U.S. Markets closed

Edited Transcript of LTXB earnings conference call or presentation 19-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 LegacyTexas Financial Group Inc Earnings Call

Plano Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of LegacyTexas Financial Group Inc earnings conference call or presentation Wednesday, April 19, 2017 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* J. Mays Davenport

LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank

* Kevin J. Hanigan

LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank

* Scott A. Almy

LegacyTexas Financial Group, Inc. - COO, Chief Risk Officer, EVP, General Counsel, COO of LegacyTexas Bank, Chief Risk Officer of LegacyTexas Bank, EVP of LegacyTexas Bank and General Counsel of LegacyTexas Bank

================================================================================

Conference Call Participants

================================================================================

* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Brady Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Christopher Whitbread Nolan

FBR Capital Markets & Co., Research Division - Analyst

* Joseph Anthony Fenech

Hovde Group, LLC, Research Division - Co-Head of Research

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD, Equity Research

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Riley Manuhoa Stormont

D.A. Davidson & Co., Research Division - Research Associate

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the LegacyTexas First Quarter 2017 Earnings Call and webcast. (Operator Instructions) Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Scott Almy. Please go ahead.

--------------------------------------------------------------------------------

Scott A. Almy, LegacyTexas Financial Group, Inc. - COO, Chief Risk Officer, EVP, General Counsel, COO of LegacyTexas Bank, Chief Risk Officer of LegacyTexas Bank, EVP of LegacyTexas Bank and General Counsel of LegacyTexas Bank [2]

--------------------------------------------------------------------------------

Thanks. Good morning, everyone, and welcome to the call. Before getting started, I'd like to remind you that this presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement.

At this time, if you're logged into our webcast, please refer to the slide presentation available online, including our safe harbor statement on Slide 2. If you're joining by phone, please note that the safe harbor statement and the presentation are available on our website at legacytexasfinancialgroup.com. All comments made during today's call are subject to that safe harbor statement.

I'm joined this morning by LegacyTexas' President and CEO, Kevin Hanigan; and Chief Financial Officer, Mays Davenport. After the presentation, we'll be happy to answer questions that you may have as time permits. And with that, I'll turn it over to Kevin.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [3]

--------------------------------------------------------------------------------

Thanks, Scott, and thank you all for joining us on the call today. I will make some brief comments on the quarter, and then walk us through most of the slide deck. While Mays is here and will be available for the Q&A session, we plan to skip a few of the slides he normally covers and try to stay on the topics of the day, thus leaving more time for your questions.

As you probably saw in our earnings release, an otherwise outstanding quarter was overshadowed by a single healthcare-related credit event and the resulting provision for credit losses. While this is certainly disappointing for all of us, our team worked hard to grow loans in the quarter by $200 million, grow our revenue despite a $3.1 million decline in warehouse interest income and continue to be disciplined in expense management. This combination of higher revenue and prudent expense management led to an all-time best efficiency ratio of 44.8%.

On the healthcare front, we have $57 million of remaining corporate healthcare loans, and we no longer are originating loans in this space.

Let's turn our attention to Page 4 of the slide deck. As you can see, we continue to have outstanding deposit market share statistics in both Collin County and DFW. GAAP net income for the first quarter totaled $18.2 million or $0.39 per share, and core EPS was $0.37. Our loans grew right at $200 million, which is the number we talked about on our last call. Our provision for expense -- or our provision expense was materially elevated at $22.3 million, which included a $16.4 million charge-off on a large syndicated healthcare credit. Notwithstanding this disappointing event, our total criticized loans actually declined by $76.4 million from last quarter, including a $62.1 million decline in criticized energy loans. Our nonperforming loans declined by $4 million in the quarter.

On Page 5, we reiterate our $200 million worth of loan growth, or 3.3% on a linked-quarter basis. Interest income grew 3.3% linked quarter, and noninterest expense grew only $300,000 over Q4 of 2016. Our net interest margin was at an all-time high of 4%, aided by the accretion of the discount on an energy loan we bought at a discount in Q4 of 2016. We can cover the NIM in greater detail in the Q&A.

Page 6 provides information on the exceptional growth in our loan portfolio and the diversity of the asset classes we finance. Our loan growth of $200 million for the quarter was centered in CRE, which grew $116 million; C&I, which grew $57.2 million; and consumer real estate, which grew at $34.5 million.

Pages 7, 8 and 9 are our standard slides that cover our energy portfolio, which now consists of $504 million of reserved-based energy loans, that's down $23.2 million from year-end, plus midstream loans of $43.1 million. The portfolio consists of 51 reserve-based borrowers and 4 midstream borrowers, and about 73% of our loans are backed by private equity firms with significant capital invested and additional equity commitments available to our borrowers.

On Page 8, we disclosed our borrowers are well-hedged, particularly our gas reserves, which are very well hedged through 2019. 46% of this portfolio is syndications purchased. 42% are direct loans made by us, and the remaining 12% are SNCs led by us.

On Page 9, you can see, while we had a slight uptick in energy nonperforming loans, our total of criticized and classified energy loans has trended down very nicely.

Turning to Page 10. We highlight our Houston CRE portfolio, which now totals $475 million, $84 million of which is in the energy corridor.

Just a quick reminder, we play in the Class B office space, the Class B retail space and, generally, in the Class B or C multifamily markets. Our LTVs in this portfolio are in the low 60s, leaving us with -- leaving these loans at a very low price-per-square-foot basis. As you can also see, our weighted average debt service coverage ratio for the entire CRE -- Houston CRE portfolio is 1.59x, and it's just slightly worse than the energy corridor at 1.56x. These coverages are down very slightly from last quarter, when the total Houston CRE portfolio had a debt service coverage ratio of 1.68 and the energy corridor was at 1.57. Thus far, our Houston CRE portfolio has, as we expected, continued to perform very well.

Let's skip forward to Slides 14 and 15, which cover asset quality. I'll give you all a moment to turn there.

On Page 14, you can see we had a slight drop in NPAs divided by loans held for investment and OREO, which now stands at 1.93%. On the charge-off chart, you can see we have historically had very low levels of charge-offs, with the spike in Q1 driven by the healthcare charge-off previously discussed.

On Page 15, we can show slightly better news as we depict our fourth consecutive quarterly decline or improvement in total criticized and classified assets. The other thing I'll point out is our classified assets are centered in our energy portfolio, which has $544 million of total outstandings, and our healthcare portfolio, which now stands at $59 million.

The loans in these asset classes or the total loans we have in these asset classes are just over $600 million, yet house $99 million of our $140 million of classified loans. In the remainder of our loans held for investment, which totals nearly $5.7 billion, we had just $41 million of classified loans. Outside of energy and healthcare, the credit metrics for the overwhelming majority of our loan portfolio are very, very good. As for energy, many, including ourselves, believe the industry is in recovery mode after 2 rough years. As you saw earlier, our classified loans in energy have shown some improvement over the last couple of quarters.

As for healthcare, we got into the business in the summer of 2015 to further diversify our revenue sources. Despite our best intentions, our entry into healthcare lending has been very, very disappointing. As such, we elected to shut down our corporate healthcare group in the first quarter.

Before we open it up for questions, just a quick note on our nonagented SNC portfolio. Outside of energy, our SNC portfolio consists of $354 million or 5.4% of our nonenergy loans held for investment. All but one of our nonenergy SNC portfolio, which includes 20 names, are located in Texas and/or the ownership sponsorship is in Texas. We tend to do smaller overall deal size transactions. And in fact, I would characterize most of these deals as being more clubby than syndications. With that, let's open it up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Michael Rose of Raymond James.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [2]

--------------------------------------------------------------------------------

All right. Just help me understand. So I understand that -- the healthcare credit this quarter, but this comes on top of kind of the 4 credits last quarter. I understand 2 are energy. One was another health care credit that -- we'd like an update there, and then understand the homebuilder credit, which you're largely out of at this point. Just help me understand why you don't believe that these kind of one-off credits are something symptomatic of something more systematic, and just maybe how you're stress-testing the portfolio now, and maybe how comfortable are you with reserve levels at this point, which look like, on a reserve basis, came down 2 bps to about 1.08% ex the warehouse.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [3]

--------------------------------------------------------------------------------

Thanks, Michael. Good question. As you said, we had a couple of credit migration events in the fourth quarter as well, followed by this one. The first point I should make is, in the fourth quarter, we did have a healthcare -- as you mentioned, we had a healthcare deal, a couple of energy deals and a homebuilder. This is a different healthcare client, so we still have that one in the fourth quarter that we're dealing with. Let me talk about the ones from the fourth quarter. The healthcare client in the fourth quarter now is on a pretty good path to resolution. They've made substantial progress in the first quarter, not enough progress to take it off the substandard nonaccrual status, but it is moving in the right direction. It probably is going to take between now and the end of the year to get it rightsized. I think back in the fourth quarter, I said that they own 3 hospitals. They now own one. So they've shuttered one, collected out the receivables on that. That was down in Houston. They sold their hospital in El Paso, which gave us a principal reduction. And their best operating asset, which is in San Antonio, they're rebuilding the company around that asset and the doctor group associated with that hospital. So I think that one's pointed in the right direction. We have greater clarity on that, just not enough to have upgraded it at this stage of the game. The homebuilder, which at the end of the fourth quarter was $12.5 million, I indicated on the fourth quarter call we would make substantial progress on that credit in the first quarter and probably get out of it or almost all the way out of it by the end of the second quarter. The $12.5 million, we got $9 million worth of paydowns in the first quarter on that thing. So largely out of that credit -- actually, we are out of that credit. Plus, in a friendly transaction, the borrower handed us over the remaining assets in the first quarter of the year. So that one's down to about $3.5 million. And that $3.5 million consists of 3 remaining lots, 5 partially-built homes and 1 completed home. We have a contract with one of our other borrowers in the homebuilding space to complete those other 5 homes. We make progress on that one every day. In fact, we've continued to make progress. Those numbers I just gave you were as of the end of the third -- or first quarter. We've made progress here in April. I don't know that we're fully out of this by the end of the second quarter, but we're going to be awfully close as we enter the prime home-buying season here. We've got to get these houses finished and sold, and we're working every day on getting that done. The remaining portion of that credit, since the assets were handed over to us, or our OREO at this stage of the game, we brought them onto the books at about a $400,000 discount to the true loan value because of the unbuilt or the unfinished homes. As you put a mark on those, if they're unfinished, they don't have a ton of value until you get them finished. That doesn't mean we think at the end of the day we lose $400,000 on this. If we lose money on this, it will be because we blow out a house or 2 at the end, if it's not moved by the end of the prime homebuilding season. But at this stage of the game, we don't see a big loss, maybe maximum of $100,000 or $120,000 possibly on that if we had to blow out a house, and less if we're more patient about how we go about it. So we made some progress. And as we look across the portfolio, the other things we've done, we've looked at all of our healthcare loans. As I said, the total's right at $58 million. It's $58.516 million at the end of the quarter. We've made some progress on some paydowns in that portfolio. As I said, the hospital had sold up in El Paso. We've gone through that entire portfolio. Other than that one credit that was the fourth quarter credit, the rest of them are all pass credits. They all look to be performing pretty well at this stage of the game. We did elect to get out of the business. A, we've had a bad experience, right, between the fourth quarter event and the first quarter event. And it's just a business with a stroke of the pen that cash flows for certain companies in the business can change materially. Whether we do a repeal and replace, or whatever it may be, we just concluded we're not smart enough to pick the winners and losers in that space and don't want to be burdened with thinking about the stroke of the pen changing the nature of the cash flows of our underlying borrowers. So we're just out of the space going forward. As it pertains to the rest of the portfolio, yes, we had a really -- the feeder stock for problem loans, and for losses as a result of problem loans, are your criticized loans, the ones that haven't gotten to the substandard status yet. There are other assets especially mentioned. So it's a grade better than substandard. We made really big progress on that in the quarter, down some $60 million, $65 million. And the remaining portion of that portfolio in terms of the feeder stock is sitting today at 100 -- or sitting at the end of the quarter at $103 million, $72 million of which is in the energy space. All of those energy loans are more likely to be upgraded than downgraded at this stage of the game. So -- and some of them more quickly than others. I think we'll have very substantial progress on those that we'll report about in the second quarter, based upon some things that are going on within the portfolio. So as we look at that, I think that $103 million of feeder stock is going to go down substantially. And whenever the feeder stock's going down, you just have less likely things to bleed into the substandard category. So I do think this is isolated. Now what would cause me to think it's not isolated? If I sit here today as a CEO and say, "I think it's isolated. We had a one-off event," and 25 other CEOs get on calls in the course of the next couple of days and say they have one-off events, well, that probably isn't a one-off event. I think we will all have to recognize that would be a change in credit. So far, I don't think I've heard or seen that, although I don't listen to the number of calls you do. But our view here is we got a really bad-event bias, okay? It's a bad credit. It was not a bad credit decision maybe at the time we made it, but it turned into a bad decision. And for a bank of our size, a loss of $16.4 million is a bad, bad day. It's disappointing, it's embarrassing, but I do think it's behind us. I think the company, as we look at the remainder of the year, we're optimistic about the remainder of the year. This has taken our return metrics at 85 basis points on assets down to the 50th percentile, while we got used to operating at the 90th percentile. As we look at the rest of the year and what we think, based upon what we know today, we think we get our return statistics back up into the 75th percentile of the entire industry. So we're kind of optimistic about how we feel about the business going forward for the rest of the year. And I don't think that's -- we're not being Pollyannaish about it. I think we've scrubbed through these portfolios. We've looked at the entire healthcare portfolio. We've looked at all our SNCs, and we just don't see the next wave of things coming. In fact, we see the next wave, just based upon that OAEM credit decline in those numbers, the next wave, just it seems to be going the other way for us. So the proof will be in the pudding. We clearly understand we got to execute and put up a good second quarter and third quarter to prove it. And we fully intend to do so.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [4]

--------------------------------------------------------------------------------

Kevin, that's great color. Maybe just following up on the returns that you talked about. Clearly, the warehouses just kind of weigh on that. This quarter, obviously, warehouse balances on average were down more than expected. But I don't think that's out of line with what we've seen in other warehouse lenders so far. But the held-for-investment growth was spot on with your guidance. Any initial take at either next quarter or the rest of the year for trends, both in loans ex warehouse and then on the warehouse average balances?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [5]

--------------------------------------------------------------------------------

Yes. I think as we talked about last quarter, the warehouses, I think after many, many years of being supported by the refi boom and what is typically the more seasonal periods of that business, which is the first and the fourth quarters, I think we're back to a seasonal business, where the first quarter was weak, and it was weaker than we thought. I think on average, we are down almost $400 million. We were thinking it might be $200 million. And part of the way through the quarter, I think it was -- we were hoping it would only be $300 million, but it ended up being $400 million. It's rebounded. As you can see, the quarter-end number was up substantially from those kinds of numbers. So we are entering the homebuilding season. The portfolio has always been heavily skewed towards purchase. Although I will tell you in the first quarter, it was 68-32, 68 purchased, 32 in refi. The other thing that happened in the first quarter is because so much volume was taken out of the business, everybody got more efficient in processing the mortgages that were coming through on warehouses. And our gestation period went from 17 days to 13 days. So it's kind of a double whammy, volume being down, and the volume that was there could move through the system faster. It was getting turned more than twice in the course of a month. I think that rebounds here in the second quarter. We're pretty optimistic on the business in terms of the second and third quarter. I think the fourth quarter is likely to look more like the first quarter than any other quarter in the past. So I think we get a rebound there. And probably, the days that it gestates lengthen out too, as more volume comes into the marketplace.

--------------------------------------------------------------------------------

Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD, Equity Research [6]

--------------------------------------------------------------------------------

Any sense on the held-for-investment portfolio, just kind of core loan growth would we expect (inaudible) levels...

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [7]

--------------------------------------------------------------------------------

Yes. It's early in the quarter. We had a couple of paydowns early. So we started off in a negative number. As I typically do, the evening before these calls, I get almost all of our lending team in a room for a couple of hours and talk about credit, talk about where we sit, get input on all lines of business so I'm prepped for this call. The sense in that room is pipelines look pretty good, and it wouldn't surprise me if we put up another quarter of $200 million. I think that's our best guess at this stage of the game. It could be slightly better or worse, depending upon some payoffs. But based upon what we know today, Michael, I think we'll replicate the first quarter in terms of the book of business outside of the warehouse.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from Brady Gailey of KBW.

--------------------------------------------------------------------------------

Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

--------------------------------------------------------------------------------

So one more on the healthcare loan. What was the par amount of that loan? I'm trying to figure out what the severity percentage was.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [10]

--------------------------------------------------------------------------------

You're going to hear different numbers from different people. It was a $175 million credit. There's several, several banks in the deal. And the reason you'll hear different numbers is they assume some non-funded portions of the loan. There were some letters of credit out backing leases, but the note buyer assumed those letters of credit. So we "covered" those. So some might give you a number on the outstanding debt. I think, overall, they paid about $0.13 to $0.15 on the dollar, depending upon how you want to mix it. So severity was high because it was largely an enterprise-value loan.

--------------------------------------------------------------------------------

Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

--------------------------------------------------------------------------------

Okay, all right. And then, yes, the margin, we saw the big benefit from the energy loan that you all purchased at a big discount. Can you just remind us when that expires or when that benefit will go away, and kind of what the forward run rate should be for the margin for the rest of the year?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [12]

--------------------------------------------------------------------------------

Yes. Mays has done some work on that. I'll let him cover it.

--------------------------------------------------------------------------------

J. Mays Davenport, LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank [13]

--------------------------------------------------------------------------------

Yes. Brady, we had $4.7 million of discount that we recognized in the first quarter, and that was 100% of what was remaining going into this year. That loan in the first quarter was re-underwritten and renewed. And when you do that, you actually go ahead and take in the full discount. So while that loan had -- originally had a maturity in May, we did that early, so there is no more remaining discount for that loan to be recognized in the second quarter. So from a NIM perspective, you can exclude that 24 basis points that we had in the first quarter when you're looking to the second quarter.

--------------------------------------------------------------------------------

Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [14]

--------------------------------------------------------------------------------

So Mays, you think somewhere kind of in the mid-3.70s is a good forward run rate?

--------------------------------------------------------------------------------

J. Mays Davenport, LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank [15]

--------------------------------------------------------------------------------

I do. If you look at the accretion that we've had on the purchase loans, it's been running anywhere between 4 and 7 basis points for the last 5 quarters. So I would expect that to be in that same range. And I think we actually picked up a couple of basis points from the rate increases, not much, but a couple of basis points. So I do see that number staying in that mid 3.70% range. Another thing that we had, I think I mentioned on the fourth quarter call, was some excess liquidity that we had built up during the fourth quarter. We've been able to bring that number down and also move that liquidity into some higher-yielding vehicles. So that helped our NIM as well, and we'll see that continuing in the second quarter.

--------------------------------------------------------------------------------

Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [16]

--------------------------------------------------------------------------------

All right. And then finally, Kevin, each quarter, you get closer and closer to $10 billion. My model has you crossing at some point next year. Can you just give us an update on kind of how you are preparing for that $10 billion cross?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [17]

--------------------------------------------------------------------------------

Yes. I mean, we have been working on DFAST and everything else related to it as well as strategies to crash through it, if you will. And I've also said in the past, we're totally comfortable if we just walk through it, if we don't find something that helps us materially bust through it. We're not going to do a bad M&A deal just to crash through $10 billion. Our cost of going through $10 billion, we've said in the past, is pretax $7.5 million. After tax, it's about $5 million. So it's $0.10 a share. I think once we return ourselves to our more normal operating statistics outside of this quarter, we can still be a top-tier performing bank, and I mean top-quartile-performing bank, if we go through it alone. We have slow-played a little bit, Brady, the cost of finishing out DFAST. We're still working on some of those things. But to the extent that a regulatory change comes about, we have slowed down a little bit on the modeling side of things, still pressing forward, but pushing some of the costs off into later periods.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Michael Young of SunTrust.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [19]

--------------------------------------------------------------------------------

I wanted to start on the deposit side, obviously a little slower growth this quarter than what we've seen kind of in the past last year. I just wanted to hear your thoughts on maybe the environment in general and kind of Dallas and Texas and the competitiveness, and then as well as any specific efforts that you all have this year to increase funding.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [20]

--------------------------------------------------------------------------------

Yes. And as we measure it over a year, it doesn't look nearly as bad as the first quarter. The first quarter is -- it really is seasonally a quarter where deposits are down. You've got tax payments. You've got housing tax payments or real estate tax payments and other things that impact it. So we're down. We never really had a good first quarter. Truth be known, if we look at it intra-quarter, we sat in the very room I'm sitting in today in an ALCO meeting, and with 40 days left in the quarter, our deposits were down $300 million. And it was the result of our corporate clients paying out bonuses. And some of them have had outstanding, outstanding years, so there was some big bonus dollars that blew out of here every Friday for the month of -- the last couple of weeks in January and all of February. And then you had our retail clients paying out their property taxes, so a very nice rebound for us in the month of March. And I think we get back to growing the deposit base more consistent with our loan growth for the rest of the year. It is a competitive market. We've got 1 or 2 banks. And it only takes 1 or 2, especially if they're of size, that are willing to pay 1.15% on a money market account, maybe with some conditions, maybe without. They impact everybody in the market that is out there trying to attract deposits. So we have -- we've dealt with that by having an upper tier to our money market account where people -- where the deposit amount was $5 million or above. We try not to let that get above $25 million. We've had some real success in that account, but we're paying somewhere between 75 and 100 basis points on that account. As we look across the money market category in general, Mays, we probably have a 72 basis point [ rate ] on that?

--------------------------------------------------------------------------------

J. Mays Davenport, LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank [21]

--------------------------------------------------------------------------------

That's what we have in our model.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [22]

--------------------------------------------------------------------------------

So that's become much larger for all of us. It's become a much larger component of our deposit base. So I think they're going to come. They're going to come at a cost. But as Mays said, we think we can hold our own NIM here going forward.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [23]

--------------------------------------------------------------------------------

Okay, great. And maybe just going back to the healthcare portfolio one more time. You said you've reviewed the rest of the remaining loans in there. I know it's small as a percentage of the total balance sheet. But are there certain differences between the credit that went bad this quarter and the rest of the portfolio to give you confidence there? Or maybe you could just talk a little more about that.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [24]

--------------------------------------------------------------------------------

Yes. Some of them are not in the healthcare providing side of things. They're supply companies, so -- and with substantially more collateral associated with them. The issue here was if we did something wrong, it was a big credit commitment to what I would call a big enterprise-value loan. There's not a ton of collateral to liquidate as a secondary source repayment. And Michael, usually, when we do any kind of EV loans, and I'll comment on that in a minute, we try to keep leverage down, both -- senior funded debt-to-EBITDA down below 2x. And on a company like this, it can screen as low because they lease most of their facilities. But if we were to take that, and we did at the time, and multiply the rents times 6, and put that in there as senior debt, and put rent in the denominator, this was a 3.75-er. And so it was a real outlier compared to the rest of our portfolio in terms of true operating leverage on this business. Notwithstanding that, this thing did have a $2.4 billion market cap. It's a publicly traded company -- or was a publicly -- is a publicly-traded company at the time of underwriting, and it was doing just great. A series of things changed that. They outsourced their receivables, and the collections through the outsourcer was not very good. They didn't do a very good job of it. They were expanding too fast, so spending cash for new facilities and opening those up and suffering the working capital loss that comes out of opening up a new facility. And they were in partnerships with hospitals, generally speaking, 51%-49% partnerships, and the hospitals were unwilling to bear their 49% share of the working capital. Man, when all that dries up all at once, that creates a cash flow problem beyond what they could deal with. So the rest of the portfolio is 9 names. We've gone through it. It just doesn't -- again, outside the one we're dealing with, and have been since the fourth quarter, it looks okay to us. We're in one other credit that's in a similar business, but operates a vastly different business model. We look -- obviously, we look very hard at that one, and we're confident it's still performing well. The other thing we've looked at was what I would call under-collateralized or what I say is some portion of it is an enterprise-value loan. We have $126 million of those across the entire portfolio, and we looked at every one of those. And this one differed because of all the leverage it had. Again, we got outside of our skis in terms of what we normally would do in terms of senior funded debt-to-EBITDA. All of those credits are pass credits at this stage of the game. We have gone through them in great detail. More than half of that, there is substantial collateral. And when we say under-collateralized, let me define that. We looked at every deal where we took margin collateral relative to debt, and there wasn't enough collateral to cover the debt. And by margin collateral, we took 80% of accounts receivable, 50% of inventory, 80% advance on any real estate we might have and said, "That's our margin." So we've built in a margin to that. And how many loans do we have in the book that are not covered by margin collateral today? And that's $126 million. And most of those have substantial levels of collateral, they just don't fully margin the loans. That's how those are different from this one, if you will, Michael. I think we've scrubbed this from every possible angle we could scrub it at. We scrubbed every SNC in the bank, and there's not that many of them. We got a total of 20 names or so, outside of the energy book. And most of those, 10 of those, 11 of those are in DFW. Almost all of them are in Texas. There's a couple of them where we've gone outside of Texas, but that's with a family office that's located here. So it's not like we're out buying SNCs just to buy paper. There's nexus to Texas, if you will, in our SNC portfolio. I'm not sure what else we could've done to scrub the portfolio. You can always, always do more or spend more time on it, but I think we have really taken a hard look at what we're doing here. And this loan has caused us to go back and look at a lot of things with a critical eye, and I think we've done that.

--------------------------------------------------------------------------------

Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - Associate [25]

--------------------------------------------------------------------------------

Okay. And if I can ask just one more on the M&A side. You've talked about the 3 buckets, and I just kind of want to meld that with you're not seeing -- you think this is an isolated credit incident. But if you do start to see more CEOs talking about one-off credit events, does that change your thinking between those 3 buckets?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [26]

--------------------------------------------------------------------------------

No, I don't think that changes our thoughts on M&A. It may change thoughts on M&A pricing, right, going forward and things of that nature and how much due diligence you do on somebody's asset quality, but it wouldn't change your thoughts about doing M&A necessarily. You've got to do the due diligence. And if it proves out to be reasonable and the economics of the price are reasonable and the earnbacks are reasonable and the accretion's reasonable, people still do it. What it does cause would be, as we sit in the room every Thursday morning and approve credits that are above $2 million, I think we get a little tougher down at the -- our left-hand side of the table, where the 5 of us who approve these things take a harder look at stuff. I think you get enough one-offs, that's not a one-off anymore. That's a trend. That's more systemic, and you have to believe that becomes the beginning of a credit cycle.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question comes from Brad Milsaps of Sandler O'Neill.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

--------------------------------------------------------------------------------

Kevin, I appreciate the additional color on SNCs outside of energy. But just curious, how many loans in your portfolio would you say would be of the size of this healthcare credit, maybe in excess of $15 million or kind of whatever number you want to pick there, what you would consider sort of larger exposure, maybe $15 million or above?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [29]

--------------------------------------------------------------------------------

I don't have that number, Brad. I'm more than happy to run a screen and get it out to everybody. Most of those kind -- look, this is an outsized number for us in our traditional C&I portfolio. We generally play at less than $10 million. $15 million is a big number. $20 million is as big as we ever get in our basic C&I space. The credits in the bank that are above $20 million are in the oil and gas portfolio and the warehouse portfolio. And most of those are above $15 million. So there's 43 names in the warehouse portfolio, and there's about a similar number of names in the energy portfolio. And the reason we have allowed higher hold levels in those 2 things are those are 2 -- at least historically, 2 extremely low loss-given default asset classes. So those are the asset classes where we're willing to take on a bigger number. In middle market, look, loss-given default can be higher. Even if you have collateral, liquidating receivables and inventory is a tough business. Or an office building -- not an office building, a plant or something of that nature, steel, equipment, those are all things that are tough to liquidate. So we generally try to keep the exposures in that line of business smaller. The only line of business, Brad, I haven't talked about is real estate, where I think you all know our loss-given default in our structured real estate product has been sub-10 basis points on a cumulative basis over a 13-year period of time. We do have relationships in our real estate business that top $50 million, $60 million, $70 million -- I think that some of the top ones are close to $80 million, but no single product or project. Do -- we rarely take a project that's over $25 million. Do we have some on the books? We do, but we generally sell down the exposures over $20 million on a single project. So all that means is we might have 3 or 4, sometimes 5, 6 projects to a single borrower, all under separate SPEs, or special purpose entities, that are just partnerships where you have different equity, and all subject to having their own unique cash flows and underwriting. So while we have relationships in that line of business that are above $20 million, it's a really rare loan that's above $20 million. And if it is, it's usually in the process of being sold down. And by the way, we have no SNCs in that portfolio, so what we sell down, it's usually to a single source.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [30]

--------------------------------------------------------------------------------

Okay, great. That's helpful. And maybe just switching gears to the income statement. I know seasonally the first quarter can be tough for fees. The mortgage stuff is pretty straightforward. You also talked about lower prepayment fees. Also curious, how much of an impact the lower warehouse had on file fees, and kind of your forecast maybe for those numbers may be bouncing back. Any initiatives there kind of as you move through the year?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [31]

--------------------------------------------------------------------------------

Yes. The file fees are driven by, obviously, the number of files we touch. We get a fee on the way in and a fee on the way out. The average fee in the quarter was $46 per client or per file. And what's odd about the volume in the first quarter, Brad, was the number of loans we touched in the fourth quarter of last year was 21,000. It was actually 20,855. The highest we've ever touched was in the third quarter last year, almost 24,000 files we touched that quarter. We still touched 19,489 files in the first quarter. So the file count wasn't that far off. The big difference, as we look across the statistics in that portfolio over really long periods of time, our average loans have been up in the $275,000 to $290,000 range, the average-sized loan that's populated in that portfolio. And in the first quarter, that number came down pretty substantially. The average loan was $235,000. So when you just look at the warehouse in general, you would've thought the fee income off of that would've been down a lot more than it actually was. But that -- again, it's driven by the number of files, and we touched almost the same number of files as we had touched the previous quarter.

--------------------------------------------------------------------------------

Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [32]

--------------------------------------------------------------------------------

No, that's interesting. Maybe last one for Mays. You guys have done a great job in the last 4 or 5 quarters on expenses. Anything else that you can kind of push lower there? Or is this a pretty good run rate as you think about 2017?

--------------------------------------------------------------------------------

J. Mays Davenport, LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank [33]

--------------------------------------------------------------------------------

Yes. I think on the fourth call, I said I thought this would be the quarter where we went over $40 million in noninterest expense. And obviously, we kept it right below that. Your first quarter, you typically have a couple of things going against you. One is you've got merit increases that are across the board, salary increases. You also have payroll taxes starting over. So you pay bonuses in February, and you have all your higher-paid officers and executives, employees starting over on payroll. So that's usually a big hit. So those were partially offset in the first quarter by lower health insurance costs. And if you remember, the fourth quarter was really high in costs there. So you will see a reduction in the second quarter in payroll taxes. So those will come down. Flat pretty much on salaries. We don't see adding any substantial headcount in that, and then, hopefully, the insurance costs will stay lower. So I think we should be stable in salary expense, if not benefit a little bit from the lower payroll tax in the second quarter. We continue to do well with the debit card losses. Those have been very, very small compared to where we were at this time. We also saw a little bit of pickup in the first quarter from some reversal of regulatory assessments that we've noted in the earnings release. Those were down in the first quarter. That was a little bit of just adjusting for accruals we had last year that were at higher rates than actual assessments were. So I think we're going to drift up here from here, maybe to $40.5 million, mid $40 million. I don't see anything really substantial that we're going to see that would lead that down, other than payroll taxes coming down. We do have in the plans, as Kevin's talked about probably the last several quarters, of continuing to look at facilities. And where we have opportunities to close some underperforming branches, we will, which will save some money. One thing we did is we actually moved some of our officers into a new location in the first quarter. That saved us a few hundred thousand dollars on lease expense. So that helped, but I don't necessarily see anything else that's going to reduce that. My goal has been to keep it pretty flat. So if we can scale up the bank and keep our expenses where they are, I feel that's a win. And that's what I've been working hard to do.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question comes from Brett Rabatin of Piper Jaffray.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [35]

--------------------------------------------------------------------------------

I wanted to, I guess, go back to credit one more time. You've obviously done a really deep scrub and looked at everything. I'm just curious on 2 items. One, you mentioned the 20 SNC names, 11 in DFW. Is there any specific industries that you would call out as being more prevalent in the remaining SNCs that are nonenergy? And then I wanted to just go back to the enterprise-value loans, I think $126 million, just kind of going back to what gives you confidence that you wouldn't see any other leakage in the rest of that portfolio?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [36]

--------------------------------------------------------------------------------

Sure. I wouldn't say there's any concentration in the nonenergy SNC portfolio. It's a little bit of everything. And again, most of it's in Texas. Most of it's backed by a family office or private equity firm here. And I'd say, out of those 20 names, the agent for half of those is a larger bank. One of the 2 -- it's the 2 larger banks to us in the marketplace here that play in that market. So I call them kind of clubbier deals. As I look across that portfolio, there's only 3 of those credits with a global credit commitment. That is the commitment of all the banks combined in the syndication. There's only 3 deals out of those 20 deals that are over $150 million. So I characterize them as clubby and diversified as a way to nail them down. On the EV loans, as I look across the average of that portfolio, it comes close to a 2x senior funded debt-to-EBITDA. So we're not as far out over our skis, if you will, in terms of cash flow leverage. And there's a really big part of those -- and that's a tough screen, if you will, to say that on a margin collateral basis, that I want to see everything that doesn't have itself covered on a margin collateral basis. That's a fairly rigorous screen to only come up with $126 million. There's a bunch of those that are doing really well, and we might have a shortfall in collateral coverage of 15% or 20%, not 85%. Is there 1 or 2 others? There's one other that has a more substantial collateral shortfall. It's probably an 80% kind of number. We don't have a big exposure to it. It's doing really fine. If I had my druthers, I'd be out of that credit given the experience we just had, and we're going to work to see if we can find our way out of the credit. I've had about all the pain I can stand on EV value lending. So if there's one thing that's going to change around here, it's our approach towards that.

--------------------------------------------------------------------------------

Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [37]

--------------------------------------------------------------------------------

Okay, that's great color. And then the other thing I was just hoping to talk about was the $200 million you kind of talked about for 2Q. Is that going to also be a little more concentrated in commercial real estate? Or just any thoughts on the segment growth? And then yields, what are you seeing in terms of -- with a little higher rates, is that helping the origination rates that you're looking at?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [38]

--------------------------------------------------------------------------------

To the first part of your question, it's pretty well diversified between C&I. And in C&I, I've got all of our buckets, which include insurance, which include oil and gas, and then our just blocking-and-tackling C&I. I think it's pretty well balanced between C&I and commercial real estate in terms of what we've got in the pipeline, with a smattering of consumer. We always have some single-family mortgages, for the most part on the consumer side. We're booking that in our backyard, originated by our team. We're not out there buying that stuff. It's -- and the stuff we're holding on our books is generally ARMs. They're 7/1 or 10/1 kind of ARM products. So we're not taking the interest rate risk or much interest rate risk on those efforts. So it's pretty well balanced, Brett. In terms of yields, we were seeing some improvement in the yields as I anticipated in the real estate book, as fewer and fewer banks are originating because they're concerned about 100 or 300. Or they're beyond concerned. They've been told to slow down by a regulator. So we saw some improvement there. And again, a lot of our commercial real estate of that structured product, where we do a 5-year fixed rate nonrecourse low-LTV loan, it's been so, so successful for us. When the 10-year got to 2.6%, we were feeling pretty good, and we were getting some really nice yields out of that. Now that we've backed up again to 2.20%, I think, and yesterday I think we spent a little time below 2.20%, I'm not so sure we're going to hold our own if that stays where it is. We're certainly hopeful for all of our cases that we get a little more positive slope to the yield curve, which will allow us to get some better yields out of commercial real estate portfolio. Holding our own in C&I, if you'll look in the queue, where we have weighted average coupons in the back, that was bloated, if you will. The C&I portfolio was bloated by the energy deal and accretion. But we're holding our own there. Warehouse, we're holding our own, as you saw. We rarely drift below LIBOR 300 to anybody in that portfolio. It's usually when we're asking a client to maybe move to someone else and we find a new client. The problem with that business, if you will, it's 100% beta. We're funding it [ at a flub ]. So that's 100% kind of beta business. As Mays said, we pick up a couple of basis points with rates. We're trying hard to make the bank more asset sensitive, and we're being successful on a dynamic basis. We're getting more successful. So I think we just hold our own across all the asset classes. Real estate will be up or down, depending upon where the 10-year is.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from Scott Valentin of Compass Point.

--------------------------------------------------------------------------------

Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [40]

--------------------------------------------------------------------------------

Just thinking about credit going forward, I know the fourth quarter, first quarter kind of had some one-offs. But I think, Kevin, as you mentioned, you guys typically have a very low net charge-off rate. I'm just wondering in terms of provision expense and where the loan-loss allowance is, allowing for loan growth. But hold the -- if you go back to a more traditional type of loss scenario, where you guys are running low losses, should the provision expense just basically track loan growth and kind of hold the allowance where it is in terms of percentage of loans? Is that a fair way to look at it?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [41]

--------------------------------------------------------------------------------

It is. And if you want to step back from 100,000 feet, it is. And the closer you get to the ground, the less it is, right? So it depends on the asset class you're generating the loan volume in. In today's world, if it's a real estate deal, given our really low loss-given default, we may put up 60 or 65 basis points. That seems low, but that's a lot when you consider we're sub-10 basis points worth of cume losses over 13 years. In oil and gas, we're still putting up 3.4% on every deal. So we -- the factors have not reeled themselves in enough in oil and gas to reel that back in. Eventually, they will. In C&I, it's pretty standard for us to put up 1%, maybe a little more than 1%. So some of it depends on the asset class going forward. So if it's -- if we do a ton of oil and gas, it bumps it up pretty materially until we -- we've seen the early signs of better credit migration in energy, particularly in the OAEM category. Again, that was down $65 million or so in the quarter, and we're down to only $103 million of total OAEM credits, $72 million of which are energy. And I think from our conversations with the oil and gas team yesterday, they believe all of those are headed to a better place, and none of them are headed to a worse place. So as we correct that portfolio, those factors will come down, we'll no longer have to put up 3.4%. But I prefer -- again, these things are all statistical models, and we follow our model. We don't go changing it for willy-nilly reasons just because we feel like it. We can't. I prefer running the bank at a 1.15%, 1.20% kind of number. It just gives you cushion for things that can go wrong, and things go wrong in the business.

--------------------------------------------------------------------------------

Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [42]

--------------------------------------------------------------------------------

Okay, fair enough. And then you mentioned energy, just wondering, spring redetermination, kind of the process is ongoing, what you're seeing there.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [43]

--------------------------------------------------------------------------------

Yes. It's -- we're in the early stages of that. And interestingly, as we set the price deck for Q2, it's a lot lower than it was in Q1 because energy, it backed up. Remember, oil got down into the high 40s. And so -- and gas was down. So at the time we set our price deck, across the board, it's lower than it was in Q1, and it remains below the strip going out. So notwithstanding that, there's a lot of money that's coming into the business. A lot of folks are back to drilling, particularly in the STACK, in the SCOOP and in the Permian. I think we'll see some potential growth in the energy portfolio in the quarter. It won't be huge because we had a payoff early in the quarter on a deal. But there's some deals out there. We're winning some. We're losing some. The ones we've lost are generally we've gotten too tough on the amount of equity we want in the deal or the amount of post-closing liquidity that's on the balance sheet. We've lost a couple who were being too sticky on that. But in general, we feel much better about that business. Last comment I'll make there, it houses $75 million of our roughly $140 million worth of substandard kind of nonaccrual loans. It's -- we have -- there's only 6 names that represent that. So it's not a big universe of things to keep your finger on. So we can keep our finger on it often. Three of those 6 names have got all or part of their assets in data rooms to be sold. So we're hoping that we can see some kind of resolution on a couple of our stickier energy credits as we go forward.

--------------------------------------------------------------------------------

Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD and Research Analyst [44]

--------------------------------------------------------------------------------

Okay. The color helps. And then just on retail, in terms of CRE. I know you used the slide on Page 10. You say 29% of the Houston portfolio is retail. I'm just wondering, overall for the portfolio, what percent is retail. And maybe any trends you're seeing there? Are you seeing vacancy rates increase, or maybe it's lease rates decline? Just wondering -- and then maybe just what asset class you guys are focused on? Is it strip mall or something else?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [45]

--------------------------------------------------------------------------------

Yes, a really good question. Think of our portfolio as about 1/3, 1/3, 1/3: 1/3, B office; 1/3, B retail; 1/3, B- to C multifamily. So it's pretty consistent. That's what it is in Houston. That's what it is across the portfolio. We haven't seen any negative trends out of retail yet, certainly can't rule it out with all that's going on. It's basically strip. It's not the prettiest stuff in town, right? It's stuff we probably don't drive by as we're going home anyhow, at least the guys are sitting in the office with me. But it's solid, and it's not big-name tenants. So it's -- if a RadioShack goes bankrupt, we might have a little bit of exposure, but it's really small. We don't have a whole lot of exposure to things like JCPenney or the big-box kind of guys. So I just haven't seen anything that concerns us yet. But I think we certainly sharpen our pencils as we do new retail deals today, particularly as it pertains to tenancy and what could happen to the tenancy of that over the next several years. That's our really focus in stress-testing new deals coming in, in the existing portfolio.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

Our next question comes from Matt Olney of Stephens Inc.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [47]

--------------------------------------------------------------------------------

Going back to your commentary on the mortgage warehouse, I believe you mentioned the industry got a lot more efficient, and the average hold period came down the first quarter. Just...

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [48]

--------------------------------------------------------------------------------

Yes, it went from 17 to 13.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [49]

--------------------------------------------------------------------------------

And is it your sense, Kevin, that, that has continued in recent weeks? I'm just trying to get a better idea. Is that a unique phenomenon in 1Q? Or could that persist into the rest of the year?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [50]

--------------------------------------------------------------------------------

I don't have a good answer to that one because I didn't ask that question yesterday, Matt. I'll put it on the list for next time, if I'm ever invited, to get them. My sense is it probably goes back -- I don't know if it goes all the way back to 17 or 18 days. But 15 days seems like it would be more reasonable going forward. So I think we get a little bit of boost out of having more volumes in people's pipelines, which just kind of slows down the turn time.

--------------------------------------------------------------------------------

Matthew Covington Olney, Stephens Inc., Research Division - MD [51]

--------------------------------------------------------------------------------

Okay. And then separately, I believe you mentioned the corporate healthcare initiative was originally a strategy to diversify the loan portfolio. And now that you've kind of shut this down, what are your thoughts from here about diversifying the loan portfolio? I'm just trying to get a better idea if you're approaching some type of internal concentration limit that would more or less kind of limit the growth of certain loan types you have right now.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [52]

--------------------------------------------------------------------------------

Yes. We don't have anything in the works, not looking at anything in particular. Our general approach, which has been -- I used to say always successful -- mostly successful, is we build around the person. If there's a person in a vertical line that is a seasoned pro, and they can bring a line of business, and we believe the loss-given default in that business is reasonable and we can be successful at it, we tend to build around people. And again, this healthcare thing is more about, as we sat around thinking about it, is that a stroke of the pen can change too much. And we don't know who the winners and losers will be after the stroke of that pen. To get LIBOR plus 350, there's just not enough risk return in there for us to be playing in the space. It's more about it just can change too fast for us. The odd thing is we talked about that before we got in the business this time. I mean, we made a mistake, okay? We made a mistake getting into the business, and we made a mistake on that credit. And it's -- and again, around here, everybody knows I'm beyond disappointed. I was -- some other words I could characterize for the first couple of days. But I'm embarrassed. We don't blow it very often, but we missed this one.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Our next question comes from Gary Tenner of D.A. Davidson.

--------------------------------------------------------------------------------

Riley Manuhoa Stormont, D.A. Davidson & Co., Research Division - Research Associate [54]

--------------------------------------------------------------------------------

This is actually Riley Stormont on for Gary. So most of my questions have been answered at this point. Just one more quick thing on the healthcare portfolio. As far as moving on from that, do you guys anticipate any loan sales there or sort of just a natural runoff over time?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [55]

--------------------------------------------------------------------------------

Natural runoff over time. A good portion of the portfolio is relatively short-dated maturities. Like a lot of our blocking-and-tackling middle market portfolio, we -- they're 1-year credit facilities. And even if the company is doing well, we'll probably think about exiting it. As you can imagine, when you have a loss in a line of business, you also have to put up higher factors in the other things in that line of business. So it's a provisioning drag to have them on here. And if we get rid of them, we get to recoup those excess -- the excess provision now up against those additional loans. So we will -- this isn't going to be a blow it out, let's get out of the $58 million we've got. We'll be rational about it. The only other comment I should make on that, that I haven't made is I'm talking about corporate healthcare. I'm talking about $3 million, $4 million, $5 million, $10 million kind of credit facilities. As I said, we've got 9 names for that $58 million in fundings. We still finance doctor offices, if they're buying a couple-hundred-thousand-dollar scanning machine or something of that nature. That's a business we're in through our branch network and through a lender that does kind of doctor offices in our back-offices in one of our branches. We're still active in that business. We'll always be active in that business. It's the 1, 2, 3 practice of a dentist or an ophthalmologist or ortho guy. I mean, we're in that business, and we'll be remaining in that business. I should make that clear.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Our next question comes from Christopher Nolan of FBR & Co.

--------------------------------------------------------------------------------

Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [57]

--------------------------------------------------------------------------------

Kevin, have you seen any change in terms of the regulatory view in terms of the $10 billion threshold? Because it seems like they're changing the perspective in terms of the financial stability concerns for $10 billion deals and up.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [58]

--------------------------------------------------------------------------------

Yes. We just have seen very little traction on the $10 billion front. I think the only regulatory change that we may feel and the others below $10 billion is the tone at the top. As the top changes, that tone gets pushed down within the agencies to the folks in the field. We haven't had -- our exam is usually scheduled for the summer. We haven't had our exam yet this year, although we've never really had major issues in any regulatory exit exam with the Fed or the state, who both regulate us. It seems to me, Chris, that most of the talk has been around the $50 billion. And I'm probably not the perfect guy to talk about this, but it seems there's a lot more traction around taking the $50 billion SIFI CCAR kind of bank up to 150 or 200, something like that. And that's not a bad thing in its own right. Should they really be regulated like the really big guys are, without naming names? And to the extent those guys get some relief at the $50 billion level, it's our understanding the cost of going above $50 billion is really expensive. $40 million or $50 million a year is what we've been told, not that we would know much about that, as compared to our $7.5 million to go through $10 billion. I think that could change a bit of the industry dynamic as it pertains to M&A. If those guys don't have to worry about incurring that cost of going above $50 billion, you may find a lot of the banks that are below $50 billion become aggregators, become acquisitive, whereas heretofore, they have not been. So I think that could change the M&A dynamics of the business as much as anything.

--------------------------------------------------------------------------------

Christopher Whitbread Nolan, FBR Capital Markets & Co., Research Division - Analyst [59]

--------------------------------------------------------------------------------

Great. And then as a follow-up question. For the $200 million loan sort of bogey that you put out there, how does this -- I mean, given everything that's happened in the last couple of quarters, are you folks -- have you changed in terms of the criteria that you're asking your deal teams to generate in terms of cash flow coverage or anything? Or is it really -- was the issue, do you think, really more at the credit committee level?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [60]

--------------------------------------------------------------------------------

Yes. This is -- first of all, I think we're tougher on credit these last couple of quarters than we've been. There's a lot more nos than there have been in the past. We're not going to do that anymore. We're going to do what we've always done in commercial real estate, which is kind of low LTV, high yield on debt, high debt coverage ratio because that's worked for us through every cycle. So that business, we're not going to change our underwriting in any way, shape or form, other than we consider retail a little more deeply than we probably did in the past just because of the future of retail. In C&I and things like this, as we talked to our lenders over the last couple of weeks -- and by the way, this one credit got resolved right at the end of March. So the pain was dealt right at the end of the quarter, actually was settled up in April. We've got them doing what they've done in the past and steering away from enterprise-value lending or loans where we don't have asset coverage. That's where you can lose money and you can ruin a quarter. And I think they all know, walking in an EV value deal or a deal that doesn't have margin asset coverage is going to be a rare day for us for a really long period of time. That was the issue here. It wasn't just it was healthcare. It was health care with a high EV component to it, which can lead to high loss-given default, as we've seen. Again, we've scrubbed it. I think that's the biggest change in the bank.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

Our next question comes from Joe Fenech of Hovde Group.

--------------------------------------------------------------------------------

Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Co-Head of Research [62]

--------------------------------------------------------------------------------

Kevin, most of my questions were answered, but one more for you. You said you expect to get back to the 75th percentile in terms of operating performance relative to peers. You're at 50 now. You were at 90. So what prevents you from getting back to that 90th percentile? What changes incrementally here? Is it the incremental cost of crossing $10 billion? Or is it something else? And then how do you define those percentiles in terms of ROA?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [63]

--------------------------------------------------------------------------------

Credit's the only thing that would prevent it, right? I think the rest of the bank, if you look -- if you strip out credit, and I know we don't get to strip out credit. And I'm not telling you the dog ate my homework. My gosh, we had a bad day. But if you strip out this event and look at the quarter without this, it was probably a $0.02 or $0.03 beat. It was a $200 million loan growth. It's the best efficiency ratio we've ever reported, some 45%. Our ROAs were way elevated. I didn't run those, but they're probably 1.30-ish without this event. It's credit that -- those are the big things that can move the needle. The blocking and tackling side of this business, we're still really, really good at. And I'll put us up against just about anybody when it comes to blocking and tackling. So Joe, I really think it's managing credit. It's getting our way through the $100 million we had, if you will, between energy and healthcare and getting those things resolved sooner rather than later. And I think outside of that, the fact that we have, outside of that, $30 million worth of OAEM and $40 million worth of substandard loans in the bank, for the remaining $5.6 billion or $7 billion worth of assets, it's pretty good. And one of those asset classes is recovering, and the other one we've shut down. So we've got to execute on getting out of the sticky names in oil and gas and getting out of the hospital deal that we own, that's been in OREO for a while, and this credit I talked about in December. That's what we've got to focus on. That's what we've got to execute in. And believe me, we, more than anybody, know we have got to put up good numbers going forward. It's our time to execute, and we fully intend to do it.

--------------------------------------------------------------------------------

J. Mays Davenport, LegacyTexas Financial Group, Inc. - CFO, EVP, CFO of LegacyTexas Bank and EVP of LegacyTexas Bank [64]

--------------------------------------------------------------------------------

And I think for the remaining quarters -- for the year, we could get over back up to the 75th. But I think for the remaining quarters, we're thinking we will be back to the high-performer level. This is just making up for this first quarter. I don't see any reason we won't be back.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [65]

--------------------------------------------------------------------------------

Yes. We're talking for the full year, the 75th. But we get paid by getting -- by stacking ourselves up against our peer group. And I've said this before, but there maybe people newer that don't remember this part of it. But our -- the executive in -- the top-of-the-house comp for most of our senior management and the executives, it's driven by stacking ourselves up against the peer group, call it the -- take a regional bank indice (sic) [ index ], if you will. And it's -- we stack ourselves up against NIM, ROA, ROE and NPAs to assets -- I'm sorry, and efficiency ratio. So if we're at the 50th percentile, we get paid at the 50th percentile. If we're at 90th, we get paid at the 90th. If we're at 75th, we get paid at the 75th. We believe we'll get back to the 75th for the entire year, as Mays said, by operating at the 90th in those things for the rest of the year. And the most challenging one there is to get back to the 75th percentile on credit, we've got to execute and get out of some of these names. So solving an OAEM credit doesn't mean that. It just means the feeder stock for another potential substandard loan is getting lower.

--------------------------------------------------------------------------------

Joseph Anthony Fenech, Hovde Group, LLC, Research Division - Co-Head of Research [66]

--------------------------------------------------------------------------------

Okay. And then last one for me. Kevin, you said you're only expecting a change in tone for banks below $10 billion. So then why -- you said earlier you're going to slow-play the building of the costs related to DFAST. What's the rationale for that if you're not expecting all that material change?

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [67]

--------------------------------------------------------------------------------

We won't have to comply until 2019, Joe. So we're just sitting here, saying, "Look, that doesn't mean something might not happen." There are some senators, there are people in the senate finance committee that are working maybe on doing some things for those of us below $10 billion. So our view is while we could've been ready maybe by the end of this year, we didn't need to necessarily have to be ready. We don't have to comply -- I can't remember who said it, but by their math, we'd get there sometime next year. And it's probably the latter part of next year if we're growing at basically $200 million a quarter. We got another year beyond that to comply. So we've got lots of time. And I think every one of our shareholders, if we can save $500,000 or $600,000 potentially by slower-playing this, I think every one of them would say, "Save the money as long as you can still comply in time." So I think we've just chosen the right strategy to slow-play this, save maybe $0.5 million of costs that we might have loaded into this year, and instead -- and still have the optionality to be ready in time. To me, at least, that was one of the easiest decisions the executive team has made all year. It's let's slow-play this and see what happens because we don't have to be ready by the end of the year. We just -- we're getting ahead of it.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kevin Hanigan for any closing remarks.

--------------------------------------------------------------------------------

Kevin J. Hanigan, LegacyTexas Financial Group, Inc. - CEO, President, Director, CEO of LegacyTexas Bank and Director of LegacyTexas Bank [69]

--------------------------------------------------------------------------------

Thank you all for participating in the call. Lots of really good questions today, which is why we wanted to make sure we left additional time for questions. Again, we're disappointed over the single event. We're going to put it behind us and get back to executing, and we'll talk to you all throughout the quarter. Thank you all.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.