and Prosperity may be delayed or may not be obtained or the merger agreement may be terminated; business disruption may occur following or in connection with the proposed merger of the Company and Prosperity; the Company's businesses may experience disruptions due to transaction-related uncertainty or other factors making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities; the diversion of managements' attention from ongoing business operations and opportunities as a result of the proposed merger or otherwise; 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.

Additional Information About the Merger and Where to Find It

In connection with the proposed merger of the Company into Prosperity, Prosperity will file with the SEC a registration statement on Form S-4 to register the shares of Prosperity Common Stock to be issued to the stockholders of the Company. The registration statement will include a joint proxy statement/prospectus which will be sent to the stockholders of the Company and Prosperity seeking their approval of the proposed transaction.

WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTION BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT PROSPERITY, THE COMPANY AND THE PROPOSED TRANSACTION.

Investors and security holders may obtain free copies of these documents through the website maintained by the SEC at http://www.sec.gov. Documents filed with the SEC by Prosperity will be available free of charge by directing a request by telephone or mail to Prosperity Bancshares, Inc., Prosperity Bank Plaza, 4295 San Felipe, Houston, Texas 77027 Attn: Investor Relations, 281-269-7199 and documents filed with the SEC by the Company will be available free of charge by directing a request by telephone or mail to LegacyTexas Financial Group, Inc., 5851 Legacy Circle, Suite 1200, Plano, Texas 75024, 972-578-5000.

Participants in the Solicitation

Prosperity, the Company and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Prosperity and stockholders of the Company in connection with the proposed transaction. Certain information regarding the interests of these participants and a description of their direct and indirect interests, by security holdings or otherwise, will be included in the joint proxy statement/prospectus regarding the proposed transaction when it becomes available. Additional information about Prosperity and its directors and executive officers may be found in the definitive proxy statement of Prosperity relating to its 2019 Annual Meeting of Shareholders filed with the SEC on March 14, 2019, and other documents filed by Prosperity with the SEC. Additional information about the Company and its directors and executive officers may be found in the definitive proxy statement of the Company relating to its 2019 Annual Meeting of Stockholders filed with the SEC on April 12, 2019, and other documents filed by the Company with the SEC. These documents can be obtained free of charge from the sources described above.

No Offer or Solicitation

This communication is for informational purposes only and is not intended to and does not constitute an offer to subscribe for, buy or sell, or the solicitation of an offer to subscribe for, buy or sell, or an invitation to subscribe for, buy or sell any securities or a solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in which such offer, invitation, sale or solicitation would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, and otherwise in accordance with applicable law.

SOURCE LegacyTexas Financial Group, Inc.

Related Links

www.LegacyTexasFinancialGroup.com