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EX-32.0 - EXHIBIT 32.0 - LegacyTexas Financial Group, Inc.exhibit32020160630.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220160630.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120160630.htm
EX-10.11 - EXHIBIT 10.11 - LegacyTexas Financial Group, Inc.exhibit1011non-employeedir.htm
EX-10.10 - EXHIBIT 10.10 - LegacyTexas Financial Group, Inc.exhibit1010rsaandnon-solic.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, 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 July 25, 2016:
 
 
47,680,110




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
June 30, 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)
 
June 30,
2016
 
December 31,
2015
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
59,217

 
$
53,847

Short-term interest-bearing deposits in other financial institutions
363,407

 
561,792

Total cash and cash equivalents
422,624

 
615,639

Securities available for sale, at fair value
325,042

 
311,708

Securities held to maturity (fair value: June 30, 2016 — $233,944, December 31, 2015— $247,202)
224,452

 
240,433

Loans held for sale, at fair value
20,752

 
22,535

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $62,194 at June 30, 2016 and $47,093 at December 31, 2015)
5,633,252

 
5,017,554

Loans held for investment - Warehouse Purchase Program
980,390

 
1,043,719

Total loans held for investment
6,613,642

 
6,061,273

FHLB stock and other restricted securities, at cost
62,247

 
63,075

Bank-owned life insurance
55,853

 
55,231

Premises and equipment, net
71,232

 
77,637

Goodwill
178,559

 
180,776

Other assets
82,602

 
63,633

Total assets
$
8,057,005

 
$
7,691,940

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,235,731

 
$
1,170,272

Interest-bearing demand
811,015

 
819,350

Savings and money market
2,249,490

 
2,209,698

Time
1,326,446

 
1,027,391

Total deposits
5,622,682

 
5,226,711

FHLB advances
1,333,337

 
1,439,904

Repurchase agreements
68,049

 
83,269

Subordinated debt
85,231

 
84,992

Other borrowings
24,894

 

Other liabilities
79,508

 
52,988

Total liabilities
7,213,701

 
6,887,864

Commitments and contingent liabilities


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2016 and December 31, 2015

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,670,440 shares issued — June 30, 2016 and 47,645,826 shares issued December 31, 2015
476

 
476

Additional paid-in capital
580,386

 
576,753

Retained earnings
272,454

 
240,496

Accumulated other comprehensive income (loss), net
2,918

 
(133
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,294,010 shares at June 30, 2016 and 1,365,457 shares at December 31, 2015
(12,930
)
 
(13,516
)
Total shareholders’ equity
843,304

 
804,076

Total liabilities and shareholders’ equity
$
8,057,005

 
$
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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
73,376

 
$
61,551

 
$
142,182

 
$
119,586

Taxable securities
2,359

 
2,252

 
4,671

 
4,751

Nontaxable securities
759

 
724

 
1,533

 
1,442

Interest-bearing deposits in other financial institutions
392

 
139

 
722

 
297

FHLB and Federal Reserve Bank stock and other
450

 
301

 
836

 
509

 
77,336

 
64,967

 
149,944

 
126,585

Interest expense
 
 
 
 
 
 
 
Deposits
4,422

 
3,049

 
8,544

 
6,176

FHLB advances
2,103

 
1,774

 
3,776

 
3,480

Repurchase agreements and other borrowings
1,457

 
323

 
2,919

 
782

 
7,982

 
5,146

 
15,239

 
10,438

Net interest income
69,354

 
59,821

 
134,705

 
116,147

Provision for loan losses
6,800

 
3,750

 
15,600

 
6,750

Net interest income after provision for loan losses
62,554

 
56,071

 
119,105

 
109,397

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
8,927

 
7,941

 
17,108

 
14,700

Net gain on sale of mortgage loans
2,250

 
2,121

 
3,830

 
4,193

Bank-owned life insurance income
441

 
424

 
867

 
843

Gain on sale of available-for-sale securities
65

 

 
65

 
211

Gain on sale and disposition of assets
1,186

 
429

 
5,258

 
457

Other
853

 
1,049

 
1,249

 
967

 
13,722

 
11,964

 
28,377

 
21,371

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
22,867

 
22,549

 
45,204

 
45,520

Merger and acquisition costs

 
8

 

 
1,553

Advertising
1,035

 
1,048

 
2,071

 
1,988

Occupancy and equipment
3,779

 
3,838

 
7,470

 
7,646

Outside professional services
1,227

 
625

 
2,043

 
1,375

Regulatory assessments
1,330

 
1,146

 
2,463

 
1,968

Data processing
3,664

 
2,537

 
6,994

 
5,332

Office operations
2,541

 
2,652

 
5,009

 
5,045

Other
3,170

 
2,505

 
5,901

 
4,258

 
39,613

 
36,908

 
77,155

 
74,685

Income before income tax expense
36,663

 
31,127

 
70,327

 
56,083

Income tax expense
13,446

 
10,876

 
25,028

 
19,508

Net income
$
23,217

 
$
20,251

 
$
45,299

 
$
36,575

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.44

 
$
0.98

 
$
0.79

Diluted
$
0.50

 
$
0.44

 
$
0.97

 
$
0.79

Dividends declared per share
$
0.14

 
$
0.13

 
$
0.28

 
$
0.26

 
 
 
 
 
 
 
 
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,
 
2016
 
2015
 
2016
 
2015
Net income
$
23,217

 
$
20,251

 
$
45,299

 
$
36,575

Change in unrealized gains (losses) on securities available for sale
1,725

 
(1,925
)
 
4,764

 
(1,034
)
Reclassification of amount realized through sale of securities
(65
)
 

 
(65
)
 
(211
)
Tax effect
(583
)
 
675

 
(1,648
)
 
437

Other comprehensive income, net of tax
1,077

 
(1,250
)
 
3,051

 
(808
)
Comprehensive income
$
24,294

 
$
19,001

 
$
48,350

 
$
35,767

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 six months ended June 30, 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

 

 
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

Activity in 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

For the six months ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
476

 
$
576,753

 
$
240,496

 
$
(133
)
 
$
(13,516
)
 
$
804,076

Net income

 

 
45,299

 

 

 
45,299

Other comprehensive income, net of tax

 

 

 
3,051

 

 
3,051

Dividends declared ($0.28 per share)

 

 
(13,341
)
 

 

 
(13,341
)
ESOP shares earned, (71,447) shares

 
982

 

 

 
586

 
1,568

Share-based compensation expense

 
2,223

 

 

 

 
2,223

Activity in employee stock plans, (24,614 shares)

 
428

 

 

 

 
428

 Balance at June 30, 2016
$
476

 
$
580,386

 
$
272,454

 
$
2,918

 
$
(12,930
)
 
$
843,304


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,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
45,299

 
$
36,575

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
15,600

 
6,750

Depreciation and amortization
3,506

 
3,636

Deferred tax expense (benefit)
(5,063
)
 
4,174

Premium amortization and accretion of securities, net
2,082

 
2,006

Accretion related to acquired loans
(2,532
)
 
(6,548
)
Gain on sale of available for sale securities
(65
)
 
(211
)
ESOP compensation expense
1,568

 
2,238

Share-based compensation expense
2,223

 
3,219

Net gain on loans held for sale
(3,830
)
 
(4,193
)
Loans originated or purchased for sale
(100,690
)
 
(114,637
)
Proceeds from sale of loans held for sale
106,303

 
116,566

FHLB stock dividends
(238
)
 
(65
)
Bank-owned life insurance income
(867
)
 
(843
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
(3,937
)
 
(176
)
Disposition of insurance subsidiary goodwill upon sale of subsidiary operations
2,217

 

Net change in deferred loan fees/costs
(4,259
)
 
470

Net change in accrued interest receivable
(2,448
)
 
(1,922
)
Net change in other assets
(4,974
)
 
5,913

Net change in other liabilities
25,107

 
2,094

Net cash provided by operating activities
75,002

 
55,046

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
228,710

 
31,352

Purchases
(246,485
)
 
(44,730
)
Proceeds from sale of AFS securities
7,700

 
16,581

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
21,177

 
26,710

Purchases
(5,774
)
 
(6,335
)
Originations of Warehouse Purchase Program loans
(8,729,890
)
 
(7,987,452
)
Proceeds from pay-offs of Warehouse Purchase Program loans
8,793,219

 
7,688,871

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(635,097
)
 
(356,801
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
1,066

 
(21,386
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.

 
128,598

Purchases of premises and equipment
(2,278
)
 
(3,476
)
Proceeds from sale of assets
13,470

 
8,225

Net cash (used in) investing activities
(554,182
)
 
(519,843
)

7


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

 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from financing activities
 
 
 
Net change in deposits
395,971

 
240,192

Proceeds from FHLB advances
650,000

 
1,075,000

Repayments on FHLB advances
(756,567
)
 
(720,602
)
Share repurchase

 
(7,989
)
Proceeds from borrowings
24,894

 

Repayments of borrowings
(15,220
)
 
(50,050
)
Payment of dividends
(13,341
)
 
(12,409
)
Activity in employee stock plans
428

 
651

Net cash provided by financing activities
286,165

 
524,793

Net change in cash and cash equivalents
(193,015
)
 
59,996

Beginning cash and cash equivalents
615,639

 
132,021

Ending cash and cash equivalents
$
422,624

 
$
192,017

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 June 30, 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 or six months ended June 30, 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 and six months ended June 30, 2016 and 2015 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
23,217

 
$
20,251

 
$
45,299

 
$
36,575

Distributed and undistributed earnings to participating securities
(103
)
 
(160
)
 
(232
)
 
(299
)
Income available to common shareholders
$
23,114

 
$
20,091

 
$
45,067

 
$
36,276

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,658,896

 
47,611,263

 
47,652,361

 
47,680,597

Less: Average unallocated ESOP shares
(1,317,433
)
 
(1,487,747
)
 
(1,335,294
)
 
(1,510,641
)
  Average unvested restricted stock awards
(205,464
)
 
(363,284
)
 
(236,942
)
 
(377,612
)
Average shares for basic earnings per share
46,135,999

 
45,760,232

 
46,080,125

 
45,792,344

Basic earnings per common share
$
0.50

 
$
0.44

 
$
0.98

 
$
0.79

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
23,114

 
$
20,091

 
$
45,067

 
$
36,276

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
46,135,999

 
45,760,232

 
46,080,125

 
45,792,344

Dilutive effect of share-based compensation plan
216,142

 
271,035

 
163,745

 
214,267

Average shares for diluted earnings per share
46,352,141

 
46,031,267

 
46,243,870

 
46,006,611

Diluted earnings per common share
$
0.50

 
$
0.44

 
$
0.97

 
$
0.79

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
830,600

 
841,623

 
946,166

 
1,053,800



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, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
221,289

 
$
2,646

 
$
96

 
$
223,839

Agency commercial mortgage-backed securities 1
9,453

 
222

 

 
9,675

Agency residential collateralized mortgage obligations 1
36,195

 
472

 
48

 
36,619

US government and agency securities
14,597

 
234

 

 
14,831

Municipal bonds
39,014

 
1,128

 
64

 
40,078

Total securities
$
320,548

 
$
4,702

 
$
208

 
$
325,042

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:
June 30, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
79,909

 
$
2,529

 
$
2

 
$
82,436

Agency commercial mortgage-backed securities 1
28,306

 
1,916

 

 
30,222

Agency residential collateralized mortgage obligations 1
49,738

 
1,343

 
32

 
51,049

Municipal bonds
66,499

 
3,750

 
12

 
70,237

Total securities
$
224,452

 
$
9,538

 
$
46

 
$
233,944

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 June 30, 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
$
1,707

 
$
1,729

 
$
14,307

Due after one to five years
7,816

 
8,182

 
13,971

Due after five to ten years
47,063

 
50,151

 
16,860

Due after ten years
9,913

 
10,175

 
9,771

Agency residential mortgage-backed securities
79,909

 
82,436

 
223,839

Agency commercial mortgage-backed securities
28,306

 
30,222

 
9,675

Agency residential collateralized mortgage obligations
49,738

 
51,049

 
36,619

Total
$
224,452

 
$
233,944

 
$
325,042


Securities with a carrying value of $228,783 and $280,629 at June 30, 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 six months ended June 30, 2016 and 2015 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Proceeds
$
7,700

 
$

 
$
7,700

 
$
16,581

Gross gains
72

 

 
72

 
211

Gross losses
7

 

 
7

 

Tax benefit of securities gains/losses
23

 

 
23

 
74

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, 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
June 30, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
9,616

 
$
50

 
$
1,957

 
$
46

 
$
11,573

 
$
96

Agency residential collateralized mortgage obligations 1
925

 
7

 
4,062

 
41

 
4,987

 
48

Municipal bonds
1,920

 
16

 
2,975

 
48

 
4,895

 
64

Total temporarily impaired
$
12,461

 
$
73

 
$
8,994

 
$
135

 
$
21,455

 
$
208

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
June 30, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
2,057

 
$
2

 
$

 
$

 
$
2,057

 
$
2

Agency residential collateralized mortgage obligations 1
3,022

 
3

 
2,218

 
29

 
5,240

 
32

Municipal bonds
279

 
1

 
1,086

 
11

 
1,365

 
12

Total temporarily impaired
$
5,358


$
6

 
$
3,304

 
$
40

 
$
8,662


$
46

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 June 30, 2016, 32 securities had unrealized losses, 19 of which had been in an unrealized loss position for over 12 months at June 30, 2016. The Company does not believe these unrealized losses are other-than-temporary and, at June 30, 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:
 
June 30,
2016
 
December 31, 2015
Loans held for sale
$
20,752

 
$
22,535

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,520,431

 
$
2,177,543

Commercial and industrial
1,782,463

 
1,612,669

Construction and land
281,936

 
269,708

Consumer real estate
1,046,794

 
936,757

Other consumer
61,423

 
69,830

Gross loans held for investment, excluding Warehouse Purchase Program
5,693,047

 
5,066,507

Net of:
 
 
 
Deferred costs (fees) and discounts, net
2,399

 
(1,860
)
Allowance for loan losses
(62,194
)
 
(47,093
)
Net loans held for investment, excluding Warehouse Purchase Program
5,633,252

 
5,017,554

Warehouse Purchase Program
980,390

 
1,043,719

Total loans held for investment
$
6,613,642

 
$
6,061,273



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, 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 June 30, 2016 and 2015, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $148 and $127, respectively.
For the three months ended June 30, 2016
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - April 1, 2016
$
15,274

 
$
31,431

 
$
3,430

 
$
4,252

 
$
1,097

 
$
55,484

Charge-offs

 
(82
)
 

 
(70
)
 
(193
)
 
(345
)
Recoveries
3

 
178

 

 
9

 
65

 
255

Provision expense
889

 
4,852

 
520

 
398

 
141

 
6,800

Ending balance - June 30, 2016
$
16,166

 
$
36,379

 
$
3,950

 
$
4,589

 
$
1,110

 
$
62,194

For the six months ended June 30, 2016

 

 

 

 

 

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2016
$
14,123

 
$
24,975

 
$
3,013

 
$
3,992

 
$
990

 
$
47,093

Charge-offs

 
(465
)
 

 
(70
)
 
(391
)
 
(926
)
Recoveries
9

 
214

 

 
52

 
152

 
427

Provision expense
2,034

 
11,655

 
937

 
615

 
359

 
15,600

Ending balance - June 30, 2016
$
16,166

 
$
36,379

 
$
3,950

 
$
4,589

 
$
1,110

 
$
62,194

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
355

 
$
8,250

 
$

 
$
109

 
$
55

 
$
8,769

Collectively evaluated for impairment
15,811

 
28,129

 
3,950

 
4,480

 
1,055

 
53,425

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
1,341

 
31,370

 
27

 
4,924

 
90

 
37,752

Collectively evaluated for impairment
2,512,377

 
1,750,814

 
281,909

 
1,041,004

 
61,060

 
5,647,164

PCI loans
6,713

 
279

 

 
866

 
273

 
8,131

Ending balance
$
2,520,431

 
$
1,782,463

 
$
281,936

 
$
1,046,794

 
$
61,423

 
$
5,693,047


15

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

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
 
 
 
 
 
 
 
 
 
 
 
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

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

16

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

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.
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, 2016 and December 31, 2015, were as follows 1:
June 30, 2016
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
1,459

 
$
248

 
$
1,093

 
$
1,341

 
$
332

Commercial and industrial
 
33,305

 
2,648

 
28,722

 
31,370

 
8,249

Construction and land
 
34

 
27

 

 
27

 

Consumer real estate
 
5,612

 
4,913

 
11

 
4,924

 
11

Other consumer
 
123

 
39

 
51

 
90

 
29

Total
 
$
40,533

 
$
7,875

 
$
29,877

 
$
37,752

 
$
8,621

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 June 30, 2016 or December 31, 2015. Loans reported do not include PCI loans.

17

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

Income on impaired loans at June 30, 2016 and 2015, was as follows1:
June 30, 2016
 
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
 
$
1,376

 
$
5,836

 
$
2

 
$
4

Commercial and industrial
 
30,351

 
25,076

 

 
1

Construction and land
 
29

 
31

 

 

Consumer real estate
 
6,040

 
5,834

 
4

 
8

Other consumer
 
98

 
105

 
1

 
2

Total
 
$
37,894

 
$
36,882

 
$
7

 
$
15

June 30, 2015
 
 
 
 
 
 
 
 
Commercial real estate
 
$
5,886

 
$
6,537

 
$
9

 
$
19

Commercial and industrial
 
9,881

 
8,187