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EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit3122015630.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit3112015630.htm
EX-32.0 - EXHIBIT 32.0 - LegacyTexas Financial Group, Inc.exhibit3202015630.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34737
LEGACYTEXAS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
6021
 
27-2176993
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
5851 Legacy Circle, Plano, Texas
 
 
 
75024
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 578-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
    
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class: Common Stock
 
Shares Outstanding as of July 27, 2015:
 
 
47,619,493




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
June 30, 2015
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
June 30,
 
December 31,
 
2015
 
2014
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
48,911

 
$
28,416

Short-term interest-bearing deposits in other financial institutions
143,106

 
103,605

Total cash and cash equivalents
192,017

 
132,021

Securities available for sale, at fair value
314,040

 
199,699

Securities held to maturity (fair value: June 30, 2015 — $262,220, December 31, 2014— $251,112)
254,526

 
241,920

Loans held for sale, at fair value
19,903

 

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $30,867 at June 30, 2015 and $25,549 at December 31, 2014)
4,360,522

 
2,605,204

Loans held for investment - Warehouse Purchase Program
1,084,997

 
786,416

Total loans held for investment
5,445,519

 
3,391,620

FHLB and Federal Reserve Bank stock, at cost
69,224

 
44,084

Bank-owned life insurance
54,614

 
36,193

Premises and equipment, net
80,095

 
48,743

Goodwill
180,632

 
29,650

Other assets
59,054

 
40,184

Total assets
$
6,669,624

 
$
4,164,114

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,084,146

 
$
494,376

Interest-bearing demand
734,430

 
472,703

Savings and money market
1,834,075

 
1,176,749

Time
875,132

 
513,981

Total deposits
4,527,783

 
2,657,809

FHLB advances
1,217,305

 
862,907

Repurchase agreements
66,172

 
25,000

Subordinated debt
11,474

 

Other liabilities
69,966

 
50,175

Total liabilities
5,892,700

 
3,595,891

Commitments and contingent liabilities


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2015 and December 31, 2014

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,619,493 shares issued — June 30, 2015 and 40,014,851 shares issued — December 31, 2014
476

 
400

Additional paid-in capital
571,083

 
386,549

Retained earnings
219,493

 
195,327

Accumulated other comprehensive income, net
122

 
930

Unearned Employee Stock Ownership Plan (ESOP) shares; 1,457,554 shares at June 30, 2015 and 1,549,651 shares at December 31, 2014
(14,250
)
 
(14,983
)
Total shareholders’ equity
776,924

 
568,223

Total liabilities and shareholders’ equity
$
6,669,624

 
$
4,164,114

 
 
 
 
See accompanying notes to consolidated financial statements.

3


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
61,551

 
$
33,888

 
$
119,586

 
$
64,276

Taxable securities
2,252

 
2,453

 
4,751

 
5,018

Nontaxable securities
724

 
561

 
1,442

 
1,125

Interest-bearing deposits in other financial institutions
139

 
71

 
297

 
128

FHLB and Federal Reserve Bank stock and other
301

 
136

 
509

 
266

 
64,967

 
37,109

 
126,585

 
70,813

Interest expense
 
 
 
 
 
 
 
Deposits
3,049

 
2,035

 
6,176

 
4,026

FHLB advances
1,774

 
1,948

 
3,480

 
3,875

Repurchase agreements and other borrowings
323

 
204

 
782

 
405

 
5,146

 
4,187

 
10,438

 
8,306

Net interest income
59,821

 
32,922

 
116,147

 
62,507

Provision for loan losses
3,750

 
1,197

 
6,750

 
1,573

Net interest income after provision for loan losses
56,071

 
31,725

 
109,397

 
60,934

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
7,941

 
5,113

 
14,700

 
9,621

Net gain on sale of mortgage loans
2,121

 

 
4,193

 

Bank-owned life insurance income
424

 
145

 
843

 
298

Gain on sale of available-for-sale securities (reclassified from accumulated other comprehensive income for unrealized gains on available-for-sale securities)

 

 
211

 

Gain on sale and disposition of assets
429

 
727

 
457

 
728

Other
1,049

 
(556
)
 
967

 
(256
)
 
11,964

 
5,429

 
21,371

 
10,391

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
22,549

 
14,127

 
45,520

 
28,259

Merger and acquisition costs
8

 
652

 
1,553

 
821

Advertising
1,048

 
493

 
1,988

 
848

Occupancy and equipment
3,838

 
1,819

 
7,646

 
3,711

Outside professional services
625

 
486

 
1,375

 
1,011

Regulatory assessments
1,146

 
687

 
1,968

 
1,315

Data processing
2,537

 
1,708

 
5,332

 
3,370

Office operations
2,652

 
1,717

 
5,045

 
3,397

Other
2,505

 
1,661

 
4,258

 
2,773

 
36,908

 
23,350

 
74,685

 
45,505

Income before income tax expense
31,127

 
13,804

 
56,083

 
25,820

Income tax expense (items reclassified from accumulated other comprehensive income include an income tax expense of $74 for the six months ended June 30, 2015)
10,876

 
4,986

 
19,508

 
9,320

Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Diluted
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Dividends declared per share
$
0.13

 
$
0.12

 
$
0.26

 
$
0.24

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


4


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Change in unrealized gains (losses) on securities available for sale
(1,925
)
 
1,065

 
(1,034
)
 
1,775

Reclassification of amount realized through sale of securities

 

 
(211
)
 

Tax effect
675

 
(373
)
 
437

 
(622
)
Other comprehensive income, net of tax
(1,250
)
 
692

 
(808
)
 
1,153

Comprehensive income
$
19,001

 
$
9,510

 
$
35,767

 
$
17,653

See accompanying notes to consolidated financial statements.


5


 
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except per share data)
For the six months ended June 30, 2014
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
Balance at January 1, 2014
$
399

 
$
377,657

 
$
183,236

 
$
(383
)
 
$
(16,449
)
 
$
544,460

Net income

 

 
16,500

 

 

 
16,500

Other comprehensive income, net of tax

 

 

 
1,153

 

 
1,153

Dividends declared ($0.24 per share)

 

 
(9,586
)
 

 

 
(9,586
)
ESOP shares earned (92,097 shares)

 
1,664

 

 

 
733

 
2,397

Share-based compensation expense

 
1,835

 

 

 

 
1,835

Net issuance of common stock under employee stock plans (56,904 shares)
1

 
652

 

 

 

 
653

Balance at June 30, 2014
$
400

 
$
381,808

 
$
190,150

 
$
770

 
$
(15,716
)
 
$
557,412

For the six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
400

 
$
386,549

 
$
195,327

 
$
930

 
$
(14,983
)
 
$
568,223

Net income

 

 
36,575

 

 

 
36,575

Other comprehensive income (loss), net of tax

 

 

 
(808
)
 

 
(808
)
Dividends declared ($0.26 per share)

 

 
(12,409
)
 

 

 
(12,409
)
ESOP shares earned (92,097 shares)

 
1,505

 

 

 
733

 
2,238

Share-based compensation expense

 
3,219

 

 

 

 
3,219

Net issuance of common stock under employee stock plans (112,522 shares)
1

 
650

 

 

 

 
651

Share repurchase (357,950 shares)
(4
)
 
(7,985
)
 

 

 

 
(7,989
)
Acquisition of LegacyTexas Group, Inc. (7,850,070 shares)
79

 
187,145

 

 

 

 
187,224

Balance at June 30, 2015
$
476

 
$
571,083

 
$
219,493

 
$
122

 
$
(14,250
)
 
$
776,924


See accompanying notes to consolidated financial statements.

6


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
36,575

 
$
16,500

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
6,750

 
1,573

Depreciation and amortization
3,636

 
2,211

Deferred tax expense
4,174

 
1,043

Premium amortization and accretion of securities, net
2,006

 
1,803

Accretion related to acquired loans
(6,548
)
 
(869
)
Gain on sale of available for sale securities
(211
)
 

ESOP compensation expense
2,238

 
2,397

Share-based compensation expense
3,219

 
1,835

Net gain on loans held for sale
(4,193
)
 

Loans originated or purchased for sale
(114,637
)
 

Proceeds from sale of loans held for sale
116,566

 

FHLB stock dividends
(65
)
 
(42
)
Bank-owned life insurance income
(843
)
 
(298
)
(Gain) loss on sale and disposition of assets
(176
)
 
49

Net change in deferred loan fees
470

 
432

Net change in accrued interest receivable
(1,922
)
 
(716
)
Net change in other assets
5,913

 
3,295

Net change in other liabilities
2,094

 
5,580

Net cash provided by operating activities
55,046

 
34,793

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
31,352

 
305,686

Purchases
(44,730
)
 
(281,000
)
Proceeds from sale of AFS securities
16,581

 

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
26,710

 
32,003

Purchases
(6,335
)
 
(5,919
)
Originations of Warehouse Purchase Program loans
(7,987,452
)
 
(5,377,239
)
Proceeds from pay-offs of Warehouse Purchase Program loans
7,688,871

 
5,281,143

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(356,801
)
 
(299,638
)
Purchase of FHLB and Federal Reserve Bank stock
(21,386
)
 
(9,607
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.
128,598

 

Purchases of premises and equipment
(3,476
)
 
(744
)
Proceeds from sale of assets
8,225

 
532

Net cash (used in) investing activities
(519,843
)
 
(354,783
)

7


CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Net change in deposits
240,192

 
171,087

Proceeds from FHLB advances
1,075,000

 
691,000

Repayments on FHLB advances
(720,602
)
 
(455,230
)
Share repurchase
(7,989
)
 

Repayments of borrowings
(50,050
)
 

Payment of dividends
(12,409
)
 
(9,586
)
Proceeds from stock option exercises
651

 
653

Net cash provided by financing activities
524,793

 
397,924

Net change in cash and cash equivalents
59,996

 
77,934

Beginning cash and cash equivalents
132,021

 
87,974

Ending cash and cash equivalents
$
192,017

 
$
165,908

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
589

 
$
409

Common stock issued in consideration of LegacyTexas Group, Inc. acquisition
187,224

 

See accompanying notes to consolidated financial statements.

8

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)


NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements of LegacyTexas Financial Group, Inc. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP") and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. Certain items in prior periods were reclassified to conform to the current presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
On January 1, 2015 (the "Effective Time"), the Company completed its merger (the "Merger") with LegacyTexas Group, Inc., pursuant to the Agreement and Plan of Merger, dated as of November 25, 2013, as amended, by and between the Company and LegacyTexas Group, Inc. (the "Merger Agreement"). At the Effective Time, LegacyTexas Group, Inc. merged into the Company, with the Company as the surviving corporation in the Merger. Immediately following the Effective Time, ViewPoint Bank, N.A., merged with and into LegacyTexas Bank, the wholly-owned subsidiary of LegacyTexas Group, Inc. prior to the Merger, with LegacyTexas Bank surviving the bank merger. At the Effective Time, the Company changed its name from ViewPoint Financial Group, Inc. to LegacyTexas Financial Group, Inc. and changed its ticker symbol on the Nasdaq Global Select Market to LTXB. The financial results reported in these consolidated financial statements for periods prior to the Effective Time only include historical activity of ViewPoint Financial Group, Inc.
In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the 2014 Form 10-K.
The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, LegacyTexas Bank (the “Bank”). All significant intercompany transactions and balances are eliminated in consolidation.


NOTE 2 - SHARE TRANSACTIONS
On January 27, 2015, the Company announced the resumption of its existing stock repurchase program. The open-ended stock repurchase program, which commenced in August 2012, allows for the repurchase of up to 1,978,871 shares in the open market and in negotiated transactions, depending on market conditions. Stock repurchases under this program were suspended in November 2013 as a result of the Company's announced acquisition of LegacyTexas Group, Inc., which automatically triggered termination of the Company's then-existing 10b5-1 trading plan with Sandler O'Neill & Partners, LP. At the time the stock repurchase program was suspended, 83,800 shares had been repurchased, leaving 1,895,071 shares available for future repurchases under the program.
Upon completion of the acquisition of LegacyTexas Group, Inc. on January 1, 2015, the Company entered into a new trading plan with Sandler O’Neill & Partners, LP in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common stock pursuant to the above mentioned stock repurchase program. No shares were repurchased in the second quarter of 2015. During the first quarter of 2015, 357,950 shares were repurchased and retired at an average price of $22.32.

9

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 3 - EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income (which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended June 30, 2015 and 2014 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Distributed and undistributed earnings to participating securities
(160
)
 
(97
)
 
(299
)
 
(187
)
Income available to common shareholders
$
20,091

 
$
8,721

 
$
36,276

 
$
16,313

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,611,263

 
39,966,568

 
47,680,597

 
39,954,509

Less: Average unallocated ESOP shares
(1,487,747
)
 
(1,671,941
)
 
(1,510,641
)
 
(1,694,835
)
  Average unvested restricted stock awards
(363,284
)
 
(420,956
)
 
(377,612
)
 
(434,729
)
Average shares for basic earnings per share
45,760,232

 
37,873,671

 
45,792,344

 
37,824,945

Basic earnings per common share
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
20,091

 
$
8,721

 
$
36,276

 
$
16,313

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
45,760,232

 
37,873,671

 
45,792,344

 
37,824,945

Dilutive effect of share-based compensation plan
271,035

 
247,703

 
214,267

 
247,786

Average shares for diluted earnings per share
46,031,267

 
38,121,374

 
46,006,611

 
38,072,731

Diluted earnings per common share
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Share awards excluded in the computation of diluted earnings per share because the exercise price was greater than the common stock average market price and were therefore antidilutive
841,623

 
86,910

 
1,053,800

 
134,790



10

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 4 - SECURITIES
The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), and the fair value of securities available for sale were as follows:
June 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
221,689

 
$
1,311

 
$
1,173

 
$
221,827

Agency residential collateralized mortgage obligations 2
40,734

 
209

 
103

 
40,840

US government and agency securities
15,223

 
161

 

 
15,384

Municipal bonds
36,207

 
70

 
288

 
35,989

Total securities
$
313,853

 
$
1,751

 
$
1,564

 
$
314,040

December 31, 2014
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
144,368

 
$
1,760

 
$
610

 
$
145,518

Agency residential collateralized mortgage obligations 2
50,424

 
211

 
81

 
50,554

US government and agency securities
3,475

 
152

 

 
3,627

Total securities
$
198,267

 
$
2,123

 
$
691

 
$
199,699

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
The carrying amount, unrealized gains and losses, and fair value of securities held to maturity were as follows:
June 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
90,159

 
$
2,441

 
$
108

 
$
92,492

Agency commercial mortgage-backed securities 2
25,076

 
1,096

 
35

 
26,137

Agency residential collateralized mortgage obligations 3
71,307

 
1,752

 
61

 
72,998

Municipal bonds
67,984

 
3,139

 
530

 
70,593

Total securities
$
254,526

 
$
8,428

 
$
734

 
$
262,220

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
63,161

 
$
3,124

 
$
13

 
$
66,272

Agency commercial mortgage-backed securities 2
25,301

 
1,144

 
49

 
26,396

Agency residential collateralized mortgage obligations 3
86,470

 
1,766

 
80

 
88,156

Municipal bonds
66,988

 
3,535

 
235

 
70,288

Total securities
$
241,920

 
$
9,569

 
$
377

 
$
251,112

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


11

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at June 30, 2015 by contractual maturity are set forth in the table below. Securities with contractual payments not due at a single maturity date, including mortgage-backed securities and collateralized mortgage obligations, are shown separately.
 
Held to maturity
 
Available for sale
 
Carrying
Amount
 
Fair Value
 
Fair Value
Due in one year or less
$
1,508

 
$
1,536

 
$
1,789

Due after one to five years
7,434

 
7,814

 
25,470

Due after five to ten years
41,454

 
44,061

 
17,764

Due after ten years
17,588

 
17,182

 
6,350

Agency residential mortgage-backed securities 1
90,159

 
92,492

 
221,827

Agency commercial mortgage-backed securities 2
25,076

 
26,137

 

Agency residential collateralized mortgage obligations 3
71,307

 
72,998

 
40,840

Total
$
254,526

 
$
262,220

 
$
314,040

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Information regarding securities and letters of credit pledged is summarized below:
 
June 30, 2015
 
December 31, 2014
Public fund certificates of deposit
$
200,398

 
$
132,320

Public fund demand deposit accounts
110,252

 
11,355

Commercial demand deposit accounts
317

 
2,956

Repurchase agreements
66,172

 
25,000

Federal Reserve Bank primary credit - collateral value
43,307

 
51,271

Carrying value of securities pledged on above funds
260,185

 
250,525

FHLB Letters of Credit pledged on the above funds
231,280

 

Sales activity of securities for the three and six months ended June 30, 2015 and 2014 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds
$

 
$

 
$
16,581

 
$

Gross gains

 

 
211

 


Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method.

12

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Securities with unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AFS
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
130,416

 
$
973

 
$
11,503

 
$
200

 
$
141,919

 
$
1,173

Agency residential collateralized mortgage obligations 2
10,203

 
41

 
4,873

 
62

 
15,076

 
103

Municipal bonds
19,588

 
288

 

 

 
19,588

 
288

Total temporarily impaired
$
160,207

 
$
1,302

 
$
16,376

 
$
262

 
$
176,583

 
$
1,564

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
6,534

 
$
14

 
$
50,729

 
$
596

 
$
57,263

 
$
610

Agency residential collateralized mortgage obligations 2
9,499

 
38

 
4,769

 
43

 
14,268

 
81

Total temporarily impaired
$
16,033

 
$
52

 
$
55,498

 
$
639

 
$
71,531

 
$
691

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
HTM
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
16,364

 
$
108

 
$

 
$

 
$
16,364

 
$
108

Agency commercial mortgage-backed securities 2
3,871

 
35

 

 

 
3,871

 
35

Agency residential collateralized mortgage obligations 3
2,195

 
19

 
3,465

 
42

 
5,660

 
61

Municipal bonds
12,450

 
253

 
6,332

 
277

 
18,782

 
530

Total temporarily impaired
$
34,880


$
415

 
$
9,797

 
$
319

 
$
44,677


$
734

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$

 
$

 
$
3,430

 
$
13

 
$
3,430

 
$
13

Agency commercial mortgage-backed securities 2

 

 
3,895

 
49

 
3,895

 
49

Agency residential collateralized mortgage obligations 3
8,984

 
33

 
4,697

 
47

 
13,681

 
80

Municipal bonds

 

 
11,415

 
235

 
11,415

 
235

Total temporarily impaired
$
8,984

 
$
33

 
$
23,437

 
$
344

 
$
32,421

 
$
377

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of June 30, 2015, 132 securities had unrealized losses, 20 of which had been in an unrealized loss position for over 12 months at June 30, 2015. The Company does not believe these unrealized losses are other-than-temporary and, at June 30, 2015, had the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. All principal and interest payments are being received on time and in full.


13

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

NOTE 5 - LOANS
Loans consist of the following:
 
June 30,
 2015
 
December 31, 2014
 
 
 
 
Loans held for sale
$
19,903

 
$

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
1,930,256

 
$
1,265,868

Commercial and industrial
1,308,168

 
781,824

Construction and land
230,582

 
21,298

Consumer real estate
845,982

 
524,199

Other consumer
79,798

 
40,491

Gross loans held for investment, excluding Warehouse Purchase Program
4,394,786

 
2,633,680

Net of:
 
 
 
Deferred fees and discounts, net
(3,397
)
 
(2,927
)
Allowance for loan losses
(30,867
)
 
(25,549
)
Net loans held for investment, excluding Warehouse Purchase Program
4,360,522

 
2,605,204

Warehouse Purchase Program
1,084,997

 
786,416

Total loans held for investment
$
5,445,519

 
$
3,391,620



14

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Activity in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014, segregated by portfolio segment and evaluation for impairment, is set forth below. All Warehouse Purchase Program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. These safeguards include the requirement that our mortgage company customers have a takeout commitment for each loan and multiple investors for purchases. To date, the Company has not experienced a loss on these loans and no allowance for loan losses has been allocated to them. At June 30, 2015 and 2014, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $127 and $272, respectively.
For the three months ended June 30, 2015
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - April 1, 2015
$
12,610

 
$
10,741

 
$
463

 
$
3,983

 
$
479

 
$
28,276

Charge-offs
(78
)
 
(977
)
 

 
(27
)
 
(275
)
 
(1,357
)
Recoveries

 
42

 

 
14

 
142

 
198

Provision expense (benefit)
(1,247
)
 
3,415

 
1,068

 
150

 
364

 
3,750

Ending balance - June 30, 2015
$
11,285

 
$
13,221

 
$
1,531

 
$
4,120

 
$
710

 
$
30,867

For the six months ended June 30, 2015
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2015
$
11,830

 
$
9,068

 
$
174

 
$
4,069

 
$
408

 
$
25,549

Charge-offs
(82
)
 
(1,041
)
 

 
(215
)
 
(523
)
 
(1,861
)
Recoveries
21

 
101

 

 
60

 
247

 
429

Provision expense (benefit)
(484
)
 
5,093

 
1,357

 
206

 
578

 
6,750

Ending balance - June 30, 2015
$
11,285

 
$
13,221

 
$
1,531

 
$
4,120

 
$
710

 
$
30,867

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
897

 
$
1,078

 
$

 
$
56

 
$
10

 
$
2,041

Collectively evaluated for impairment
10,388

 
12,143

 
1,531

 
4,064

 
700

 
28,826

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
4,282

 
12,648

 
141

 
5,041

 
191

 
22,303

Collectively evaluated for impairment
1,914,846

 
1,293,671

 
230,000

 
840,099

 
79,258

 
4,357,874

PCI loans
11,128

 
1,849

 
441

 
842

 
349

 
14,609

Ending balance
$
1,930,256

 
$
1,308,168

 
$
230,582

 
$
845,982

 
$
79,798

 
$
4,394,786


For the three months ended June 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - April 1, 2014
$
10,668

 
$
4,802

 
$
243

 
$
3,327

 
$
362

 
$
19,402

Charge-offs

 
(92
)
 

 
(74
)
 
(128
)
 
(294
)
Recoveries

 
39

 

 
20

 
76

 
135

Provision expense
518

 
536

 
9

 
66

 
68

 
1,197

Ending balance - June 30, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440



15

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

For the six months ended June 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2014
$
10,944

 
$
4,536

 
$
212

 
$
3,280

 
$
386

 
$
19,358

Charge-offs

 
(302
)
 

 
(156
)
 
(307
)
 
(765
)
Recoveries

 
57

 

 
25

 
192

 
274

Provision expense
242

 
994

 
40

 
190

 
107

 
1,573

Ending balance - June 30, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
964

 
$
1,535

 
$

 
$
189

 
$
1

 
$
2,689

Collectively evaluated for impairment
10,222

 
3,750

 
252

 
3,150

 
377

 
17,751

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
8,052

 
6,407

 
52

 
5,152

 
453

 
20,116

Collectively evaluated for impairment
1,149,741

 
604,396

 
31,889

 
495,083

 
42,597

 
2,323,706

PCI loans
4,242

 
184

 

 
1,093

 
168

 
5,687

Ending balance
$
1,162,035

 
$
610,987

 
$
31,941

 
$
501,328

 
$
43,218

 
$
2,349,509

The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.
The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact the Company's specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and classified loans within the Company's loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy and capitalization rates and other pertinent economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower's ability to repay and on individually analyzed loans found to be impaired. Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

16

LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
Impaired loans at June 30, 2015 and December 31, 2014, were as follows 1:
June 30, 2015
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,900

 
$
918

 
$
3,364

 
$
4,282

 
$
824

Commercial and industrial
 
15,115

 
9,493

 
3,155

 
12,648

 
1,068

Construction and land
 
201

 
141

 

 
141

 

Consumer real estate
 
5,523

 
4,875

 
166

 
5,041

 
22

Other consumer
 
272

 
191

 

 
191

 

Total
 
$
26,011

 
$
15,618

 
$
6,685

 
$
22,303

 
$
1,914

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,372

 
$
4,162

 
$
3,243

 
$
7,405

 
$
784

Commercial and industrial
 
7,043

 
2,008

 
3,921

 
5,929

 
1,768

Construction and land
 
109

 
103

 

 
103

 

Consumer real estate
 
6,037

 
4,735

 
872

 
5,607

 
161

Other consumer
 
336

 
282

 
2

 
284

 
2

Total
 
$
21,897

 
$
11,290

 
$
8,038

 
$
19,328

 
$
2,715

1 No Warehouse Purchase Program loans were impaired at June 30, 2015 or December 31, 2014. Loans reported do not include PCI loans.

Income on impaired loans at June 30, 2015 and 2014, was as follows1:
June 30, 2015
 
Current Quarter Average
Recorded
Investment
 
Year-to-Date Average
Recorded
Investment
 
Current Quarter Interest
Income
Recognized
 
Year-to-Date Interest
Income
Recognized
Commercial real estate
 
$
5,886

 
$
6,537

 
$
9

 
$
19

Commercial and industrial
 
9,881

 
8,187

 
2

 
5

Construction and land
 
141

 
125

 

 

Consumer real estate
 
5,103

 
5,319

 
3

 
5

Other consumer
 
216

 
245

 
1

 
2

Total
 
$
21,227

 
$
20,413

 
$
15

 
$
31

June 30, 2014
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,067

 
$
8,021

 
$
3

 
$
3

Commercial and industrial
 
6,163

 
5,973

 
3

 
6

Construction and land
 
13

 
9