LegacyTexas Financial Group, Inc. Reports Record Second Quarter 2017 Earnings of $27.9 million

PLANO, Texas, July 18, 2017 /PRNewswire/ -- LegacyTexas Financial Group, Inc. (Nasdaq: LTXB) (the "Company"), the holding company for LegacyTexas Bank (the "Bank"), today announced record net income of $27.9 million for the second quarter of 2017, an increase of $9.7 million from the first quarter of 2017 and $4.7 million from the second quarter of 2016.

"We are pleased to report record net income of $27.9 million for the quarter," said President and CEO Kevin Hanigan.  "We continue to grow our customer base and market share in the Dallas/Fort Worth Metroplex. Our team grew loans and deposits and controlled expenses, resulting in a very strong return on average assets of 1.32%."

Second Quarter 2017 Performance Highlights

• Company assets of $8.97 billion generated basic earnings per share for the second quarter of 2017 of $0.60 on both a GAAP and core (non-GAAP) basis.
• Gross loans held for investment at June 30, 2017, excluding Warehouse Purchase Program loans, grew $144.0 million from March 31, 2017, while total deposits grew $182.9 million for the same period.
• Warehouse Purchase Program loans of $1.26 billion at June 30, 2017, an increase of $409.8 million from March 31, 2017, generated a $2.2 million increase in interest income on a linked-quarter basis.
• Efficiency ratio remained low at 44.96% for the quarter ended June 30, 2017, compared to 44.83% for the quarter ended March 31, 2017.
• Return on average assets for the quarter ended June 30, 2017 was 1.32%, compared to 0.89% for the quarter ended March 31, 2017, and 1.20% for the quarter ended June 30, 2016.
• Interest income on loans increased $814,000 on a linked-quarter basis to $83.9 million for the second quarter of 2017. Excluding the amortization of a $4.7 million discount on a purchased energy loan in the first quarter, interest income on loans increased $5.5 million on a linked-quarter basis.

Core (non-GAAP) net income (which is net income adjusted for the impact of infrequent or non-recurring items) totaled $27.9 million for the quarter ended June 30, 2017, up $10.6 million from the first quarter of 2017 and $4.8 million from the second quarter of 2016.  Basic earnings per share for the quarter ended June 30, 2017 was $0.60, an increase of $0.21 from the first quarter of 2017 and $0.10 from the second quarter of 2016.  Basic core earnings per share for the second quarter of 2017 was $0.60, up $0.23 from the first quarter of 2017 and $0.10 from the second quarter of 2016.

Net interest income for the quarter ended June 30, 2017 was $75.7 million, an $828,000 decrease from the first quarter of 2017 and a $6.4 million increase from the second quarter of 2016.  The first quarter of 2017 included amortization of a $4.7 million discount on a purchased energy loan that was not repeated in the second quarter of 2017.  Interest income, excluding this discount, increased by $5.5 million, which was partially offset by increases in interest expense paid on deposits and FHLB advances of $1.2 million and $795,000, respectively.  The linked-quarter increase in loan interest income was driven by increased volume in all loan portfolios with the exception of construction and land and other consumer loans.  The average yield earned on commercial and industrial loans for the first quarter of 2017 was increased by the above-mentioned amortization of a $4.7 million discount on a purchased energy loan, which positively impacted the average yield on commercial and industrial loans for the first quarter of 2017 by 96 basis points, an impact that was not repeated in the second quarter of 2017.  The average balance of commercial real estate loans increased by $57.3 million to $2.78 billion from the first quarter of 2017, resulting in a $1.3 million increase in interest income, while the average balance of commercial and industrial loans increased by $26.1 million to $2.00 billion from the first quarter of 2017, partially offsetting the 77 basis point linked-quarter decline in the average yield due to the discount amortization discussed above.

The average balance of Warehouse Purchase Program loans increased by $198.7 million to $896.0 million from the first quarter of 2017, resulting in a $2.2 million increase in interest income, while interest income earned on consumer real estate loans increased by $543,000 for the same period due to a $36.0 million linked-quarter increase in the average balance.

Interest income on loans for the second quarter of 2017 included $874,000 in accretion of purchase accounting fair value adjustments on acquired loans, which includes $233,000 on acquired commercial real estate loans, $155,000 on acquired commercial and industrial loans, $19,000 on acquired construction and land loans and $467,000 on acquired consumer loans.  Accretion of purchase accounting fair value adjustments on acquired loans contributed five basis points, four basis points and 15 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the second quarter of 2017, compared to six basis points, three basis points and 11 basis points, respectively, for the first quarter of 2017. 

The $6.4 million increase in net interest income compared to the second quarter of 2016 was primarily due to a $10.5 million increase in interest income on loans, which was driven by increased volume in all loan portfolios with the exception of Warehouse Purchase Program and other consumer loans.  The average balance of commercial real estate loans increased by $365.2 million from the second quarter of 2016, resulting in a $4.8 million increase in interest income.  The average balance of commercial and industrial loans increased by $300.8 million from the second quarter of 2016, resulting in a $4.6 million increase in interest income.  The average balance of consumer real estate loans increased by $123.9 million compared to the second quarter of 2016, leading to a $1.2 million increase in interest income. Despite a $91.2 million decline in the average balance compared to the prior year period, interest income on Warehouse Purchase Program loans increased by $218,000 due to a 42 basis point increase in the average yield earned for the second quarter of 2017, compared to the same quarter last year.

Interest expense for the quarter ended June 30, 2017 increased by $2.0 million compared to the linked quarter, which was primarily due to higher average deposit rates, as well as increases of $50.4 million and $41.1 million in the average balances of savings and money market and time deposits, respectively, compared to the first quarter of 2017.  A $102.2 million increase in the average balance of borrowings and a 13 basis point increase in the average rate paid for borrowings from the first quarter of 2017 resulted in a $790,000 increase in interest expense on borrowed funds.

Compared to the second quarter of 2016, interest expense for the quarter ended June 30, 2017 increased by $5.0 million, primarily due to higher average deposit rates and increased volume in all deposit products.  The average balance of savings and money market and time deposits increased by $537.3 million and $185.7 million, respectively, compared to the second quarter of 2016, while the average rates paid on these deposits increased by 32 basis points and 26 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 second quarter of 2016 by $2.5 million and $1.2 million, respectively.  The average rate paid on interest-bearing demand deposits increased by eight basis points compared to the second quarter of 2016, while the average balance of interest-bearing demand deposits increased by $64.9 million for the same period.  A $365.8 million decrease in the average balance of borrowings from the second quarter of 2016 was more than offset by a 69 basis point increase in the average rate, resulting in a $1.1 million increase in interest expense on borrowed funds.

The net interest margin for the second quarter of 2017 was 3.77%, a 23 basis point decrease from the first quarter of 2017 and a four basis point decrease from the second 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 June 30, 2017, compared to five basis points for the quarter ended March 31, 2017 and seven basis points for the quarter ended June 30, 2016.  The average yield on earning assets for the second quarter of 2017 was 4.42%, a 16 basis point decrease from the first quarter of 2017 and a 17 basis point increase from the second quarter of 2016.  The cost of deposits for the second quarter of 2017 was 0.53%, up six basis points from the linked quarter and up 20 basis points from the second quarter of 2016.

Non-interest Income

Non-interest income for the second quarter of 2017 was $12.3 million, a $195,000 increase from the first quarter of 2017 and a $1.4 million decrease from the second quarter of 2016.  Service charges and other fees increased by $1.5 million from the first quarter of 2017, which was primarily due to a $671,000 increase in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), a $288,000 increase in Warehouse Purchase Program fee income, a $214,000 increase in debit card interchange income, and a $122,000 increase in title premiums.  The Company recognized $2.2 million in net gains on the sale of mortgage loans held for sale during the second quarter of 2017, which includes the gain recognized on $56.4 million of one-to four-family mortgage loans that were sold or committed for sale during the second quarter of 2017, fair value changes on mortgage derivatives and mortgage fees collected, compared to $1.6 million in comparable net gains recorded during the first quarter of 2017 on $39.6 million of one-to four-family mortgage loans sold or committed for sale.  Gain (loss) on sale and disposition of assets for the second quarter of 2017 included a $139,000 gain on the sale of foreclosed properties, compared to a gain of $1.3 million resulting from the sale of a parcel of land in the first quarter of 2017. 

The $1.4 million decrease in non-interest income from the second quarter of 2016 was primarily due to a $1.2 million decrease in other non-interest income and a $1.0 million decrease in gain (loss) on sale and disposition of assets.  Other non-interest income included $642,000 in income recorded in the second quarter of 2016 from insurance activities, which was not repeated in the second quarter of 2017 due to the sale of the Company's insurance subsidiary operations in the second quarter of 2016.  Also, other non-interest income for the second quarter of 2016 included $365,000 in swap fee income recorded on interest rate derivative positions with our customers, with only $2,000 of swap fee income recognized in the second quarter of 2017.  Gain (loss) on sale and disposition of assets decreased by $1.0 million from the second quarter of 2016, primarily due to a gain of $1.2 million on the sale of the Company's insurance subsidiary in the second quarter of 2016, which was not repeated in the second quarter of 2017.  A $969,000 year-over-year increase in service charges and fees, which was driven by a $691,000 increase in commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees) and a $234,000 increase in Warehouse Purchase Program fee income, partially offset these decreases.

Non-interest Expenses

Non-interest expense for the quarter ended June 30, 2017 was $39.6 million, a $163,000 decrease from the first quarter of 2017 and a $24,000 decrease from the second quarter of 2016.  Salaries and employee benefits expense decreased by $1.1 million from the first quarter of 2017, which was driven by a reduction in payroll taxes, as more employees have reached the wage base limit for Social Security tax for the year, as well as increased deferred salary costs related to loan originations that will be accounted for over the lives of the related loans.  These linked-quarter decreases in salaries and employee benefits expense were partially offset by an increase in variable incentives paid as a result of the above-mentioned $56.4 million of one-to four-family mortgage loans that were sold or committed for sale during the second quarter of 2017, as well as an increase in share-based compensation expense related to new stock awards granted at the end of the first quarter and during the second quarter of 2017.  Compared to the first quarter of 2017, advertising expense increased by $362,000 due to a higher number of events and sponsorships during the second quarter of 2017, while regulatory assessments expense increased by $286,000 due to a higher assessment rate in the second quarter of 2017.

The $24,000 decrease in non-interest expense from the second quarter of 2016 was primarily related to a $562,000 decline in other non-interest expense due to lower debit card fraud losses in the 2017 period, as well as decreases in office operations and occupancy and equipment expenses.  These decreases were partially offset by a $524,000 increase in salaries and employee benefits expense compared to the 2016 period, which was driven by additional staff and merit increases, as well as increases in health care costs and share-based compensation expense related to new stock awards granted in the 2017 period. Data processing expense increased by $213,000 compared to the second quarter of 2016 primarily due to increased costs for system upgrades to enhance customer service and increase operating efficiency.

Financial Condition - Loans

Gross loans held for investment at June 30, 2017, excluding Warehouse Purchase Program loans, grew $144.0 million from March 31, 2017, which included growth in commercial real estate, commercial and industrial and consumer real estate loans.  Commercial real estate and commercial and industrial loans at June 30, 2017 increased by $31.0 million and $91.3 million, respectively, from March 31, 2017, and consumer real estate loans increased by $44.9 million for the same period.  These linked-quarter increases were partially offset by a $20.2 million decline in construction and land loans. 

Compared to June 30, 2016, gross loans held for investment at June 30, 2017, excluding Warehouse Purchase Program loans, grew $716.2 million, which included growth in commercial real estate, commercial and industrial and consumer real estate loans.  On a year-over-year basis, commercial real estate, commercial and industrial, and consumer real estate loans increased by $297.0 million, $337.2 million, and $107.6 million, respectively.  These year-over-year increases were partially offset by declines of $11.9 million and $13.7 million in construction and land and other consumer loans, respectively. 

At June 30, 2017, Warehouse Purchase Program loans increased by $409.8 million compared to March 31, 2017 and by $276.4 million compared to June 30, 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 $515.5 million at June 30, 2017, up $11.5 million from $504.0 million at March 31, 2017 and up $26.4 million from $489.1 million at June 30, 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 June 30, 2017, "Midstream and Other" loans had a total outstanding balance of $30.4 million, down $12.7 million from $43.1 million at March 31, 2017 and down $24.4 million from $54.8 million at June 30, 2016.

Financial Condition - Deposits

Total deposits at June 30, 2017 increased by $182.9 million from March 31, 2017, which included growth in all deposit categories. Time and non-interest-bearing demand deposits increased by $83.1 million and $73.2 million, respectively, on a comparative basis, while interest-bearing demand and savings and money market balances increased by $20.5 million and $6.1 million, respectively.

Compared to June 30, 2016, total deposits increased by $939.8 million, which includes growth in all deposit categories.  Savings and money market deposits and time deposits increased by $436.1 million and $134.0 million, respectively, while non-interest-bearing demand and interest-bearing demand deposits increased by $287.1 million and $82.5 million, respectively, from June 30, 2016.

The Company recorded a provision for credit losses of $6.3 million for the quarter ended June 30, 2017, a decrease of $16.0 million from the quarter ended March 31, 2017 and $545,000 from the quarter ended June 30, 2016.  The decrease in provision expense on a linked-quarter 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 $44.1 million at June 30, 2017. At this time, the Company is no longer originating corporate healthcare finance loans.

The below table shows criticized (rated "special mention") and classified (rated "substandard" or "doubtful") loans at June 30, 2017, March 31, 2017 and June 30, 2016. 

The allowance for loan losses allocated to energy and corporate healthcare finance loans at June 30, 2017 totaled $24.6 million and $4.7 million, respectively.  Classified loans at June 30, 2017 declined by $8.9 million from March 31, 2017, while a $33.7 million decline in classified energy loans drove a $33.4 million decrease in classified loans compared to the same period last year.

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, 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 June 30, 2017 and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will also host an investor conference call to review the results on Wednesday, July 19, 2017 at 8 a.m. Central Time.  Participants may pre-register for the call by visiting http://dpregister.com/10110220 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) 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 #10110220.   This replay, as well as the webcast, will be available until August 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.