LegacyTexas Financial Group, Inc. Reports Record Second Quarter 2016 Earnings of $23.2 million

PLANO, Texas, July 19, 2016 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $23.2 million for the second quarter of 2016, an increase of $1.1 million from the first quarter of 2016, and $3.0 million from the second quarter of 2015.

"We are pleased to report such a fabulous quarter," said President and CEO Kevin Hanigan.  "We had record quarterly earnings, despite adding to our energy loan loss reserves.  Loan growth of $424 million is also a record for the Company, and our efficiency ratio of 48% is at an all-time best.  Our results speak to the strength of the DFW economy and the hard work and dedication of our team in executing on our strategic plan."

Second Quarter 2016 Performance Highlights

• The Company exceeded $8 billion in assets and earned an annualized return on average assets of 1.20%, which generated basic and diluted earnings per share for the second quarter of 2016 of $0.50.
• Efficiency ratio improved to 48.17% for the quarter ended June 30, 2016, compared to 48.96% for the first quarter of 2016 and 51.61% for the second quarter of 2015.
• Gross loans held for investment at June 30, 2016, excluding Warehouse Purchase Program loans, grew $423.7 million, or 8.0%, from March 31, 2016, with $338.5 million of growth in commercial real estate and commercial and industrial loans and $74.7 million of growth in consumer real estate loans.
• The allowance for loan losses allocated to energy loans at June 30, 2016 totaled $21.9 million, or 4.0% of total energy loans (including both reserve-based and midstream), up $4.5 million ($0.10 per share on a pre-tax basis, $0.06 per share after tax) from $17.4 million at March 31, 2016.

Core (non-GAAP) net income (which is net income adjusted for the impact of one-time gains and losses on assets and security sales, the net gain on the sale of the Company's insurance subsidiary operations, merger and acquisition costs and certain other items) totaled $23.3 million for the quarter ended June 30, 2016, up $3.4 million from the first quarter of 2016 and up $3.2 million from the second quarter of 2015.  Basic earnings per share for the quarter ended June 30, 2016 was $0.50, an increase of $0.02 from the first quarter of 2016 and an increase of $0.06 from the second quarter of 2015.  Core earnings per share for the second quarter of 2016 was $0.50, up $0.07 from the first quarter of 2016 and up $0.06 from the second 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 June 30, 2016 was $69.4 million, a $4.0 million increase from the first quarter of 2016 and a $9.5 million increase from the second quarter of 2015.  The $4.0 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 $187.6 million to $2.42 billion from the first quarter of 2016, resulting in a $2.3 million increase in interest income.  The average balance of Warehouse Purchase Program loans increased by $190.4 million to $987.2 million from the first quarter of 2016, which was partially offset by a nine basis point decrease in the average yield earned on this portfolio, resulting in a $1.4 million increase in interest income.  The average balance of commercial and industrial and consumer real estate loans increased by $82.9 million and $53.3 million, respectively, compared to the first quarter of 2016, leading to increases in interest income of $548,000 and $440,000, respectively.

Interest income on loans for the second 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., unchanged from the first quarter of 2016. The $1.1 million in accretion income recorded in the second quarter of 2016 includes $294,000 on acquired commercial real estate loans, $174,000 on acquired commercial and industrial loans, $57,000 on acquired construction and land loans and $562,000 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, four basis points and 22 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the second quarter of  2016, compared to six basis points, five basis points and 21 basis points, respectively, for the first quarter of 2016. 

The $9.5 million increase in net interest income, compared to the second quarter of 2015, was primarily due to an $11.8 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 real estate loans increased by $566.2 million from the second quarter of 2015, which was partially offset by a 16 basis point year-over-year decrease in the average yield earned on this portfolio, resulting in a $6.4 million increase in interest income.  The average balance of commercial and industrial loans increased by $446.6 million from the second quarter of 2015, which was partially offset by a 39 basis point year-over-year decrease in the average yield earned on this portfolio, resulting in a $3.7 million increase in interest income.    The average balance of consumer real estate and Warehouse Purchase Program loans increased by $197.3 million and $67.2 million, respectively, compared to the second quarter of 2015, leading to increases in interest income of $1.5 million and $322,000, respectively.

Interest expense for the quarter ended June 30, 2016 increased by $725,000 compared to the linked quarter, which was primarily due to increased volume in time deposits and borrowings compared to the first quarter of 2016.  The average balance of time accounts increased by $120.2 million to $1.17 billion from the first quarter of 2016, resulting in a $289,000 increase in interest expense. The average balance of borrowings increased by $402.2 million to $1.51 billion from the first quarter of 2016, resulting in a $425,000 increase in interest expense.  The linked-quarter increase in borrowings was primarily related to growth in Warehouse Purchase Program loan balances during the quarter, a portion of which are strategically funded by short-term FHLB advances. 

Compared to the second quarter of 2015, interest expense for the quarter ended June 30, 2016 increased by $2.8 million, primarily due to increased volume in all deposit products, including a $359.1 million increase in the average balance of savings and money market deposits and a $330.4 million increase in the average balance of time deposits, which increased interest expense by $570,000 and $675,000, respectively.  Interest expense on borrowings increased by $1.5 million compared to the second quarter of 2015, primarily due to the issuance of $75.0 million of fixed-to-floating rate subordinated notes by the Company in November 2015. 

The net interest margin for the second quarter of 2016 was 3.79%, a nine basis point decrease from the first quarter of 2016 and a 27 basis point decrease from the second 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 June 30, 2016, compared to seven basis points for the quarter ended March 31, 2016 and 20 basis points for the quarter ended June 30, 2015.  The average yield on earning assets for the second quarter of 2016 was 4.23%, an eight basis point decrease from the first quarter of 2016 and an 18 basis point decrease from the second quarter of 2016.  The cost of deposits for the second quarter of 2016 was 0.33%, up one basis point from the linked quarter and up five basis points from the second quarter of 2015.

Non-interest Income

Non-interest income for the second quarter of 2016 was $13.7 million, a $933,000 decrease from the first quarter of 2016 and a $1.8 million increase from the second quarter of 2015.  Core non-interest income for the second quarter of 2016, which excludes one-time gains and losses on assets and security sales, the net gain on the sale of the Company's insurance subsidiary operations and certain other items, was $12.7 million, up $1.4 million from the first quarter of 2016 and up $1.0 million from the second quarter of 2015.  Gain on sale and disposition of assets for the second quarter of 2016 included a gain of $1.2 million on the sale of the Company's insurance subsidiary operations, compared to $3.9 million in gains recorded in the first quarter of 2016 on the sale of two buildings.   Service charges and other fees increased by $746,000 from the first quarter of 2016, which includes a $727,000 increase in title premiums and a $221,000 increase in Warehouse Purchase Program fee income, which was partially offset by a $301,000 decrease in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees). The $457,000 increase in other non-interest income compared to the linked quarter was primarily due to $365,000 in swap fee income recorded in the second quarter of 2016 on interest rate derivative positions with our customers, with only $7,000 in comparable income recognized in the first quarter of 2016.  Other non-interest income for the second quarter of 2016 included a $237,000 net decrease in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds"), compared to a $530,000 net decrease in the CRA Funds recorded in the first quarter of 2016.

The $1.8 million increase in non-interest income from the second quarter of 2015 was primarily due to an increase of $986,000 in service charges and other fees, which includes a $407,000 increase in title premiums and a $501,000 increase in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees).  Gain on sale and disposition of assets for the second quarter of 2016 included the $1.2 million gain on the sale of the Company's insurance subsidiary operations discussed above.

Non-interest Expenses

Non-interest expense for the quarter ended June 30, 2016 was $39.6 million, a $2.1 million increase from the first quarter of 2016 and a $2.7 million increase from the second quarter of 2015.  Salaries and employee benefits expense increased by $530,000 from the first quarter of 2016, primarily due to a $1.1 million increase in performance-based incentive accruals and commissions related to higher loan production, as well as a $458,000 increase in share-based compensation expense (including expense related to the Company's ESOP) due to the increase in the Company's average stock price during the second quarter of 2016.  The linked-quarter increase in salary expense was partially offset by a $554,000 reduction in payroll taxes, as more employees have reached the wage base limit for Social Security tax for the year, as well as $720,000 in additional deferred salary costs related to loan originations that will be accounted for over the lives of the related loans.  Outside professional services expense increased by $411,000 compared to the linked quarter, primarily due to higher consulting and legal expenses, while data processing expense increased by $374,000 for the same period due to increased expense for card processing services. Other non-interest expense increased by $399,000 for the second quarter of 2016 compared to the linked quarter, primarily driven by increases in maintenance costs on foreclosed assets, legal expenses on loans and debit card fraud losses. 

The $2.7 million increase in non-interest expense from the second quarter of 2015 was primarily due to a $1.1 million increase in data processing expense related to increased expenses for card processing services and software, as well as a $665,000 increase in other non-interest expense for the same period, primarily due to increased debit card fraud losses in the 2016 period.  During 2016, the Company implemented enhanced authorization and fraud prevention procedures to assist in mitigation of future debit card fraud cases.  Outside professional services expense for the second quarter of 2016 increased by $602,000 compared to the second quarter of 2015, primarily due to higher consulting and audit expenses in the 2016 period.  Salaries and employee benefits expense for the second quarter of 2016 increased by $318,000 compared to the second quarter of 2015, primarily due to an increase in the number of employees in the 2016 period.

Financial Condition - Loans

Gross loans held for investment at June 30, 2016, excluding Warehouse Purchase Program loans, grew $423.7 million from March 31, 2016, which included growth in commercial real estate, commercial and industrial, consumer real estate and construction and land loans.  Commercial real estate and commercial and industrial loans at June 30, 2016 increased by $196.1 million and $142.4 million, respectively, from March 31, 2016, and consumer real estate and construction and land loans increased by $74.7 million and $14.4 million, respectively, from March 31, 2016.  These increases were partially offset by a decline of $3.9 million in other consumer loans.

Compared to June 30, 2015, gross loans held for investment, excluding Warehouse Purchase Program loans, grew $1.30 billion, which included growth in all loan portfolios with the exception of an $18.4 million decline in other consumer loans.  On a year over year basis, commercial real estate and commercial and industrial loans increased by $590.2 million and $474.3 million, respectively.  Consumer real estate and construction and land loans increased by $200.8 million and $51.4 million, respectively, from June 30, 2015.

Compared to March 31, 2016 and June 30, 2015, Warehouse Purchase Program loans declined by $48.2 million and $104.6 million, respectively. 

Energy loans, which are reported as commercial and industrial loans, totaled $489.1 million at June 30, 2016, up $28.0 million from $461.1 million at March 31, 2016 and up $86.5 million from $402.6 million at June 30, 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 June 30, 2016, "Midstream and Other" loans had a total outstanding balance of $54.8 million, down $8.9 million from $63.7 million at March 31, 2016 and up $33.5 million from $21.3 million at June 30, 2015.

Financial Condition - Deposits

Total deposits at June 30, 2016 increased by $319.8 million from March 31, 2016, with all deposit categories growing on a linked-quarter basis.  Time and non-interest-bearing demand deposits increased by $206.2 million and $60.9 million, respectively, on a linked-quarter basis, while interest-bearing demand and savings and money market deposits increased by $28.9 million and $23.9 million, respectively, from March 31, 2016.

Compared to June 30, 2015, total deposits increased by $1.09 billion, which includes growth in all deposit categories.  On a year over year basis, time deposits and savings and money market deposits increased by $451.3 million and $415.4 million, respectively, while non-interest-bearing demand and interest-bearing demand deposits increased by $151.6 million and $76.6 million, respectively, from June 30, 2015.

The Company recorded a provision for loan losses of $6.8 million for the quarter ended June 30, 2016, a decrease of $2.0 million from the quarter ended March 31, 2016 and an increase of $3.1 million from the quarter ended June 30, 2015.  The Company increased qualitative reserve factors applied to the Energy portfolio in the first quarter of 2016 and in the fourth quarter of 2015 due to the impact of continued pressure on the price of oil and gas, and continued to apply the increased qualitative reserve factors to the Energy portfolio in the second quarter of 2016. This ongoing pressure on oil and gas prices resulted in continued 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 June 30, 2016, March 31, 2016 and June 30, 2015. 

The $1.4 million increase in substandard non-performing energy loans from March 31, 2016 was due to one reserve-based energy loan that was placed on non-accrual status during the second quarter of 2016 and is now considered to be impaired.  This loan totaling $1.6 million at June 30, 2016 was placed on non-accrual during the spring redetermination process as a result of collateral value declines and deteriorating financial condition due to the ongoing low commodity price environment.  At June 30, 2016, the Company set aside a specific reserve of $64,000 on this credit to reflect impairment based on that recent collateral valuation.  The $26.6 million in substandard non-performing energy loans reported at June 30, 2016 also included two reserve-based energy relationships that were placed on non-accrual status during the first quarter of 2016 and are considered to be impaired.  One relationship totaling $6.2 million at June 30, 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.  At June 30, 2016, the Company set aside a specific reserve of $87,000 on this relationship to reflect impairment.  The second credit totaled $6.7 million at June 30, 2016 and is on non-accrual status as a result of collateral value deterioration due to the ongoing low commodity price environment.  At June 30, 2016, the Company set aside a specific reserve of $190,000 on this credit to reflect impairment based on that recent collateral valuation.  Additionally, substandard non-performing energy loans reported at June 30, 2016 included a $12.0 million reserve-based credit that has been on non-accrual status since the third quarter of 2015 and, at June 30, 2016, was in the midst of bankruptcy proceedings.  As of June 30, 2016, the Company had a specific reserve of $6.5 million on this credit.  In July 2016, this credit was resolved through the aforementioned bankruptcy proceedings.    

The increase in substandard performing energy loans on a linked-quarter and year-over-year basis, as well as the increase in special mention performing energy loans on a year-over-year basis, resulted from collateral value declines and deteriorating financial condition due to commodity price declines.  At June 30, 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.

The allowance for loan losses allocated to energy loans at June 30, 2016 totaled $21.9 million, up $4.5 million from $17.4 million at March 31, 2016 and up $17.2 million from $4.7 million at June 30, 2015.  In addition to the $6.9 million in specific reserves on the non-performing energy relationships discussed above, these reserve amounts reflect elevated qualitative factors and an increase in energy portfolio balances. 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 level of loan loss reserves for energy loans as of June 30, 2016 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.

Additionally, 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 $499.7 million during the second quarter of 2016.

Net charge-offs for the second quarter of 2016 totaled $90,000, a decrease of $319,000 from the first quarter of 2016 and a decrease of $1.1 million from the second quarter of 2015.

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 June 30, 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 June 30, 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, July 20, 2016 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10088935 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 #10088935.   This replay, as well as the webcast, will be available until August 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 45 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 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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