LegacyTexas Financial Group, Inc. Reports Second Quarter 2015 Earnings

PLANO, Texas, July 21, 2015 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (NASDAQ: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $20.3 million, an increase of $3.9 million from the first quarter of 2015 and an increase of $11.4 million from the second quarter of 2014.  Core (non-GAAP) net income (which is net income adjusted for the impact of merger and acquisition costs and certain other items) totaled $20.1 million for the quarter ended June 30, 2015, up $2.4 million from the first quarter of 2015 and up $10.2 million from the second quarter of 2014.  Basic earnings per share for the quarter ended June 30, 2015 was $0.44, an increase of $0.09 from the first quarter of 2015 and an increase of $0.21 from the second quarter of 2014.  Core earnings per share for the second quarter of 2015 was also $0.44, up $0.05 from the first quarter of 2015 and up $0.18 from the second quarter of 2014.  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.

Second Quarter 2015 Performance Highlights

• Return on average assets for the second quarter of 2015 was 1.28%, up 20 basis points from the first quarter of 2015 and up 32 basis points from the second quarter of 2014.
• Gross loans held for investment at June 30, 2015, excluding Warehouse Purchase Program loans, grew $198.1 million, or 4.7%, from March 31, 2015, with $135.6 million of growth in commercial real estate and commercial and industrial loans.  Excluding $1.17 billion of net growth resulting from loans acquired from LegacyTexas Group, Inc., gross loans held for investment, excluding Warehouse Purchase Program loans, increased by $872.9 million, or 24.8%, from June 30, 2014.
• Warehouse Purchase Program loans at June 30, 2015 totaled $1.08 billion, a $46.1 million, or 4.4%, increase from March 31, 2015, and a $315.4 million, or 41.0%, increase from June 30, 2014.
• Deposits at June 30, 2015 increased by $134.7 million, or 3.1%, from March 31, 2015, with $53.3 million of growth in non-interest-bearing demand and $52.2 million of growth in time deposits.  Excluding $1.63 billion of growth resulting from deposits acquired from LegacyTexas Group, Inc., deposits increased by $462.3 million, or 11.4%, from June 30, 2014. 
• Net interest margin for the quarter ended June 30, 2015 was 4.06%, a three basis point increase from the linked quarter and a 30 basis point increase compared to the second quarter of 2014, which includes 20 basis points of accretion of interest related to purchase accounting fair value adjustments for the second quarter of 2015.

"As a team, we continue to execute on our strategy to be the bank of choice for DFW-based businesses and families," said President and CEO Kevin Hanigan.  "The exceptional results of the quarter are a reflection of many things: the strength of the DFW market place, our presence within the market, the many benefits of the merger with LegacyTexas Group, Inc. and the dedication of our team to march toward the goals we have set for ourselves."

Financial Highlights

Net Interest Income and Net Interest Margin

Net interest income for the quarter ended June 30, 2015 was $59.8 million, a $3.5 million increase from the first quarter of 2015 and a $26.9 million increase from the second quarter of 2014.  The $3.5 million increase from the linked quarter was primarily due to an increase in interest income on loans, which was driven by increased volume in Warehouse Purchase Program, commercial and industrial, commercial real estate and consumer real estate loan balances.   The average balance of Warehouse Purchase Program loans increased by $232.5 million to $920.0 million from the first quarter of 2015, which resulted in a $1.9 million increase in interest income.  The average balance of commercial and industrial loans increased by $113.4 million to $1.25 billion from the first quarter of 2015, resulting in a $902,000 increase in interest income. The average balance of consumer real estate loans increased by $18.7 million to $805.6 million from the first quarter of 2015, resulting in a $913,000 increase in interest income.  A ten basis point linked-quarter reduction in the average yield earned on commercial real estate loans, which was partially offset by a $14.9 million increase in the average balance, led to a $238,000 decline in interest income on commercial real estate loans compared to the first quarter of 2015.

Interest income on loans for the second quarter of 2015 increased by $2.6 million in accretion of purchase accounting fair value adjustments on loans acquired from LegacyTexas Group, Inc., which included $1.1 million in accretion income recorded on acquired commercial and industrial loans, $686,000 in accretion income recorded on acquired commercial real estate loans, $278,000 in accretion income recorded on acquired construction and land loans, and $566,000 recorded on acquired consumer real estate loans.  The amount of accretion income recognized on these loans in the second quarter of 2015 decreased by $481,000 from the $3.1 million recorded during the first quarter of 2015.  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 17 basis points, 37 basis points and 43 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the second quarter of 2015, compared to 11 basis points, 52 basis points and 47 basis points, respectively, for the first quarter of 2015.

The $26.9 million increase in net interest income compared to the second quarter of 2014 was primarily due to a $27.7 million increase in interest income on loans, which was driven by increased volume in all loan categories resulting from loans acquired from LegacyTexas Group, Inc. on January 1, 2015, as well as organic growth.  The average balance of commercial real estate loans increased by $703.1 million to $1.85 billion from the second quarter of 2014, resulting in an $8.4 million increase in interest income.  The $703.1 million in growth includes $551.0 million in commercial real estate loans acquired from LegacyTexas Group, Inc.; excluding these loans, the average balance of commercial real estate loans increased by $152.1 million from the second quarter of 2014.  The average balance of commercial and industrial loans increased by $658.1 million to $1.25 billion from the second quarter of 2014, resulting in an $8.6 million increase in interest income.  The $658.1 million in growth includes $337.1 million in commercial and industrial loans acquired from LegacyTexas Group, Inc.; excluding these loans, the average balance of commercial and industrial loans increased by $321.0 million from the second quarter of 2014.  The average balance of consumer real estate loans increased by $328.1 million to $805.6 million from the second quarter of 2014, resulting in a $4.4 million increase in interest income.  The $328.1 million in growth includes $264.0 million in consumer real estate loans acquired from LegacyTexas Group, Inc.; excluding these loans, the average balance of consumer real estate loans increased by $64.1 million from the second quarter of 2014.  The average balance of Warehouse Purchase Program loans increased by $348.1 million to $920.0 million from the second quarter of 2014, which resulted in a $2.6 million increase in interest income.

Interest expense for the quarter ended June 30, 2015 decreased by $146,000 compared to the linked quarter.  Compared to the second quarter of 2014, interest expense for the quarter ended June 30, 2015 increased by $959,000, primarily due to an increase in interest expense on deposits, which was driven by increased volume in all deposit categories resulting from deposits acquired from LegacyTexas Group, Inc. on January 1, 2015, as well as organic growth during the 2015 period in savings and money market deposit balances.  An $806.6 million increase in the average balance of savings and money market deposits to $1.81 billion from the second quarter of 2014 was partially offset by a 13 basis point reduction in the average rate, resulting in a $10,000 increase in interest expense.  The $806.6 million in growth includes $534.6 million in savings and money market deposits acquired from LegacyTexas Group, Inc.; excluding these deposits, the average balance of savings and money market deposits increased by $272.0 million from the second quarter of 2014. The average balance of time deposits increased by $336.6 million to $839.6 million from the second quarter of 2014, resulting in a $594,000 increase in interest expense.  The $336.6 million in growth includes $336.8 million in time deposits acquired from LegacyTexas Group, Inc.; excluding these deposits, the average balance of time deposits decreased by $262,000 from the second quarter of 2014.  The average balance of interest-bearing demand deposits increased by $233.3 million to $701.6 million from the second quarter of 2014, resulting in a $410,000 increase in interest expense.  The $233.3 million in growth includes $258.7 million in interest-bearing demand deposits acquired from LegacyTexas Group, Inc.; excluding these deposits, the average balance of interest-bearing demand deposits decreased by $25.4 million from the second quarter of 2014.

The net interest margin for the second quarter of 2015 was 4.06%, a three basis point increase from the first quarter of 2015 and a 30 basis point increase from the second quarter of 2014.  Accretion of interest resulting from the merger with LegacyTexas Group, Inc. on January 1, 2015, as well as the 2012 Highlands acquisition, contributed 20 basis points to the net interest margin and average yield on earning assets for the quarter ended June 30, 2015, compared to 23 basis points for the quarter ended March 31, 2015, and four basis points for the quarter ended June 30, 2014.  The average yield on earning assets for the second quarter of 2015 was 4.41%, unchanged from the first quarter of 2015 and a 17 basis point increase from the second quarter of 2014.  The cost of deposits for the second quarter of 2015 was 0.28%, down one basis point from the first quarter of 2015 and down six basis points from the second quarter of 2014.

Non-interest Income

Non-interest income for the second quarter of 2015 was $12.0 million, a $2.6 million increase from the first quarter of 2015 and a $6.5 million increase from the second quarter of 2014.  Core non-interest income for the second quarter of 2015, excluding one-time gains and losses on assets, was $11.7 million, up $1.7 million from the first quarter of 2015 and up $5.7 million from the second quarter of 2014.  Service charges and other fees increased by $1.2 million from the first quarter of 2015, which includes a $457,000 increase in services charges generated by LegacyTexas Title, as well as increases in debit card income and Warehouse Purchase Program fee income.  Additionally, other non-interest income increased by $1.1 million, primarily driven by a $674,000 net decrease in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds") recorded in the first quarter of 2015 with no comparable loss recorded in the second quarter of 2015.  The $401,000 increase in gain on sale and disposition of assets during the second quarter of 2015 was primarily related to the sale of an other real estate owned property and one of the Company's branch buildings in the second quarter of 2015.  These increases were partially offset by a $211,000 gain on the sale of securities recognized in the first quarter of 2015, with no comparable sales occurring during the second quarter of 2015.  Non-interest income for the second quarter of 2015 includes $2.1 million in non-interest income from the Company's title and insurance subsidiaries.

The $6.5 million increase in non-interest income from the second quarter of 2014 was primarily due to a $2.8 million increase in service charges and other fees, which was driven by the addition of $1.3 million of title income, as well as increased debit card income, Warehouse Purchase Program fee income, and service charges related to accounts acquired from LegacyTexas Group, Inc.  Additionally, the Company recognized $2.1 million in net gains on the sale of mortgage loans during the second quarter of 2015, which includes the gain recognized on $61.5 million of one-to four-family mortgage loans that were sold or committed for sale during the second quarter of 2015, fair value changes on mortgage derivatives and mortgage fees collected.  Prior to the January 1, 2015 merger with LegacyTexas Group, Inc., the Company did not originate or sell mortgage loans to outside investors; therefore, a comparable gain was not recorded in the second quarter of 2014.  Other non-interest income increased by $1.6 million from the second quarter of 2014, primarily due to a $637,000 net decrease in the CRA Funds recorded in the second quarter of 2014 with no comparable charge recorded in the 2015 period, as well as $790,000 of insurance income added through the acquisition of LegacyTexas Group, Inc.

Non-interest Expenses

Non-interest expense for the quarter ended June 30, 2015 was $36.9 million, an $869,000 decrease from the first quarter of 2015 and a $13.6 million increase from the second quarter of 2014.  The linked-quarter comparison includes a $1.5 million decrease in merger and acquisition costs related to the merger with LegacyTexas Group, Inc., which was completed on January 1, 2015.  Excluding the impact of these merger costs, core non-interest expense, which totaled $36.9 million for the quarter ended June 30, 2015, increased by $668,000 compared to the linked quarter.  Other non-interest expense for the second quarter of 2015 increased by $752,000 compared to the linked quarter, primarily due to a $540,000 increase in debit card fraud losses resulting from card compromises at two retailers leading to several fraud cases, as well as an increase in fraud alerts from MasterCard.  These increases were partially offset by a $422,000 decline in salaries and benefits expense from the first quarter of 2015, primarily resulting from a decline in salary expense and payroll taxes due to terminations, several of which were related to the Company's reorganization following the merger with LegacyTexas Group, Inc. and will not be replaced.  Additionally, certain senior managers of LegacyTexas Group, Inc. who joined the Company, received immediately-vested stock awards, which resulted in $600,000 of share-based compensation expense recognized during the first quarter of 2015, without a comparable charge in the second quarter of 2015.  Non-interest expense for the second quarter of 2015 includes $1.5 million of non-interest expense from the Company's title and insurance subsidiaries. 

The $13.6 million increase in non-interest expense from the second quarter of 2014 was partially offset by a $644,000 decrease in merger and acquisition costs related to the merger with LegacyTexas Group, Inc.  Excluding the impact of these merger costs and one-time payroll and severance costs incurred during the second quarter of 2014, core non-interest expense increased by $14.6 million, which was driven by an $8.4 million increase in salaries and employee benefits expense, primarily due to the addition of employees and grants of share-based compensation related to the merger with LegacyTexas Group, Inc. Compared to the quarter ended June 30, 2014, non-interest expense increased due to the merger with LegacyTexas Group, Inc., including a $2.0 million increase in occupancy and equipment expense, an $829,000 increase in data processing expense, a $555,000 increase in advertising expense and a $935,000 increase in office operations expense.  

Financial Condition - Loans

Gross loans held for investment at June 30, 2015, excluding Warehouse Purchase Program loans, grew $198.1 million from March 31, 2015 and by $2.05 billion from June 30, 2014.  Excluding $1.17 billion in loans acquired from LegacyTexas Group, Inc. and Warehouse Purchase Program loans, gross loans held for investment increased by $872.9 million from June 30, 2014.   Compared to March 31, 2015, gross loans held for investment grew in all loan categories with the exception of the other consumer portfolio.  Commercial and industrial and commercial real estate loans at June 30, 2015 increased by $95.8 million and $39.7 million, respectively, from March 31, 2015, while consumer real estate loans increased by $53.0 million for the same period.  Warehouse Purchase Program loans at June 30, 2015 increased by $46.1 million from March 31, 2015 and by $315.4 million compared to June 30, 2014.

The below table breaks out the growth in gross loans held for investment at June 30, 2015, excluding Warehouse Purchase Program balances, and shows the percentage change from June 30, 2014.

Energy loans, which are reported as commercial and industrial loans, totaled $402.6 million at June 30, 2015, up $31.5 million from $371.1 million at March 31, 2015 and up $180.4 million from June 30, 2014.  In May 2013, the Company formed its Energy Finance group, which is comprised of a group of seasoned lenders, executives and credit risk professionals with more than 100 years of combined Texas energy experience, to focus on providing loans to private and public oil and gas companies throughout the United States. The group also offers the Bank's full array of commercial services, including Treasury Management and letters of credit, to its customers.  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. Three loans managed by the Energy Finance group are not secured by oil and gas reserves. These loans, with a combined commitment of $51.5 million and a total outstanding balance of $21.3 million at June 30, 2015, are categorized as "Midstream and Other" loans. Loans in this category are typically related to the transmission of oil and natural gas and would only be indirectly impacted from declining commodity prices.

Financial Condition - Deposits

Total deposits at June 30, 2015 increased by $134.7 million from March 31, 2015, and by $2.09 billion from June 30, 2014, with $1.63 billion of growth resulting from deposits acquired from LegacyTexas Group, Inc.  All deposit categories increased on a linked-quarter basis, with non-interest-bearing demand deposits growing by $53.3 million due to higher balances in commercial checking deposits and time deposits increasing by $52.2 million.  At June 30, 2015, non-interest-bearing demand deposits comprised 24.0% of total deposits, compared to 17.8% of total deposits at June 30, 2014.  Interest-bearing demand and savings and money market deposits increased by $21.2 million and $8.0 million, respectively, compared to March 31, 2015. 

The below table breaks out the growth in deposits at June 30, 2015 and shows the percentage change from June 30, 2014:

Credit Quality

The Company recorded a provision for loan losses of $3.8 million for the quarter ended June 30, 2015, compared to $3.0 million for the quarter ended March 31, 2015 and $1.2 million for the quarter ended June 30, 2014.  The increase in the provision for loan losses on a linked-quarter basis, as well as compared to the second quarter of 2014, was primarily related to increased organic loan production, as well as loans acquired from LegacyTexas Group, Inc. that were re-underwritten following completion of the merger.  Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to the Company's allowance for loan loss methodology.   

Consistent with prior quarters, the Company has continued to apply qualitative reserve factors to provide for additional allowance for loan losses due to the economic uncertainty in Texas related to the recent decline in the price of oil.  To date, the Company has not recognized a loss from loans in the Energy portfolio, which we believe is a reflection of prudent risk mitigation techniques.  These techniques include 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.  At June 30, 2015, 1.5% of the Company's loan portfolio (excluding Warehouse Purchase Program loans) consisted of criticized energy loans, and all but one of these energy loans were performing.  One energy loan totaling $5.2 million was placed on non-accrual status during the second quarter of 2015 and was considered impaired at June 30, 2015; however, the Company does not have a specific reserve set aside for this loan and does not currently anticipate a loss.  Four energy lending relationships totaling $58.6 million at June 30, 2015 have been downgraded to substandard as a result of collateral value deterioration due to commodity price declines. As a result of the deterioration the Company has taken action to improve the risk profile of the loans. These actions range from instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support, and requiring additional equity injections or asset sales.  Borrower response to these actions has been favorable and the Company believes the loans will be paid off or paid down to acceptable risk levels within a reasonable time frame.  These four relationships, which were performing at June 30, 2015, have been considered in management's analysis of potential loan losses.

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, 2015 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, 2015 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 22, 2015 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10067048 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 #10067048.   This replay, as well as the webcast, will be available until August 22, 2015.

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 47 banking offices in the Dallas/Fort Worth Metroplex and surrounding counties. For more information, please visit www.legacytexasfinancialgroup.com or www.legacytexas.com.

When used in filings by LegacyTexas Financial Group, Inc. (the "Company") with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or stockholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected, including, among other things: 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 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.

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SOURCE LegacyTexas Financial Group, Inc.

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