With Deal Done, Price of Oil Is New Challenge for LegacyTexas

LegacyTexas Financial Group should be enjoying a victory lap now instead of slipping on oil.

ViewPoint Financial Group agreed in late 2013 to buy LegacyTexas Group for $300 million. The deal, which finally closed earlier this month, created a $6 billion-asset player under the LegacyTexas name that is targeting a 40% boost to earnings in its first full year.

The company, which overcame lengthy regulatory delays to complete the merger, has seen its stock slide nearly 18% so far this year — joining most publicly traded Texas banks — as oil prices plummet.

"They have this fantastic acquisition that is super-accretive and really catapults them in terms of their franchise, but it is totally being overshadowed by concerns over energy," said Brett Rabatin, an analyst at Sterne Agee. "Most of 2015 for … Texas banks is going to be determined by oil prices, but they have this great transaction and the market is just pushing it under the rug."

Falling oil prices haven't changed the way LegacyTexas views the deal's ability to pad earnings, Kevin Hanigan, the company's chief executive, said in an interview. The first quarter will be noisy tied to the merger's integration and cost cutting, but the benefits should start to show up the next quarter. The integration, originally set for the fourth quarter, will occur in mid-February.

Analysts' estimates peg the company earning 38 cents a share in the second quarter, which would compare to the 23 cents ViewPoint earned by itself a year earlier.

The merger delay could help earnings. The company had expected to cut about 100 jobs post-closing, but about 45 employees — many of whom were expected to be let go — left on their own as the approval process dragged on, Hanigan said. LegacyTexas didn't have to pay severance in those instances.

Management at both banks, worried about losing critical employees, informed all remaining employees about their future. In addition, about 25 employees signed non-solicitation agreements just before the deal was announced.

"We did begin to get worried that we were at risk of losing good people," Hanigan said. "So we went to them with the organizational chart and told those who were going to have a job until closing and those who were going to have a job through the conversion. … It was our way of walling off the people we wanted to stay."

Not surprisingly, the biggest question mark for LegacyTexas is its energy portfolio. The company has about $300 million in loans tied to oil and gas, with nearly all of it coming from ViewPoint. In the combined company, such loans represent about 6.5% of the total portfolio.

"ViewPoint had about 11% dedicated to energy, so that has dropped. But even at 6.5%, they have a notable exposure to a commodity that has fallen off a cliff," said Brady Gailey, an analyst at Keefe, Bruyette & Woods. This year "will be dominated by figuring out what the effect of lower oil will be."

The company's energy loans are to producers, not servicers, Hanigan and industry observers note. Those loans are expected to have better performance since producers hedge, meaning that the current pricing won't be felt for at least a year.

"Whereas, servicers are probably already feeling stress," Gailey said.

Hanigan said the company's energy exposure largely centers around the Dallas-Fort Worth area where the overall economy is notably less dependent on energy, compared to places like west Texas or Houston.

Just 3% of the state's 810 rigs operate near Dallas-Fort Worth, Hanigan said. "Lower prices are going to have an impact on Texas … but it is not going to be felt the same through the state."

Still, LegacyTexas is feeling pain in its stock price. The so-called "Texas bank premium" has disappeared in recent months, giving potential buyers a weaker currency to use on deals. Privately held banks, specifically potential sellers, have yet to adjust to the lower pricing, Hanigan said. That could complicate his plans to find a deal this year. By his estimation, LegacyTexas has $150 million to $200 million in excess capital it could use on acquisitions.

"I have 10 banks in the Dallas-Fort Worth area that I see as good strategic fits," Hanigan said.

"It is not a long shopping list, but these are deals that if we can work out I would love to do," he added. "But sellers' expectations remain lofty. They don't have price discovery like we do every day and, until they recognize that their stock is worth less now, there's going to be a disconnect."