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EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit3112015930.htm
EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit3202015930.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit3122015930.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 September 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 October 26, 2015:
 
 
47,640,193




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






PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 
September 30,
 
December 31,
 
2015
 
2014
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
47,720

 
$
28,416

Short-term interest-bearing deposits in other financial institutions
193,994

 
103,605

Total cash and cash equivalents
241,714

 
132,021

Securities available for sale, at fair value
318,219

 
199,699

Securities held to maturity (fair value: September 30, 2015 — $258,795, December 31, 2014— $251,112)
249,838

 
241,920

Loans held for sale, at fair value
22,802

 

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $36,382 at September 30, 2015 and $25,549 at December 31, 2014)
4,649,215

 
2,605,204

Loans held for investment - Warehouse Purchase Program
960,377

 
786,416

Total loans held for investment
5,609,592

 
3,391,620

FHLB stock and other restricted securities, at cost
63,891

 
44,084

Bank-owned life insurance
54,920

 
36,193

Premises and equipment, net
79,153

 
48,743

Goodwill
180,632

 
29,650

Other assets
58,082

 
40,184

Total assets
$
6,878,843

 
$
4,164,114

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,136,255

 
$
494,376

Interest-bearing demand
750,551

 
472,703

Savings and money market
1,982,729

 
1,176,749

Time
900,515

 
513,981

Total deposits
4,770,050

 
2,657,809

FHLB advances
1,152,916

 
862,907

Repurchase agreements
71,643

 
25,000

Subordinated debt
11,522

 

Other liabilities
80,075

 
50,175

Total liabilities
6,086,206

 
3,595,891

Commitments and contingent liabilities


 


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

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,640,193 shares issued — September 30, 2015 and 40,014,851 shares issued — December 31, 2014
476

 
400

Additional paid-in capital
573,929

 
386,549

Retained earnings
230,720

 
195,327

Accumulated other comprehensive income, net
1,395

 
930

Unearned Employee Stock Ownership Plan (ESOP) shares; 1,411,505 shares at September 30, 2015 and 1,549,651 shares at December 31, 2014
(13,883
)
 
(14,983
)
Total shareholders’ equity
792,637

 
568,223

Total liabilities and shareholders’ equity
$
6,878,843

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
63,025

 
$
35,872

 
$
182,611

 
$
100,148

Taxable securities
2,292

 
2,225

 
7,043

 
7,243

Nontaxable securities
773

 
562

 
2,215

 
1,687

Interest-bearing deposits in other financial institutions
137

 
57

 
421

 
185

FHLB and Federal Reserve Bank stock and other
298

 
139

 
820

 
405

 
66,525

 
38,855

 
193,110

 
109,668

Interest expense
 
 
 
 
 
 
 
Deposits
3,382

 
2,021

 
9,558

 
6,047

FHLB advances
1,606

 
1,957

 
5,086

 
5,832

Repurchase agreements and other borrowings
349

 
207

 
1,131

 
612

 
5,337

 
4,185

 
15,775

 
12,491

Net interest income
61,188

 
34,670

 
177,335

 
97,177

Provision for loan losses
7,515

 
2,511

 
14,265

 
4,084

Net interest income after provision for loan losses
53,673

 
32,159

 
163,070

 
93,093

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
8,195

 
4,798

 
22,895

 
14,419

Net gain on sale of mortgage loans
1,944

 

 
6,137

 

Bank-owned life insurance income
424

 
147

 
1,267

 
445

Gain (loss) on sale of available-for-sale securities (reclassified from accumulated other comprehensive income for unrealized gains on available-for-sale securities)
(25
)
 

 
186

 

Gain (loss) on sale and disposition of assets
228

 
(85
)
 
685

 
643

Other
1,085

 
198

 
2,052

 
(58
)
 
11,851

 
5,058

 
33,222

 
15,449

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
23,633

 
13,661

 
69,153

 
41,920

Merger and acquisition costs

 
1,188

 
1,553

 
2,009

Advertising
645

 
262

 
2,633

 
1,110

Occupancy and equipment
3,622

 
1,807

 
11,268

 
5,518

Outside professional services
934

 
569

 
2,309

 
1,580

Regulatory assessments
1,026

 
698

 
2,994

 
2,013

Data processing
2,830

 
1,739

 
8,162

 
5,109

Office operations
2,879

 
1,566

 
7,924

 
4,963

Other
2,258

 
1,301

 
6,516

 
4,074

 
37,827

 
22,791

 
112,512

 
68,296

Income before income tax expense
27,697

 
14,426

 
83,780

 
40,246

Income tax expense (items reclassified from accumulated other comprehensive income include an income tax benefit of $9 for the three months ended September 30, 2015 and an income tax expense of $65 for the nine months ended September 30, 2015)
9,802

 
5,114

 
29,310

 
14,434

Net income
$
17,895

 
$
9,312

 
$
54,470

 
$
25,812

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.24

 
$
1.18

 
$
0.67

Diluted
$
0.38

 
$
0.24

 
$
1.17

 
$
0.67

Dividends declared per share
$
0.14

 
$
0.12

 
$
0.40

 
$
0.36

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


4


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
17,895

 
$
9,312

 
$
54,470

 
$
25,812

Change in unrealized gains (losses) on securities available for sale
1,936

 
(206
)
 
902

 
1,569

Reclassification of amount realized through sale of securities
25

 

 
(186
)
 

Tax effect
(688
)
 
71

 
(251
)
 
(551
)
Other comprehensive income (loss), net of tax
1,273

 
(135
)
 
465

 
1,018

Comprehensive income
$
19,168

 
$
9,177

 
$
54,935

 
$
26,830

See accompanying notes to consolidated financial statements.


5



LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except share and per share data)
For the nine months ended September 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

 

 
25,812

 

 

 
25,812

Other comprehensive income, net of tax

 

 

 
1,018

 

 
1,018

Dividends declared ($0.36 per share)

 

 
(14,385
)
 

 

 
(14,385
)
ESOP shares earned (138,146 shares)

 
2,482

 

 

 
1,099

 
3,581

Share-based compensation expense

 
2,698

 

 

 

 
2,698

Net issuance of common stock under employee stock plans (68,125 shares)
1

 
942

 

 

 

 
943

Balance at September 30, 2014
$
400

 
$
383,779

 
$
194,663

 
$
635

 
$
(15,350
)
 
$
564,127

For the nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
400

 
$
386,549

 
$
195,327

 
$
930

 
$
(14,983
)
 
$
568,223

Net income

 

 
54,470

 

 

 
54,470

Other comprehensive income, net of tax

 

 

 
465

 

 
465

Dividends declared ($0.40 per share)

 

 
(19,077
)
 

 

 
(19,077
)
ESOP shares earned (138,146 shares)

 
2,484

 

 

 
1,100

 
3,584

Share-based compensation expense

 
4,569

 

 

 

 
4,569

Net issuance of common stock under employee stock plans (133,222 shares)
1

 
1,167

 

 

 

 
1,168

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 September 30, 2015
$
476

 
$
573,929

 
$
230,720

 
$
1,395

 
$
(13,883
)
 
$
792,637


See accompanying notes to consolidated financial statements.

6


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

 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
54,470

 
$
25,812

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
14,265

 
4,084

Depreciation and amortization
5,452

 
3,301

Deferred tax expense
3,189

 
2,042

Premium amortization and accretion of securities, net
3,166

 
2,653

Accretion related to acquired loans
(8,565
)
 
(1,198
)
Gain on sale of available for sale securities
(186
)
 

ESOP compensation expense
3,584

 
3,581

Share-based compensation expense
4,569

 
2,698

Net gain on loans held for sale
(6,137
)
 

Loans originated or purchased for sale
(174,201
)
 

Proceeds from sale of loans held for sale
175,175

 

FHLB stock dividends
(111
)
 
(70
)
Bank-owned life insurance income
(1,267
)
 
(445
)
(Gain) loss on sale and disposition of assets
(232
)
 
134

Net change in deferred loan fees
302

 
921

Net change in accrued interest receivable
(1,791
)
 
(284
)
Net change in other assets
7,065

 
1,279

Net change in other liabilities
9,891

 
12,638

Net cash provided by operating activities
88,638

 
57,146

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
998,967

 
1,176,311

Purchases
(1,016,762
)
 
(1,139,501
)
Proceeds from sale of AFS securities
17,947

 

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
38,891

 
44,590

Purchases
(14,180
)
 
(5,919
)
Originations of Warehouse Purchase Program loans
(11,932,205
)
 
(8,708,357
)
Proceeds from pay-offs of Warehouse Purchase Program loans
11,758,244

 
8,645,203

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(651,141
)
 
(439,229
)
Purchase of FHLB and Federal Reserve Bank stock
(15,384
)
 
(6,520
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.
128,598

 

Purchases of premises and equipment
(4,164
)
 
(916
)
Proceeds from sale of assets
8,511

 
508

Net cash (used in) investing activities
(682,678
)
 
(433,830
)

7


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

 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Net change in deposits
484,201

 
231,829

Proceeds from FHLB advances
1,040,000

 
620,000

Repayments on FHLB advances
(749,991
)
 
(459,392
)
Share repurchase
(7,989
)
 

Repayments of borrowings
(44,579
)
 

Payment of dividends
(19,077
)
 
(14,385
)
Proceeds from stock option exercises
1,168

 
943

Net cash provided by financing activities
703,733

 
378,995

Net change in cash and cash equivalents
109,693

 
2,311

Beginning cash and cash equivalents
132,021

 
87,974

Ending cash and cash equivalents
$
241,714

 
$
90,285

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
906

 
$
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 or third 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 nine months ended September 30, 2015 and 2014 is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
17,895

 
$
9,312

 
$
54,470

 
$
25,812

Distributed and undistributed earnings to participating securities
(127
)
 
(97
)
 
(426
)
 
(285
)
Income available to common shareholders
$
17,768

 
$
9,215

 
$
54,044

 
$
25,527

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,633,320

 
39,998,205

 
47,664,665

 
39,969,234

Less: Average unallocated ESOP shares
(1,441,870
)
 
(1,626,065
)
 
(1,487,465
)
 
(1,671,660
)
  Average unvested restricted stock awards
(328,610
)
 
(400,350
)
 
(361,099
)
 
(423,144
)
Average shares for basic earnings per share
45,862,840

 
37,971,790

 
45,816,101

 
37,874,430

Basic earnings per common share
$
0.39

 
$
0.24

 
$
1.18

 
$
0.67

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
17,768

 
$
9,215

 
$
54,044

 
$
25,527

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
45,862,840

 
37,971,790

 
45,816,101

 
37,874,430

Dilutive effect of share-based compensation plan
325,621

 
231,718

 
257,158

 
246,667

Average shares for diluted earnings per share
46,188,461

 
38,203,508

 
46,073,259

 
38,121,097

Diluted earnings per common share
$
0.38

 
$
0.24

 
$
1.17

 
$
0.67

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
920,000

 
367,780

 
1,012,971

 
416,890



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:
September 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
224,702

 
$
1,734

 
$
214

 
$
226,222

Agency residential collateralized mortgage obligations 1
35,686

 
153

 
102

 
35,737

US government and agency securities
15,064

 
187

 

 
15,251

Municipal bonds
40,619

 
492

 
102

 
41,009

Total securities
$
316,071

 
$
2,566

 
$
418

 
$
318,219

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

 
$
1,760

 
$
610

 
$
145,518

Agency residential collateralized mortgage obligations 1
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 Mortgage-backed securities and collateralized mortgage obligations are 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:
September 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
91,627

 
$
2,555

 
$
18

 
$
94,164

Agency commercial mortgage-backed securities 1
24,964

 
1,476

 

 
26,440

Agency residential collateralized mortgage obligations 1
64,732

 
1,670

 
55

 
66,347

Municipal bonds
68,515

 
3,500

 
171

 
71,844

Total securities
$
249,838

 
$
9,201

 
$
244

 
$
258,795

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

 
$
3,124

 
$
13

 
$
66,272

Agency commercial mortgage-backed securities 1
25,301

 
1,144

 
49

 
26,396

Agency residential collateralized mortgage obligations 1
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 Mortgage-backed securities and collateralized mortgage obligations are 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 September 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
$
1,948

 
$
1,977

 
$
3,343

Due after one to five years
7,362

 
7,734

 
23,923

Due after five to ten years
46,684

 
49,617

 
17,987

Due after ten years
12,521

 
12,516

 
11,007

Agency residential mortgage-backed securities
91,627

 
94,164

 
226,222

Agency commercial mortgage-backed securities
24,964

 
26,440

 

Agency residential collateralized mortgage obligations
64,732

 
66,347

 
35,737

Total
$
249,838

 
$
258,795

 
$
318,219


Securities with a carrying value of $265,654 and $250,525 at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Sales activity of securities for the three and nine months ended September 30, 2015 and 2014 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Proceeds
$
1,366

 
$

 
$
17,947

 
$

Gross gains

 

 
211

 

Gross losses
25

 

 
25

 

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 September 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
September 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
40,026

 
$
127

 
$
11,068

 
$
87

 
$
51,094

 
$
214

Agency residential collateralized mortgage obligations 1
11,754

 
51

 
3,910

 
51

 
15,664

 
102

Municipal bonds
5,578

 
102

 

 

 
5,578

 
102

Total temporarily impaired
$
57,358

 
$
280

 
$
14,978

 
$
138

 
$
72,336

 
$
418

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

 
$
14

 
$
50,729

 
$
596

 
$
57,263

 
$
610

Agency residential collateralized mortgage obligations 1
9,499

 
38

 
4,769

 
43

 
14,268

 
81

Total temporarily impaired
$
16,033

 
$
52

 
$
55,498

 
$
639

 
$
71,531

 
$
691

HTM
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
1,256

 
$
18

 
$

 
$

 
$
1,256

 
$
18

Agency residential collateralized mortgage obligations 1
1,457

 
12

 
3,187

 
43

 
4,644

 
55

Municipal bonds
1,916

 
24

 
6,286

 
147

 
8,202

 
171

Total temporarily impaired
$
4,629


$
54

 
$
9,473

 
$
190

 
$
14,102


$
244

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

 
$

 
$
3,430

 
$
13

 
$
3,430

 
$
13

Agency commercial mortgage-backed securities 1

 

 
3,895

 
49

 
3,895

 
49

Agency residential collateralized mortgage obligations 1
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 Mortgage-backed securities and collateralized mortgage obligations are 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 September 30, 2015, 61 securities had unrealized losses, 21 of which had been in an unrealized loss position for over 12 months at September 30, 2015. The Company does not believe these unrealized losses are other-than-temporary and, at September 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:
 
September 30, 2015
 
December 31, 2014
 
 
 
 
Loans held for sale
$
22,802

 
$

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,035,631

 
$
1,265,868

Commercial and industrial
1,437,241

 
781,824

Construction and land
260,433

 
21,298

Consumer real estate
880,532

 
524,199

Other consumer
74,989

 
40,491

Gross loans held for investment, excluding Warehouse Purchase Program
4,688,826

 
2,633,680

Net of:
 
 
 
Deferred fees and discounts, net
(3,229
)
 
(2,927
)
Allowance for loan losses
(36,382
)
 
(25,549
)
Net loans held for investment, excluding Warehouse Purchase Program
4,649,215

 
2,605,204

Warehouse Purchase Program
960,377

 
786,416

Total loans held for investment
$
5,609,592

 
$
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 nine months ended September 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 September 30, 2015 and 2014, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $139 and $182, respectively.
For the three months ended September 30, 2015
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - July 1, 2015
$
11,285

 
$
13,221

 
$
1,531

 
$
4,120

 
$
710

 
$
30,867

Charge-offs
(9
)
 
(1,649
)
 

 
(106
)
 
(360
)
 
(2,124
)
Recoveries
3

 
23

 

 
6

 
92

 
124

Provision expense
1,789

 
4,019

 
888

 
252

 
567

 
7,515

Ending balance - September 30, 2015
$
13,068

 
$
15,614

 
$
2,419

 
$
4,272

 
$
1,009

 
$
36,382

For the nine months ended September 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
(91
)
 
(2,690
)
 

 
(321
)
 
(883
)
 
(3,985
)
Recoveries
24

 
124

 

 
66

 
339

 
553

Provision expense
1,305

 
9,112

 
2,245

 
458

 
1,145

 
14,265

Ending balance - September 30, 2015
$
13,068

 
$
15,614

 
$
2,419

 
$
4,272

 
$
1,009

 
$
36,382

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
888

 
$
1,426

 
$

 
$
80

 
$
85

 
$
2,479

Collectively evaluated for impairment
12,180

 
14,188

 
2,419

 
4,192

 
924

 
33,903

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
13,880

 
41,805

 
39

 
5,571

 
160

 
61,455

Collectively evaluated for impairment
2,011,101

 
1,395,066

 
260,394

 
874,115

 
74,514

 
4,615,190

PCI loans
10,650

 
370

 

 
846

 
315

 
12,181

Ending balance
$
2,035,631

 
$
1,437,241

 
$
260,433

 
$
880,532

 
$
74,989

 
$
4,688,826


For the three months ended September 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - July 1, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440

Charge-offs

 
(171
)
 
(51
)
 
(81
)
 
(190
)
 
(493
)
Recoveries

 
19

 
1

 
12

 
95

 
127

Provision expense (benefit)
488

 
1,058

 
(59
)
 
910

 
114

 
2,511

Ending balance - September 30, 2014
$
11,674

 
$
6,191

 
$
143

 
$
4,180

 
$
397

 
$
22,585



15

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

For the nine months ended September 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

 
(473
)
 
(51
)
 
(237
)
 
(497
)
 
(1,258
)
Recoveries

 
76

 
1

 
37

 
287

 
401

Provision expense (benefit)
730

 
2,052

 
(19
)
 
1,100

 
221

 
4,084

Ending balance - September 30, 2014
$
11,674

 
$
6,191

 
$
143

 
$
4,180

 
$
397

 
$
22,585

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
835

 
$
1,595

 
$

 
$
416

 
$
4

 
$
2,850

Collectively evaluated for impairment
10,839

 
4,596

 
143

 
3,764

 
393

 
19,735

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
8,158

 
6,485

 
104

 
5,393

 
340

 
20,480

Collectively evaluated for impairment
1,206,151

 
688,868

 
16,796

 
509,206

 
40,973

 
2,461,994

PCI loans
5,127

 
190

 

 
1,107

 
165

 
6,589

Ending balance
$
1,219,436

 
$
695,543

 
$
16,900

 
$
515,706

 
$
41,478

 
$
2,489,063

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 September 30, 2015 and December 31, 2014, were as follows 1:
September 30, 2015
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
14,378

 
$
10,529

 
$
3,351

 
$
13,880

 
$
829

Commercial and industrial
 
44,302

 
38,268

 
3,537

 
41,805

 
1,418

Construction and land
 
43

 
39

 

 
39

 

Consumer real estate
 
6,120

 
5,408

 
163

 
5,571

 
20

Other consumer
 
238

 
60

 
100

 
160

 
73

Total
 
$
65,081

 
$
54,304

 
$
7,151

 
$
61,455

 
$
2,340

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 September 30, 2015 or December 31, 2014. Loans reported do not include PCI loans.
Income on impaired loans at September 30, 2015 and 2014, was as follows1:
September 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
 
$
6,394

 
$
6,705

 
$
3

 
$
22

Commercial and industrial
 
27,446

 
15,444

 
2

 
7

Construction and land
 
65

 
99

 

 

Consumer real estate
 
5,253

 
5,320

 
1

 
6

Other consumer
 
172

 
221

 

 
2

Total
 
$
39,330

 
$
27,789

 
$
6

 
$
37

September 30, 2014
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,114

 
$
8,043

 
$
9

 
$
12

Commercial and industrial
 
6,209

 
6,018

 
3

 
9

Construction and land
 
94

 
31

 

 

Consumer real estate
 
5,252

 
4,802

 
8

 
31

Other consumer
 
396

 
482

 
2

 
4

Total
 
$
20,065

 
$
19,376

 
$
22

 
$
56

1 Loans reported do not include PCI loans.

Past due status is based on the contractual terms of the loan. Loans that are past due 30 days are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process

17

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

of collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans past due over 90 days that were still accruing interest totaled $139 at September 30, 2015 and $612 at December 31, 2014, which consisted entirely of PCI loans. At September 30, 2015, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at September 30, 2015 or December 31, 2014. Non-performing (nonaccrual) loans were as follows: