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EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120160331.htm
EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020160331.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220160331.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 March 31, 2016
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 April 22, 2016:
 
 
47,645,826




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2016
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)
 
March 31,
 
December 31,
 
2016
 
2015
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
55,348

 
$
53,847

Short-term interest-bearing deposits in other financial institutions
261,423

 
561,792

Total cash and cash equivalents
316,771

 
615,639

Securities available for sale, at fair value
320,866

 
311,708

Securities held to maturity (fair value: March 31, 2016 — $237,389, December 31, 2015— $247,202)
228,576

 
240,433

Loans held for sale, at fair value
17,615

 
22,535

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $55,484 at March 31, 2016 and $47,093 at December 31, 2015)
5,214,311

 
5,017,554

Loans held for investment - Warehouse Purchase Program
1,028,561

 
1,043,719

Total loans held for investment
6,242,872

 
6,061,273

FHLB stock and other restricted securities, at cost
54,648

 
63,075

Bank-owned life insurance
55,535

 
55,231

Premises and equipment, net
71,271

 
77,637

Goodwill
180,776

 
180,776

Other assets
73,196

 
63,633

Total assets
$
7,562,126

 
$
7,691,940

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,174,816

 
$
1,170,272

Interest-bearing demand
782,161

 
819,350

Savings and money market
2,225,611

 
2,209,698

Time
1,120,261

 
1,027,391

Total deposits
5,302,849

 
5,226,711

FHLB advances
1,201,632

 
1,439,904

Repurchase agreements
69,079

 
83,269

Subordinated debt
85,104

 
84,992

Other liabilities
80,410

 
52,988

Total liabilities
6,739,074

 
6,887,864

Commitments and contingent liabilities


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — March 31, 2016 and December 31, 2015

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,645,826 shares issued — March 31, 2016 and December 31, 2015
476

 
476

Additional paid-in capital
578,050

 
576,753

Retained earnings
255,908

 
240,496

Accumulated other comprehensive income (loss), net
1,841

 
(133
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,329,733 shares at March 31, 2016 and 1,365,457 shares at December 31, 2015
(13,223
)
 
(13,516
)
Total shareholders’ equity
823,052

 
804,076

Total liabilities and shareholders’ equity
$
7,562,126

 
$
7,691,940

 
 
 
 
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 March 31,
 
 
2016
 
2015
Interest and dividend income
 
 
 
 
Loans, including fees
 
$
68,806

 
$
58,035

Taxable securities
 
2,312

 
2,499

Nontaxable securities
 
774

 
718

Interest-bearing deposits in other financial institutions
 
330

 
158

FHLB and Federal Reserve Bank stock and other
 
386

 
208

 
 
72,608

 
61,618

Interest expense
 
 
 
 
Deposits
 
4,122

 
3,127

FHLB advances
 
1,673

 
1,706

Repurchase agreements and other borrowings
 
1,462

 
459

 
 
7,257

 
5,292

Net interest income
 
65,351

 
56,326

Provision for loan losses
 
8,800

 
3,000

Net interest income after provision for loan losses
 
56,551

 
53,326

Non-interest income
 
 
 
 
Service charges and other fees
 
8,181

 
6,759

Net gain on sale of mortgage loans
 
1,580

 
2,072

Bank-owned life insurance income
 
426

 
419

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
 
4,072

 
28

Other
 
396

 
(82
)
 
 
14,655

 
9,407

Non-interest expense
 
 
 
 
Salaries and employee benefits
 
22,337

 
22,971

Merger and acquisition costs
 

 
1,545

Advertising
 
1,036

 
940

Occupancy and equipment
 
3,691

 
3,808

Outside professional services
 
816

 
750

Regulatory assessments
 
1,133

 
822

Data processing
 
3,290

 
2,795

Office operations
 
2,468

 
2,393

Other
 
2,771

 
1,753

 
 
37,542

 
37,777

Income before income tax expense
 
33,664

 
24,956

Income tax expense (items reclassified from accumulated other comprehensive income include an income tax expense of $74 for the three months ended March 31, 2015)
 
11,582

 
8,632

Net income
 
$
22,082

 
$
16,324

Earnings per share:
 
 
 
 
Basic
 
$
0.48

 
$
0.35

Diluted
 
$
0.48

 
$
0.35

Dividends declared per share
 
$
0.14

 
$
0.13

 
 
 
 
 
See accompanying notes to consolidated financial statements.


4


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
March 31,
 
2016
 
2015
Net income
$
22,082

 
$
16,324

Change in unrealized gains (losses) on securities available for sale
3,039

 
891

Reclassification of amount realized through sale of securities

 
(211
)
Tax effect
(1,065
)
 
(238
)
Other comprehensive income, net of tax
1,974

 
442

Comprehensive income
$
24,056

 
$
16,766

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 three months ended March 31, 2015
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
Balance at January 1, 2015
$
400

 
$
386,549

 
$
195,327

 
$
930

 
$
(14,983
)
 
$
568,223

Net income

 

 
16,324

 

 

 
16,324

Other comprehensive income, net of tax

 

 

 
442

 

 
442

Dividends declared ($0.13 per share)

 

 
(6,220
)
 

 

 
(6,220
)
ESOP shares earned, 46,049 shares

 
666

 

 

 
367

 
1,033

Share-based compensation expense

 
1,719

 

 

 

 
1,719

Activity in employee stock plans, 95,750 shares
1

 
302

 

 

 

 
303

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 March 31, 2015
$
476

 
$
568,396

 
$
205,431

 
$
1,372

 
$
(14,616
)
 
$
761,059

For the three months ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
476

 
$
576,753

 
$
240,496

 
$
(133
)
 
$
(13,516
)
 
$
804,076

Net income

 

 
22,082

 

 

 
22,082

Other comprehensive income, net of tax

 

 

 
1,974

 

 
1,974

Dividends declared ($0.14 per share)

 

 
(6,670
)
 

 

 
(6,670
)
ESOP shares earned, 35,724 shares

 
404

 

 

 
293

 
697

Share-based compensation expense

 
997

 

 

 

 
997

Activity in employee stock plans, 0 shares

 
(104
)
 

 

 

 
(104
)
Balance at March 31, 2016
$
476

 
$
578,050

 
$
255,908

 
$
1,841

 
$
(13,223
)
 
$
823,052


See accompanying notes to consolidated financial statements.

6


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

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
22,082

 
$
16,324

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
8,800

 
3,000

Depreciation and amortization
1,761

 
1,786

Deferred tax expense
(3,622
)
 
2,650

Premium amortization and accretion of securities, net
1,030

 
939

Accretion related to acquired loans
(1,246
)
 
(3,416
)
Gain on sale of available for sale securities

 
(211
)
ESOP compensation expense
697

 
1,033

Share-based compensation expense
997

 
1,719

Net gain on loans held for sale
(1,580
)
 
(2,072
)
Loans originated or purchased for sale
(43,061
)
 
(53,512
)
Proceeds from sale of loans held for sale
49,561

 
49,240

FHLB stock dividends
(134
)
 
(30
)
Bank-owned life insurance income
(426
)
 
(419
)
(Gain) loss on sale and disposition of repossessed assets, premises and equipment
(3,940
)
 
229

Net change in deferred loan fees/costs
(2,343
)
 
362

Net change in accrued interest receivable
(321
)
 
(1,182
)
Net change in other assets
952

 
(1,286
)
Net change in other liabilities
26,468

 
(3,659
)
Net cash provided by operating activities
55,675

 
11,495

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
14,266

 
14,867

Purchases
(21,123
)
 
(2,182
)
Proceeds from sale of AFS securities

 
16,581

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
11,565

 
13,586

Originations of Warehouse Purchase Program loans
(3,746,783
)
 
(3,708,951
)
Proceeds from pay-offs of Warehouse Purchase Program loans
3,761,941

 
3,456,481

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(212,558
)
 
(160,698
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
8,561

 
(17,667
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.

 
131,048

Purchases of premises and equipment
(780
)
 
(3,322
)
Proceeds from sale of assets
13,466

 
6,284

Net cash (used in) investing activities
(171,445
)
 
(253,973
)

7


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

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from financing activities
 
 
 
Net change in deposits
76,138

 
110,585

Proceeds from FHLB advances
515,000

 
1,025,000

Repayments on FHLB advances
(753,272
)
 
(716,284
)
Share repurchase

 
(7,989
)
Repayments of borrowings
(14,190
)
 
(11,024
)
Payment of dividends
(6,670
)
 
(6,220
)
Activity in employee stock plans
(104
)
 
303

Net cash provided by (used in) financing activities
(183,098
)
 
394,371

Net change in cash and cash equivalents
(298,868
)
 
151,893

Beginning cash and cash equivalents
615,639

 
132,021

Ending cash and cash equivalents
$
316,771

 
$
283,914

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
10,590

 
$
589

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, 2015 (“2015 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
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 2015 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 March 1, 2016, 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. At March 31, 2016, 441,750 shares have been repurchased under this stock repurchase program, leaving 1,537,121 shares available for future repurchases under the program. Subsequently, 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 of Company stock were repurchased under this program during the three months ended March 31, 2016.

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 months ended March 31, 2016 and 2015 is as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Basic earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
22,082

 
$
16,324

Distributed and undistributed earnings to participating securities
(128
)
 
(138
)
Income available to common shareholders
$
21,954

 
$
16,186

Denominator:
 
 
 
Weighted average common shares outstanding
47,645,826

 
47,750,701

Less: Average unallocated ESOP shares
(1,353,156
)
 
(1,533,790
)
  Average unvested restricted stock awards
(268,420
)
 
(392,099
)
Average shares for basic earnings per share
46,024,250

 
45,824,812

Basic earnings per common share
$
0.48

 
$
0.35

Diluted earnings per share:
 
 
 
Numerator:
 
 
 
Income available to common shareholders
$
21,954

 
$
16,186

Denominator:
 
 
 
Average shares for basic earnings per share
46,024,250

 
45,824,812

Dilutive effect of share-based compensation plan
128,051

 
178,009

Average shares for diluted earnings per share
46,152,301

 
46,002,821

Diluted earnings per common share
$
0.48

 
$
0.35

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
1,696,399

 
1,077,780



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:
March 31, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
229,417

 
$
1,707

 
$
204

 
$
230,920

Agency commercial mortgage-backed securities 1
9,467

 
154

 

 
9,621

Agency residential collateralized mortgage obligations 1
25,283

 
252

 
66

 
25,469

US government and agency securities
14,752

 
201

 

 
14,953

Municipal bonds
39,113

 
905

 
115

 
39,903

Total securities
$
318,032

 
$
3,219

 
$
385

 
$
320,866

December 31, 2015
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
224,582

 
$
841

 
$
1,575

 
$
223,848

Agency commercial mortgage-backed securities 1
9,483

 

 
66

 
9,417

Agency residential collateralized mortgage obligations 1
22,430

 
26

 
142

 
22,314

US government and agency securities
14,906

 
148

 

 
15,054

Municipal bonds
40,512

 
637

 
74

 
41,075

Total securities
$
311,913

 
$
1,652

 
$
1,857

 
$
311,708

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:
March 31, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
82,883

 
$
2,344

 
$
4

 
$
85,223

Agency commercial mortgage-backed securities 1
24,730

 
1,531

 

 
26,261

Agency residential collateralized mortgage obligations 1
54,425

 
1,317

 
40

 
55,702

Municipal bonds
66,538

 
3,679

 
14

 
70,203

Total securities
$
228,576

 
$
8,871

 
$
58

 
$
237,389

December 31, 2015
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
87,935

 
$
1,837

 
$
284

 
$
89,488

Agency commercial mortgage-backed securities 1
24,848

 
913

 
64

 
25,697

Agency residential collateralized mortgage obligations 1
59,174

 
1,087

 
55

 
60,206

Municipal bonds
68,476

 
3,447

 
112

 
71,811

Total securities
$
240,433

 
$
7,284

 
$
515

 
$
247,202

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 March 31, 2016 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
$
1,708

 
$
1,742

 
$
14,309

Due after one to five years
7,617

 
7,990

 
14,125

Due after five to ten years
47,009

 
50,092

 
16,776

Due after ten years
10,204

 
10,379

 
9,646

Agency residential mortgage-backed securities
82,883

 
85,223

 
230,920

Agency commercial mortgage-backed securities
24,730

 
26,261

 
9,621

Agency residential collateralized mortgage obligations
54,425

 
55,702

 
25,469

Total
$
228,576

 
$
237,389

 
$
320,866


Securities with a carrying value of $284,403 and $280,629 at March 31, 2016 and December 31, 2015, 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 months ended March 31, 2016 and 2015 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended March 31,
 
2016
 
2015
Proceeds
$

 
$
16,581

Gross gains

 
211

Gross losses

 

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 March 31, 2016 and December 31, 2015, 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
March 31, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
26,402

 
$
101

 
$
19,389

 
$
103

 
$
45,791

 
$
204

Agency residential collateralized mortgage obligations 1
2,047

 
11

 
5,446

 
55

 
7,493

 
66

Municipal bonds
2,697

 
62

 
2,970

 
53

 
5,667

 
115

Total temporarily impaired
$
31,146

 
$
174

 
$
27,805

 
$
211

 
$
58,951

 
$
385

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
158,172

 
$
1,353

 
$
10,474

 
$
222

 
$
168,646

 
$
1,575

Agency commercial mortgage-backed securities 1
9,417

 
66

 

 

 
9,417

 
66

Agency residential collateralized mortgage obligations 1
13,517

 
81

 
6,992

 
61

 
20,509

 
142

Municipal bonds
7,249

 
74

 

 

 
7,249

 
74

Total temporarily impaired
$
188,355

 
$
1,574

 
$
17,466

 
$
283

 
$
205,821

 
$
1,857

HTM
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
1,257

 
$
4

 
$

 
$

 
$
1,257

 
$
4

Agency residential collateralized mortgage obligations 1
472

 
3

 
2,415

 
37

 
2,887

 
40

Municipal bonds
558

 
4

 
808

 
10

 
1,366

 
14

Total temporarily impaired
$
2,287


$
11

 
$
3,223

 
$
47

 
$
5,510


$
58

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
41,935

 
$
284

 
$

 
$

 
$
41,935

 
$
284

Agency commercial mortgage-backed securities 1
3,805

 
64

 

 

 
3,805

 
64

Agency residential collateralized mortgage obligations 1
3,714

 
6

 
3,060

 
49

 
6,774

 
55

Municipal bonds
1,638

 
10

 
6,369

 
102

 
8,007

 
112

Total temporarily impaired
$
51,092

 
$
364

 
$
9,429

 
$
151

 
$
60,521

 
$
515

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 March 31, 2016, 46 securities had unrealized losses, 23 of which had been in an unrealized loss position for over 12 months at March 31, 2016. The Company does not believe these unrealized losses are other-than-temporary and, at March 31, 2016, 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:
 
March 31, 2016
 
December 31, 2015
 
 
 
 
Loans held for sale
$
17,615

 
$
22,535

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,324,338

 
$
2,177,543

Commercial and industrial
1,640,042

 
1,612,669

Construction and land
267,543

 
269,708

Consumer real estate
972,115

 
936,757

Other consumer
65,274

 
69,830

Gross loans held for investment, excluding Warehouse Purchase Program
5,269,312

 
5,066,507

Net of:
 
 
 
Deferred costs (fees) and discounts, net
483

 
(1,860
)
Allowance for loan losses
(55,484
)
 
(47,093
)
Net loans held for investment, excluding Warehouse Purchase Program
5,214,311

 
5,017,554

Warehouse Purchase Program
1,028,561

 
1,043,719

Total loans held for investment
$
6,242,872

 
$
6,061,273


Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015, 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 March 31, 2016 and 2015, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $178 and $155, respectively.
For the three months ended March 31, 2016
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2016
$
14,123

 
$
24,975

 
$
3,013

 
$
3,992

 
$
990

 
$
47,093

Charge-offs

 
(383
)
 

 

 
(198
)
 
(581
)
Recoveries
6

 
36

 

 
43

 
87

 
172

Provision expense
1,145

 
6,803

 
417

 
217

 
218

 
8,800

Ending balance - March 31, 2016
$
15,274

 
$
31,431

 
$
3,430

 
$
4,252

 
$
1,097

 
$
55,484

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
402

 
$
4,680

 
$

 
$
130

 
$
55

 
$
5,267

Collectively evaluated for impairment
14,872

 
26,751

 
3,430

 
4,122

 
1,042

 
50,217

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
1,467

 
30,120

 
31

 
7,061

 
104

 
38,783

Collectively evaluated for impairment
2,315,238

 
1,609,736

 
267,512

 
964,199

 
64,894

 
5,221,579

PCI loans
7,633

 
186

 

 
855

 
276

 
8,950

Ending balance
$
2,324,338

 
$
1,640,042

 
$
267,543

 
$
972,115

 
$
65,274

 
$
5,269,312


14

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

For the three months ended March 31, 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
(4
)
 
(64
)
 

 
(188
)
 
(248
)
 
(504
)
Recoveries
21

 
59

 

 
46

 
105

 
231

Provision expense
763

 
1,678

 
289

 
56

 
214

 
3,000

Ending balance - March 31, 2015
$
12,610

 
$
10,741

 
$
463

 
$
3,983

 
$
479

 
$
28,276

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
848

 
$
1,927

 
$

 
$
44

 
$
4

 
$
2,823

Collectively evaluated for impairment
11,762

 
8,814

 
463

 
3,939

 
475

 
25,453

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
7,483

 
5,838

 
140

 
4,873

 
239

 
18,573

Collectively evaluated for impairment
1,871,786

 
1,204,255

 
215,181

 
787,286

 
84,478

 
4,162,986

PCI loans
11,249

 
2,235

 
431

 
836

 
400

 
15,151

Ending balance
$
1,890,518

 
$
1,212,328

 
$
215,752

 
$
792,995

 
$
85,117

 
$
4,196,710

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.

15

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 March 31, 2016 and December 31, 2015, were as follows 1:
March 31, 2016
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
1,579

 
$
513

 
$
954

 
$
1,467

 
$
321

Commercial and industrial
 
31,845

 
8,851

 
21,269

 
30,120

 
4,680

Construction and land
 
37

 
31

 

 
31

 

Consumer real estate
 
7,708

 
4,962

 
2,099

 
7,061

 
53

Other consumer
 
181

 
43

 
61

 
104

 
35

Total
 
$
41,350

 
$
14,400

 
$
24,383

 
$
38,783

 
$
5,089

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
11,682

 
$
10,618

 
$
962

 
$
11,580

 
$
303

Commercial and industrial
 
18,649

 
13,894

 
3,012

 
16,906

 
1,467

Construction and land
 
38

 
33

 

 
33

 

Consumer real estate
 
5,327

 
4,754

 
13

 
4,767

 
13

Other consumer
 
199

 
49

 
71

 
120

 
45

Total
 
$
35,895

 
$
29,348

 
$
4,058

 
$
33,406

 
$
1,828

1 No Warehouse Purchase Program loans were impaired at March 31, 2016 or December 31, 2015. Loans reported do not include PCI loans.
Income on impaired loans at March 31, 2016 and 2015, was as follows1:
 
 
March 31, 2016
 
March 31, 2015
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
9,204

 
$
2

 
$
7,425

 
$
10

Commercial and industrial
 
21,063

 
1

 
5,906

 
3

Construction and land
 
32

 

 
112

 

Consumer real estate
 
5,935

 
4

 
5,424

 
2

Other consumer
 
112

 
1

 
272

 
1

Total
 
$
36,346

 
$
8

 
$
19,139

 
$
16

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 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.

16

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

Loans past due over 90 days that were still accruing interest totaled $116 at March 31, 2016 and $111 at December 31, 2015, which consisted entirely of PCI loans. At March 31, 2016, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at March 31, 2016 or December 31, 2015. Non-performing (nonaccrual) loans were as follows:
 
March 31, 2016
 
December 31, 2015
Commercial real estate
$
1,307

 
$
11,418

Commercial and industrial
30,105

 
16,877

Construction and land
31

 
33

Consumer real estate
11,948

 
9,781

Other consumer
105

 
107

Total
$
43,496

 
$
38,216

A modified loan is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company's policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans.
The outstanding balances of TDRs are shown below:
 
March 31, 2016
 
December 31, 2015
Nonaccrual TDRs(1)
$
13,551

 
$
6,207

Performing TDRs (2)
581

 
605

Total
$
14,132

 
$
6,812

Specific reserves on TDRs
$
475

 
$
487

Outstanding commitments to lend additional funds to borrowers with TDR loans

 

1 Nonaccrual TDR loans are included in the nonaccrual loan totals.
2 Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans.
The following tables provide the recorded balances of loans modified as a TDR during the three months ended March 31, 2016 and 2015.
Three Months Ended March 31, 2016
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
Commercial and industrial
 
$
9

 
$

 
$
7,225

(2) 
$
7,234

Consumer real estate
 
67

 
83

 

 
150

Other consumer
 

 

 
3

 
3

Total
 
$
76

 
$
83

 
$
7,228

 
$
7,387

Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
Commercial and industrial
 
$

 
$

 
$
80

 
$
80

Consumer real estate
 

 
62

 

 
62

Total
 
$

 
$
62

 
$
80

 
$
142

1 Principal deferrals include Chapter 7 bankruptcy loans for which the court has discharged the borrower's obligation and the borrower has not reaffirmed the debt. Such loans are placed on non-accrual status.
2 Includes a $6.3 million reserve-based energy relationship; the primary modification to this relationship was suspension of required borrowing base payments.

17

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

Loans modified as a TDR during the three months ended March 31, 2016 or 2015 which experienced a subsequent payment default during the periods are shown below. A payment default is defined as a loan that was 90 days or more past due.
 
Three Months Ended March 31,
 
2016
 
2015
Consumer real estate
$
36

 
$

Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company would not be able to collect all contractual amounts due, were accounted for as PCI loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related outstanding balances at March 31, 2016 and December 31, 2015 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
 
March 31, 2016
 
December 31, 2015
Carrying amount 1
$
8,772

 
$
11,804

Outstanding balance
9,823

 
13,053

1 The carrying amounts are reported net of allowance for loan losses of $178 and $150 as of March 31, 2016 and December 31, 2015.

18

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

Changes in the accretable yield for PCI loans for the three months ended March 31, 2016, and 2015 are as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Beginning balance
$
3,356

 
$
2,100

Additions

 
1,907

Reclassifications from nonaccretable
237

 
106

Disposals
(268
)
 
(4
)
Accretion
(269
)
 
(373
)
Balance at end of period
$
3,056

 
$
3,736

Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2016 and December 31, 2015. No Warehouse Purchase Program loans were delinquent at March 31, 2016 or December 31, 2015 and therefore are not included in the following table.
March 31, 2016
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days and Greater Past Due
 
Total Loans Past Due
 
Current Loans 1
 
Total Loans
Commercial real estate
 
$
534

 
$

 
$
160

 
$
694

 
$
2,323,644

 
$
2,324,338

Commercial and industrial
 
3,961

 
661

 
12,000

 
16,622

 
1,623,420

 
1,640,042

Construction and land
 
2,566

 

 
31

 
2,597

 
264,946

 
267,543

Consumer real estate
 
14,174

 
465

 
2,319

 
16,958

 
955,157

 
972,115

Other consumer
 
382

 
19

 

 
401

 
64,873

 
65,274

Total
 
$
21,617

 
$
1,145

 
$
14,510

 
$
37,272

 
$
5,232,040

 
$
5,269,312

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
16

 
$
176

 
$
10,269

 
$
10,461

 
$
2,167,082

 
$
2,177,543

Commercial and industrial
 
884

 
670

 
12,255

 
13,809

 
1,598,860

 
1,612,669

Construction and land
 
623

 

 

 
623

 
269,085

 
269,708

Consumer real estate
 
10,880

 
2,463

 
3,458

 
16,801

 
919,956

 
936,757

Other consumer
 
463

 
37

 

 
500

 
69,330

 
69,830

Total
 
$
12,866

 
$
3,346

 
$
25,982

 
$
42,194

 
$
5,024,313

 
$
5,066,507

1 Includes acquired PCI loans with a total carrying value of $8,071 and $11,328 at March 31, 2016 and December 31, 2015, respectively.
For loans collateralized by real property and commercial and industrial loans, credit exposure is monitored by internally assigned grades used for classification of loans. A loan is considered “special mention” when management has determined that there is a potential weakness that deserves management's close attention. Loans rated as "special mention" are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. A loan is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected, and the loan may or may not meet the criteria for impairment. Loans classified as “doubtful” have all of the weaknesses of those classified as “substandard”, with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” All other loans that do not fall into the above mentioned categories are considered “pass” loans. Updates to internally assigned grades are made monthly and/or upon significant developments.
For consumer loans, credit exposure is monitored by payment history of the loans. Non-performing consumer loans are on nonaccrual status and are generally greater than 90 days past due.

19

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

The recorded investment in loans by credit quality indicators at March 31, 2016 and December 31, 2015, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
March 31, 2016
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
2,292,798

 
$
1,409,718

 
$
267,421

 
$
954,025

Special Mention
 
16,353

 
148,717