LegacyTexas Financial Group, Inc. Reports Record First Quarter 2016 Earnings of $22.1 million

PLANO, Texas, April 19, 2016 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $22.1 million for the first quarter of 2016, an increase of $5.6 million from the fourth quarter of 2015 and $5.8 million from the first quarter of 2015.

"I am really pleased with the quarter and the way we continue to execute on our strategic plan," said President and CEO Kevin Hanigan.  "Not only did we report record earnings, we grew our loans at a mid-teens rate, bolstered our reserves and managed our expenses to achieve a sub 50% efficiency ratio.  This quarter demonstrates our focus on execution and the earnings power of this great franchise."

First Quarter 2016 Performance Highlights

• Net income of $22.1 million for the first quarter of 2016 was a record high for the Company. Core (non-GAAP) net income for the same period totaled $19.9 million, which excluded gains realized in the first quarter of 2016 on the sale of two buildings and other one-time items. On a linked-quarter basis, non-interest expense and provision for loan losses declined by $1.5 million and $2.4 million, respectively, while net interest income increased by $1.6 million.
• Gross loans held for investment at March 31, 2016, excluding Warehouse Purchase Program loans, grew $202.8 million, or 4.0%, from December 31, 2015, with $174.2 million of growth in commercial real estate and commercial and industrial loans, and $35.4 million of growth in consumer real estate loans.
• The allowance for loan losses allocated to energy loans at March 31, 2016 totaled $17.4 million, or 3.3% of total energy loans (including both reserve-based and midstream), up $5.4 million ($0.12 per share on a pre-tax basis, $0.08 per share after tax) from $12.0 million at December 31, 2015.
• Efficiency ratio improved to 48.96% for the quarter ended March 31, 2016, compared to 51.85% for the fourth quarter of 2015 and 54.58% for the first quarter of 2015.

Core (non-GAAP) net income (which is net income adjusted for the impact of one-time gains and losses on assets and security sales, merger and acquisition costs and certain other items) totaled $19.9 million for the quarter ended March 31, 2016, up $3.6 million from the fourth quarter of 2015 and up $2.2 million from the first quarter of 2015.  Basic earnings per share for the quarter ended March 31, 2016 was $0.48, an increase of $0.12 from the fourth quarter of 2015 and an increase of $0.13 from the first quarter of 2015.  Core earnings per share for the first quarter of 2016 was $0.43, up $0.08 from the fourth quarter of 2015 and up $0.04 from the first quarter of 2015.  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, 2016 was $65.4 million, a $1.6 million increase from the fourth quarter of 2015 and a $9.0 million increase from the first quarter of 2015.  The $1.6 million increase from the linked quarter was primarily due to an increase in interest income on loans, which was driven by increased volume in all loan categories with the exception of construction and land and other consumer loans.  The average balance of commercial real estate loans increased by $126.0 million to $2.23 billion from the fourth quarter of 2015, which was partially offset by an eight basis point linked-quarter decrease in the average yield earned on this portfolio, resulting in a $1.2 million increase in interest income.  The average balance of commercial and industrial loans increased by $109.3 million to $1.61 billion from the fourth quarter of 2015, resulting in a $1.1 million increase in interest income.  The average balance of consumer real estate and Warehouse Purchase Program loans increased by $54.2 million and $18.9 million, respectively, compared to the fourth quarter of 2015, leading to increases in interest income of $552,000 and $201,000, respectively.

Interest income on loans for the first quarter of 2016 included $1.1 million in accretion of purchase accounting fair value adjustments on loans acquired through the merger with LegacyTexas Group, Inc., a decrease of $351,000 from the $1.4 million in accretion income recorded on these loans for the fourth quarter of 2015. The $1.1 million includes $365,000 in accretion income recorded on acquired commercial real estate loans, $155,000 in accretion income recorded on acquired commercial and industrial loans, $67,000 in accretion income recorded on acquired construction and land loans and $508,000 recorded on acquired consumer loans.  Accretion of purchase accounting fair value adjustments related to the LegacyTexas Group, Inc. acquisition, as well as a smaller amount related to the Highlands Bank acquisition in 2012, contributed six basis points, five basis points and 21 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the first quarter of 2016, compared to 13 basis points, six basis points and 22 basis points, respectively, for the fourth quarter of 2015. 

The $9.0 million increase in net interest income, compared to the first quarter of 2015, was primarily due to a $10.8 million increase in interest income on loans, which was driven by increased volume in all loan categories with the exception of other consumer loans.  The average balance of commercial and industrial loans increased by $477.1 million from the first quarter of 2015, which was partially offset by a 45 basis point year-over-year decrease in the average yield earned on this portfolio, resulting in a $4.0 million increase in interest income.  The average balance of commercial real estate loans increased by $393.5 million from the first quarter of 2015, which was partially offset by a 25 basis point year-over-year decrease in the average yield earned on this portfolio, resulting in a $3.8 million increase in interest income.  The average balance of consumer real estate and Warehouse Purchase Program loans increased by $162.7 million and $109.3 million, respectively, compared to the first quarter of 2015, leading to increases in interest income of $1.9 million and $899,000, respectively.

Interest expense for the quarter ended March 31, 2016 increased by $1.4 million compared to the linked quarter, which was primarily due to increased volume in all deposit products compared to the fourth quarter of 2015.  The average balance of savings and money market accounts increased by $181.4 million to $2.21 billion from the fourth quarter of 2015, resulting in a $364,000 increase in interest expense. The average balance of time accounts increased by $84.7 million to $1.05 billion from the fourth quarter of 2015, resulting in a $135,000 increase in interest expense.  Additionally, interest expense on borrowings for the first quarter of 2016 included a full quarter of interest expense totaling $1.1 million related to the $75.0 million of fixed-to-floating rate subordinated notes issued by the Company in November 2015, compared to a partial quarter of interest expense totaling $462,000 recorded on these notes in the fourth quarter of 2015. 

Compared to the first quarter of 2015, interest expense for the quarter ended March 31, 2016 increased by $2.0 million, primarily due to increased volume in all deposit products, including a $400.5 million increase in the average balance of savings and money market deposits and a $229.8 million increase in the average balance of time deposits, which increased interest expense by $329,000 and $451,000, respectively.  Interest expense on borrowings increased by $970,000 compared to the first quarter of 2015, primarily due to the above-mentioned subordinated notes issued in November 2015. 

The net interest margin for the first quarter of 2016 was 3.88%, a six basis point decrease from the fourth quarter of 2015 and a 15 basis point decrease from the first quarter of 2015.  Accretion of interest resulting from the merger with LegacyTexas Group, Inc. on January 1, 2015, as well as the 2012 Highlands acquisition, contributed seven basis points to the net interest margin and average yield on earning assets for the quarter ended March 31, 2016, compared to ten basis points for the quarter ended December 31, 2015 and 23 basis points for the quarter ended March 31, 2015.  The average yield on earning assets for the first quarter of 2016 was 4.31%, a one basis point increase from the fourth quarter of 2015 and a ten basis point decrease from the first quarter of 2015.  The cost of deposits for the first quarter of 2016 was 0.32%, up three basis points from the fourth and first quarters of 2015.

Non-interest Income

Non-interest income for the first quarter of 2016 was $14.7 million, a $3.1 million increase from the fourth quarter of 2015 and a $5.2 million increase from the first quarter of 2015.  Core non-interest income for the first quarter of 2016, which excludes one-time gains and losses on assets and security sales, was $11.3 million, down $76,000 from the fourth quarter of 2015 and up $1.2 million from the first quarter of 2015.  Gain on sale and disposition of assets for the first quarter of 2016 included $3.9 million in gains on the sale of two buildings.  One building was a former branch location that previously closed in connection with the January 2015 merger with LegacyTexas Group, Inc., and the other building still houses a branch location that the Company is currently leasing.  The $620,000 decline in other non-interest income compared to the linked quarter primarily related to $530,000 in losses recorded in the first quarter of 2016 caused by declines in the value of community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds").  The gains on the building sales and the losses on the CRA Funds are not included in core non-interest income for the first quarter of 2016.  Service charges and other fees increased by $140,000 from the fourth quarter of 2015, which includes a $674,000 increase in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees) compared to the fourth quarter of 2015, which was partially offset by a $240,000 decrease in title income.

The $5.2 million increase in non-interest income from the first quarter of 2015 was primarily due to the sale of the two buildings discussed above, as well as a $1.4 million increase in service charges and other fees, which included a $701,000 increase in commercial loan fee income and a $137,000 increase in title income.

Non-interest Expenses

Non-interest expense for the quarter ended March 31, 2016 was $37.5 million, a $1.5 million decrease from the fourth quarter of 2015 and a $235,000 decrease from the first quarter of 2015.  Salaries and employee benefits expense decreased by $1.0 million from the fourth quarter of 2015, primarily due to lower ESOP expense related to a decline in the Company's average stock price, as well as a lower number of shares allocated in the 2016 period under the Company's 2006 ESOP plan, due to the related loan being paid off in September 2016.  Additionally, due to higher loan volume and an increase in the origination of more complex, higher-balance commercial loans, loan origination costs, a significant portion of which relate to compensation for our loan originators and others, increased on a linked-quarter basis.  However, these costs are deferred and accounted for over the life of the loan and, as a result, a smaller amount of these costs are reflected in salary and employee benefits expense during the current quarter.  Office operations expense decreased by $305,000 from the fourth quarter of 2015, primarily due to lower printing and supply costs, while outside professional services expense decreased by $298,000 compared to the linked quarter, primarily due to higher audit and legal expenses incurred during the fourth quarter of 2015 that were not repeated in the first quarter of 2016.

The $235,000 decrease in non-interest expense from the first quarter of 2015 includes a $1.5 million decrease in merger and acquisition costs related to the merger with LegacyTexas Group, Inc.  Excluding the impact of these merger costs, core non-interest expense increased by $1.3 million, which was driven by a $1.0 million increase in other non-interest expense primarily due to increased debit card fraud.  During the first quarter of 2016, the Company implemented enhanced authorization and fraud prevention procedures to assist in mitigation of future debit card fraud cases.  Salaries and employee benefits expense decreased by $634,000 compared to the first quarter of 2015, primarily due to lower share-based compensation expense due to a decline in the Company's stock price, as well as a lower number of shares allocated in the 2016 period under the Company's 2006 ESOP plan, due to the related loan being paid off in September 2016.  Additionally, due to higher loan volume and an increase in the origination of more complex, higher-balance commercial loans, loan origination costs, a significant portion of which relate to compensation for our loan originators and others, increased on a year-over-year basis.  However, these costs are deferred and accounted for over the life of the loan and, as a result, a smaller amount of these costs are reflected in salary and employee benefits expense during the current quarter.

Financial Condition - Loans

Gross loans held for investment at March 31, 2016, excluding Warehouse Purchase Program loans, grew $202.8 million from December 31, 2015, which included growth in commercial real estate, commercial and industrial and consumer real estate loans.  Commercial real estate and commercial and industrial loans at March 31, 2016 increased by $146.8 million and $27.4 million, respectively, from December 31, 2015, and consumer real estate loans increased by $35.4 million for the same period.  These increases from the linked quarter were partially offset by declines of $4.6 million and $2.2 million in other consumer and construction and land loans, respectively.

Compared to March 31, 2015, gross loans held for investment, excluding Warehouse Purchase Program loans, grew $1.07 billion, which included growth in all loan portfolios with the exception of a $19.8 million decline in other consumer loans.  On a year over year basis, commercial real estate and commercial and industrial loans increased by $433.8 million and $427.7 million, respectively.  Consumer real estate and construction and land loans increased by $179.1 million and $51.8 million, respectively, for the same period.

Compared to December 31, 2015 and March 31, 2015, Warehouse Purchase Program loans declined by $15.2 million and $10.3 million, respectively.

Energy loans, which are reported as commercial and industrial loans, totaled $461.1 million at March 31, 2016, up $1.3 million from $459.8 million at December 31, 2015 and up $90.0 million from $371.1 million at March 31, 2015.  Substantially all of the loans in the Energy portfolio are reserve-based loans, secured by deeds of trust on properties containing proven oil and natural gas reserves.  In addition to the 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 from declining commodity prices.  At March 31, 2016, "Midstream and Other" loans had a total outstanding balance of $63.7 million, down $945,000 from $64.6 million at December 31, 2015 and up $51.0 million from $12.7 million at March 31, 2015.

Financial Condition - Deposits

Total deposits at March 31, 2016 increased by $76.1 million from December 31, 2015, with all deposit categories growing on a linked-quarter basis with the exception of interest-bearing demand deposits, which declined by $37.2 million.  Time deposits increased by $92.9 million on a linked-quarter basis, while savings and money market and non-interest-bearing demand deposits increased by $15.9 million and $4.5 million, respectively, for the same period.

Compared to March 31, 2015, total deposits increased by $909.8 million, which includes growth in all deposit categories.  On a year over year basis, savings and money market and time deposits increased by $399.5 million and $297.4 million, respectively, while non-interest-bearing demand and interest-bearing demand deposits increased by $144.0 million and $69.0 million, respectively, for the same period.

The Company recorded a provision for loan losses of $8.8 million for the quarter ended March 31, 2016, a decrease of $2.4 million from the quarter ended December 31, 2015 and an increase of $5.8 million from the quarter ended March 31, 2015.  The Company increased qualitative reserve factors applied to the Energy portfolio in the fourth quarter of 2015 and again in the first quarter of 2016, due to the impact of continued pressure on the price of oil and gas. This continued pressure resulted in sustained increases in economic uncertainty and regulatory concerns surrounding energy loans.  Over the past year, risk rating downgrades on energy loans have increased, primarily in the special mention category, which consists entirely of performing loans.  The below table shows criticized energy loans at March 31, 2016, December 31, 2015 and March 31, 2015. 

The $13.1 million increase in substandard non-performing energy loans from December 31, 2015 was due to two reserve-based energy loans that were placed on non-accrual status during the first quarter of 2016, now considered to be impaired.  One relationship totaling $6.3 million at March 31, 2016 is a syndicated credit facility that was modified during the first quarter of 2016 and was considered to be a troubled debt restructuring during the most recent Shared National Credit ("SNC") review, which is a regulatory review conducted by the Federal Reserve Bank, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency of large syndicated loans of at least $20 million that are shared by three or more supervised institutions. The Company does not have any specific reserve set aside for this relationship and does not currently anticipate a loss. 

The second credit with an outstanding balance of $6.8 million at March 31, 2016 was placed on non-accrual as a result of collateral value deterioration due to the ongoing low commodity price environment.  At March 31, 2016, the Company set aside a specific reserve of $280,000 on this credit to reflect impairment based on that recent collateral valuation.  The $25.2 million in substandard non-performing energy loans reported at March 31, 2016 included a $12.0 million reserve-based credit that has been on non-accrual status since the third quarter of 2015 and is currently in the midst of bankruptcy proceedings.  Based on information received late in the first quarter of 2016, the Company set aside a specific reserve of $3.1 million on this credit.  

The increase in special mention and substandard performing energy loans on a linked-quarter and year-over-year basis resulted from collateral value deterioration due to commodity price declines.  Of the balances reported above for special mention and substandard performing energy loans at March 31, 2016, $71.8 million were downgraded during the first quarter of 2016 due to declining collateral values and resulting diminished operating performance, which includes $29.6 million of energy loans reviewed during the first quarter of 2016 as part of the SNC program.  At March 31, 2016, no special mention or substandard performing energy loans were considered to be impaired, and the Company did not have any specific loss reserves set aside for these loans.  The Company continues to take action to improve the risk profile of the criticized energy loans by instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support and/or requiring additional equity injections or asset sales.

Due to the increase in qualitative reserve factors discussed above over the last two quarters, the allowance for loan losses allocated to energy loans at March 31, 2016 totaled $17.4 million, up $5.4 million from $12.0 million at December 31, 2015 and up $13.8 million from $3.6 million at March 31, 2015.  With the exception of $3.4 million in specific reserves on the two non-performing energy relationships discussed above, these reserve amounts result from the increase in qualitative factors and the increase in the energy portfolio, and not from historical loss factors. Since the inception of our Energy Finance Group, we have maintained a number of risk mitigation techniques, including sound underwriting (reasonable advance rates based on number and diversification of wells), sound policy (requiring hedges on production sales) and conservative collateral valuations (frequent borrowing base determinations at prices below NYMEX posted rates).  All borrowing base valuations are performed by experienced and nationally recognized third party firms intimately familiar with the properties and their production history.  The Company believes that the current level of loan loss reserve for energy loans is sufficient to cover estimated credit losses in the portfolio based on currently available information; however, future sustained declines in oil pricing could lead to further risk rating downgrades, additional loan loss reserves or losses.

In addition to the changes in qualitative factors related to energy lending, the increase in loan loss reserves on a linked-quarter and year-over-year basis resulted from increased organic loan production, as well as loans acquired through the merger with LegacyTexas Group, Inc. that were re-underwritten following completion of the merger, totaling $299.9 million during the first quarter of 2016.

Net charge-offs for the first quarter of 2016 totaled $409,000, a decrease of $80,000 from the fourth quarter of 2015 and an increase of $136,000 from the first quarter of 2015.   The $13.2 million increase in non-performing commercial and industrial loans from the fourth quarter of 2015 was primarily due to the two downgraded energy relationships discussed above.  Additionally, non-performing commercial real estate loans declined by $10.1 million compared to the fourth quarter of 2015 due to a non-performing commercial real estate property secured by a medical facility that was transferred into foreclosed assets in the first quarter of 2016.

Subsequent Events

The Company is required, under generally accepted accounting principles, to evaluate subsequent events through the filing of its consolidated financial statements for the quarter ended March 31, 2016 on Form 10-Q.  As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of March 31, 2016 and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will host an investor conference call to review the results on Wednesday, April 20, 2016 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10083763 and will receive a unique PIN number, 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) 1-877-513-4119 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) 1-855-669-9657.

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 1-877-344-7529, Conference #10083763.   This replay, as well as the webcast, will be available until May 20, 2016.

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 46 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 the Company-LegacyTexas Group, Inc. merger (the "Merger") 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 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.

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SOURCE LegacyTexas Financial Group, Inc.

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