LegacyTexas Financial Group, Inc. Reports First Quarter 2017 Earnings

PLANO, Texas, April 18, 2017 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced net income of $18.2 million for the first quarter of 2017, a decrease of $7.1 million from the fourth quarter of 2016 and $3.9 million from the first quarter of 2016.  Net income for the first quarter of 2017 included a provision for credit losses totaling $22.3 million, which resulted from the charge-off of a $16.4 million interest in a large syndicated credit.

"We produced a strong quarter that was highlighted with very strong net interest income, despite the seasonal decline in Warehouse Purchase Program loans," said President and CEO Kevin Hanigan. "Loans held for investment, excluding Warehouse, grew $200 million and operating expenses remained relatively flat compared to last quarter, producing a record low 44.8% efficiency ratio. However, our performance during the quarter was obviously overshadowed by the increased provision expense related to a syndicated health care credit that we charged off. While our remaining exposure to corporate healthcare is only $60 million in funded loans, we have strategically decided to shut down our origination of these credits going forward.  We believe that business fundamentals and local economy remain favorable for our Company, and we expect to continue executing on our strategic plan.  The earning power of our company remains strong."  

First Quarter 2017 Performance Highlights

• Net income for the first quarter of 2017 included a $2.5 million increase in net interest income compared to the fourth quarter of 2016, despite a $3.1 million reduction in interest income on Warehouse Purchase Program loans related to decreased volume during the quarter.
• Efficiency ratio improved to 44.83% for the quarter ended March 31, 2017, compared to 45.79% for the quarter ended December 31, 2016, as non-interest expense for the quarter remained nearly flat, with a linked-quarter increase of only $204,000.
• Gross loans held for investment at March 31, 2017, excluding Warehouse Purchase Program loans, grew $199.8 million from December 31, 2016, while total deposits grew $14.2 million for the same period.
• Company assets totaled $8.44 billion, which generated basic earnings per share for the first quarter of 2017 of $0.39 on a GAAP basis and $0.37 on a core (non-GAAP) basis.

Core (non-GAAP) net income (which is net income adjusted for the impact of infrequent or non-recurring items) totaled $17.3 million for the quarter ended March 31, 2017, down $8.0 million from the fourth quarter of 2016 and $2.2 million from the first quarter of 2016.  Basic earnings per share for the quarter ended March 31, 2017 was $0.39, a decrease of $0.15 from the fourth quarter of 2016 and $0.09 from the first quarter of 2016.  Basic core earnings per share for the first quarter of 2017 was $0.37, down $0.18 from the fourth quarter of 2016 and $0.05 from the first quarter of 2016.

Net interest income for the quarter ended March 31, 2017 was $76.5 million, a $2.5 million increase from the fourth quarter of 2016 and an $11.2 million increase from the first quarter of 2016.  The $2.5 million increase from the linked quarter was primarily due to an increase in interest income on loans, which was driven by increased volume in the commercial and industrial, commercial real estate and consumer real estate portfolios, as well as the amortization of a discount recorded in the fourth quarter of 2016 on a purchased energy loan, of which $4.7 million was completely amortized to interest income during the first quarter of 2017.  The amortization of this discount positively impacted the yield on commercial and industrial loans for the first quarter of 2017 by 96 basis points, while the average balance of commercial and industrial loans increased by $133.2 million to $1.97 billion from the fourth quarter of 2016, resulting in a $4.9 million increase in interest income.  The average balance of commercial real estate loans increased by $125.2 million to $2.72 billion from the fourth quarter of 2016, resulting in a $916,000 increase in interest income.

The average balance of Warehouse Purchase Program loans decreased by $403.4 million to $697.3 million from the fourth quarter of 2016, resulting in a $3.1 million decrease in interest income, which reflects the seasonal slowdown typically experienced with Warehouse Purchase Program loans during the first quarter of the year.  Interest income earned on consumer real estate loans increased by $292,000 for the same period due to a $38.5 million linked-quarter increase in the average balance.

Interest income on loans for the first quarter of 2017 included $943,000 in accretion of purchase accounting fair value adjustments on acquired loans, which includes $385,000 on acquired commercial real estate loans, $157,000 on acquired commercial and industrial loans, $21,000 on acquired construction and land loans and $380,000 on acquired consumer loans.  Accretion of purchase accounting fair value adjustments on acquired loans contributed six basis points, three basis points and 11 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the first quarter of 2017, compared to four basis points, three basis points and 13 basis points, respectively, for the fourth quarter of 2016. 

The $11.2 million increase in net interest income compared to the first quarter of 2016 was primarily due to a $14.3 million increase in interest income on loans, which was driven by increased volume in the commercial real estate, commercial and industrial and consumer real estate portfolios.  The average balance of commercial real estate loans increased by $495.5 million from the first quarter of 2016, resulting in a $5.8 million increase in interest income.  The average balance of commercial and industrial loans increased by $357.6 million from the first quarter of 2016, resulting in an $8.3 million increase in interest income, which also included the impact of the amortized loan discount discussed above.  The average balance of consumer real estate loans increased by $141.1 million compared to the first quarter of 2016, which was partially offset by a 23 basis point decline in the average yield earned on that portfolio compared to the prior year period, leading to a $1.1 million increase in interest income.

Interest expense for the quarter ended March 31, 2017 increased by $575,000 compared to the linked quarter, which was primarily due to higher average rates paid on interest-bearing demand,  savings, money market and time products, as well as a $16.4 million increase in the average balance of interest-bearing demand deposits compared to the fourth quarter of 2016.  The average balance of savings and money market accounts decreased by $34.0 million to $2.65 billion from the fourth quarter of 2016, which was offset by a seven basis point increase in the average rate, resulting in a $377,000 increase in interest expense, while the average balance of time deposits decreased by $92.8 million to $1.31 billion for the same period, resulting in a $68,000 decrease in interest expense.  The decrease in interest expense on time deposits compared to the fourth quarter of 2016 was partially offset by a five basis point linked-quarter increase in the rate paid. A $160.2 million decrease in the average balance of borrowings from the fourth quarter of 2016 was more than offset by a 29 basis point increase in the average rate, resulting in a $199,000 increase in interest expense on borrowed funds.

Compared to the first quarter of 2016, interest expense for the quarter ended March 31, 2017 increased by $3.7 million, primarily due to higher average rates and increased volume in all deposit products.  The average balance of savings and money market deposits increased by $443.2 million and the average balance of time deposits increased by $264.8 million compared to the first quarter of 2016, while the average rates paid on these deposits increased by 22 basis points and 20 basis points, respectively, compared to the prior year period.  These increases in volume and rate on savings and money market and time deposits increased interest expense compared to the first quarter of 2016 by $1.7 million and $1.1 million, respectively.  A $65.7 million decrease in the average balance of borrowings from the first quarter of 2016 was more than offset by a 37 basis point increase in the average rate, resulting in a $743,000 increase in interest expense on borrowed funds.

The net interest margin for the first quarter of 2017 was 4.00%, a 32 basis point increase from the fourth quarter of 2016 and a ten basis point increase from the first quarter of 2016.  Approximately 24 basis points of the net interest margin for the quarter ended March 31, 2017 was related to the amortization of the purchased loan discount discussed above.  Accretion of interest resulting from the merger with LegacyTexas Group, Inc. on January 1, 2015, as well as the 2012 Highlands acquisition, contributed five basis points to the net interest margin and average yield on earning assets for the quarter ended March 31, 2017, compared to four basis points for the quarter ended December 31, 2016 and seven basis points for the quarter ended March 31, 2016.  The average yield on earning assets for the first quarter of 2017 was 4.58%, a 38 basis point increase from the fourth quarter of 2016 and a 25 basis point increase from the first quarter of 2016.  The cost of deposits for the first quarter of 2017 was 0.47%, up four basis points from the linked quarter and up 15 basis points from the first quarter of 2016.

Non-interest Income

Non-interest income for the first quarter of 2017 was $12.1 million, a $147,000 decrease from the fourth quarter of 2016 and a $2.5 million decrease from the first quarter of 2016.  Gain (loss) on sale and disposition of assets for the first quarter of 2017 included a gain of $1.3 million resulting from the sale of a parcel of land, compared to a loss of $407,000 recorded in the fourth quarter of 2016 on the sale of a foreclosed property.  Service charges and other fees decreased by $1.5 million from the fourth quarter of 2016, which was primarily due to a $683,000 reduction in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees) and a $695,000 incentive payment received from Mastercard in the fourth quarter of 2016 that was not repeated in the first quarter of 2017.  The Company recognized $1.6 million in net gains on the sale of mortgage loans held for sale during the first quarter of 2017, which includes the gain recognized on $39.6 million of one-to four-family mortgage loans that were sold or committed for sale during the first quarter of 2017, fair value changes on mortgage derivatives and mortgage fees collected, compared to $2.0 million in comparable net gains recorded during the fourth quarter of 2016 on $57.8 million of one-to four-family mortgage loans sold or committed for sale.

The $2.5 million decrease in non-interest income from the first quarter of 2016 was primarily due to a gain of $3.9 million recorded in the first quarter of 2016 on the sale of two buildings, compared to the above-discussed $1.3 million gain on the sale of a parcel of land recorded in the first quarter of 2017.  Service charges and other fees increased by $250,000, which was driven by a $281,000 increase in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees).

Non-interest Expenses

Non-interest expense for the quarter ended March 31, 2017 was $39.8 million, a $204,000 increase from the fourth quarter of 2016 and a $2.2 million increase from the first quarter of 2016.  Salaries and employee benefits expense increased by $998,000 from the fourth quarter of 2016, which was driven by increased payroll taxes related to Social Security tax wage base limits and higher salary costs related to additional staff and merit increases in the first quarter of 2017.  Performance incentive accruals were also higher during the 2017 period, as these accruals were reduced in the fourth quarter of 2016 related to an increase in non-performing loans.  These increases in salaries and employee benefits expense were partially offset by reduced health care costs and share-based compensation expense compared to the fourth quarter of 2016.  Regulatory assessment expense decreased by $331,000 compared to the quarter ended December 31, 2016, due to a lower assessment rate, while office operations and advertising expenses also decreased by $248,000 and $222,000, respectively, compared to the linked quarter.

The $2.2 million increase in non-interest expense from the first quarter of 2016 was primarily due to a $2.1 million increase in salaries and employee benefits expense, which was driven by additional staff and merit increases, as well as increases in performance incentive accruals, payroll taxes and share-based compensation expense.  Data processing expense increased by $605,000 compared to the first quarter of 2016 primarily due to increased costs for system upgrades to enhance customer service and increase operating efficiency.  These increases in salaries and employee benefits expense and data processing expense were partially offset by a $246,000 decline in other non-interest expense due to lower debit card fraud losses in the 2017 period, as well as a $219,000 decline in advertising costs compared to the first quarter of 2016.

Financial Condition - Loans

Gross loans held for investment at March 31, 2017, excluding Warehouse Purchase Program loans, grew $199.8 million from December 31, 2016, 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, 2017 increased by $116.0 million and $57.2 million, respectively, from December 31, 2016, and consumer real estate loans increased by $34.5 million for the same period.  These linked-quarter increases were partially offset by a $4.6 million decline in construction and land loans. 

Compared to March 31, 2016, gross loans held for investment at March 31, 2017, excluding Warehouse Purchase Program loans, grew $996.0 million, which included growth in all loan portfolios with the exception of a $14.6 million decline in other consumer loans.  On a year over year basis, commercial real estate and commercial and industrial loans increased by $462.1 million and $388.3 million, respectively.  Consumer real estate and construction and land loans increased by $137.3 million and $22.7 million, respectively, from March 31, 2016. 

At March 31, 2017, Warehouse Purchase Program loans decreased by $208.4 million compared to December 31, 2016 and by $181.6 million compared to March 31, 2016. 

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 $504.0 million at March 31, 2017, down $23.2 million from $527.2 million at December 31, 2016 and up $42.9 million from $461.1 million at March 31, 2016.  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 from declining commodity prices.  At March 31, 2017, "Midstream and Other" loans had a total outstanding balance of $43.1 million, up $4.1 million from $39.0 million at December 31, 2016 and down $20.6 million from $63.7 million at March 31, 2016.

Financial Condition - Deposits

Total deposits at March 31, 2017 increased by $14.2 million from December 31, 2016, with non-interest-bearing demand deposits increasing by $65.7 million and time deposits increasing by $9.5 million on a linked-quarter basis. These increases were partially offset by declines in savings and money market and interest-bearing demand balances, which decreased by $30.8 million and $30.2 million, respectively, on a linked-quarter basis.

Compared to March 31, 2016, total deposits increased by $1.08 billion, which includes growth in all deposit categories.  On a year over year basis, savings and money market deposits and time deposits increased by $453.9 million and $257.1 million, respectively, while non-interest-bearing demand and interest-bearing demand deposits increased by $274.8 million and $90.9 million, respectively, from March 31, 2016.

The Company recorded a provision for credit losses of $22.3 million for the quarter ended March 31, 2017, an increase of $14.5 million from the quarter ended December 31, 2016 and $13.5 million from the quarter ended March 31, 2016.  The increase in provision expense on a linked-quarter and year-over-year basis was primarily due to a $16.4 million charge-off recorded during the first quarter of 2017 on the sale of a note at a deep discount after the borrower experienced liquidity constraints during the first quarter of 2017 that challenged its ongoing viability. This charged-off relationship was part of the Company's corporate healthcare finance portfolio, which is reported on the balance sheet as commercial and industrial loans and totaled $59.7 million at March 31, 2017.  One other relationship in the corporate healthcare finance portfolio totaling $11.4 million was considered to be impaired and rated as substandard at March 31, 2017.  At this time, the Company is no longer originating corporate healthcare finance loans.

The below table shows criticized and classified loans at March 31, 2017, December 31, 2016 and March 31, 2016. 

The allowance for loan losses allocated to energy and corporate healthcare finance loans at March 31, 2017 totaled $18.7 million and $7.2 million, respectively.  Non-performing loans at March 31, 2017 declined by $4.0 million from December 31, 2016, primarily due to an $11.1 million decrease in construction and land non-performing loans related to the resolution of a relationship with a residential home builder.  After various lots and homes were liquidated, paying down the credit facility, the Company foreclosed on the majority of the remaining partially completed homes in the first quarter of 2017, which resulted in a net charge-off of $418,000.

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, 2017 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, 2017 and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will host an investor conference call to review these results on Wednesday, April 19, 2017 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10104965 and will receive a unique PIN, which can be used when dialing in for the call.  This will allow attendees to enter the call immediately.  Alternatively, participants may call (toll-free) 877-513-4119 at least five minutes prior to the call to be placed into the call by an operator.  International participants are asked to call 1-412-902-4148 and participants in Canada are asked to call (toll-free) 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 877-344-7529, Conference #10104965.   This replay, as well as the webcast, will be available until May 19, 2017.

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 44 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.