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EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020160930.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220160930.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120160930.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, 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 October 24, 2016:
 
 
47,773,160




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
September 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)
 
September 30,
2016
 
December 31,
2015
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
63,598

 
$
53,847

Short-term interest-bearing deposits in other financial institutions
214,289

 
561,792

Total cash and cash equivalents
277,887

 
615,639

Securities available for sale, at fair value
433,603

 
311,708

Securities held to maturity (fair value: September 30, 2016 — $229,194, December 31, 2015— $247,202)
220,919

 
240,433

Loans held for sale, at fair value
23,184

 
22,535

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $57,318 at September 30, 2016 and $47,093 at December 31, 2015)
5,702,667

 
5,017,554

Loans held for investment - Warehouse Purchase Program
1,345,818

 
1,043,719

Total loans held for investment
7,048,485

 
6,061,273

FHLB stock and other restricted securities, at cost
54,850

 
63,075

Bank-owned life insurance
56,169

 
55,231

Premises and equipment, net
72,325

 
77,637

Goodwill
178,559

 
180,776

Other assets
74,029

 
63,633

Total assets
$
8,440,010

 
$
7,691,940

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,375,883

 
$
1,170,272

Interest-bearing demand
848,564

 
819,350

Savings and money market
2,442,434

 
2,209,698

Time
1,461,194

 
1,027,391

Total deposits
6,128,075

 
5,226,711

FHLB advances
1,134,318

 
1,439,904

Repurchase agreements
75,138

 
83,269

Subordinated debt
134,083

 
84,992

Accrued expenses and other liabilities
101,551

 
52,988

Total liabilities
7,573,165

 
6,887,864

Commitments and contingent liabilities


 


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

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,773,160 shares issued — September 30, 2016 and 47,645,826 shares issued December 31, 2015
478

 
476

Additional paid-in capital
583,800

 
576,753

Retained earnings
292,510

 
240,496

Accumulated other comprehensive income (loss), net
2,639

 
(133
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,258,284 shares at September 30, 2016 and 1,365,457 shares at December 31, 2015
(12,582
)
 
(13,516
)
Total shareholders’ equity
866,845

 
804,076

Total liabilities and shareholders’ equity
$
8,440,010

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
78,966

 
$
63,025

 
$
221,148

 
$
182,611

Taxable securities
2,314

 
2,292

 
6,985

 
7,043

Nontaxable securities
763

 
773

 
2,296

 
2,215

Interest-bearing deposits in other financial institutions
463

 
137

 
1,185

 
421

FHLB and Federal Reserve Bank stock and other
405

 
298

 
1,241

 
820

 
82,911

 
66,525

 
232,855

 
193,110

Interest expense
 
 
 
 
 
 
 
Deposits
5,756

 
3,382

 
14,300

 
9,558

FHLB advances
1,865

 
1,606

 
5,641

 
5,086

Repurchase agreements and other borrowings
1,810

 
349

 
4,729

 
1,131

 
9,431

 
5,337

 
24,670

 
15,775

Net interest income
73,480

 
61,188

 
208,185

 
177,335

Provision for credit losses
3,467

 
7,515

 
19,067

 
14,265

Net interest income after provision for credit losses
70,013

 
53,673

 
189,118

 
163,070

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
9,670

 
8,195

 
26,778

 
22,895

Net gain on sale of mortgage loans held for sale
2,383

 
1,944

 
6,213

 
6,137

Bank-owned life insurance income
441

 
424

 
1,308

 
1,267

Gain (loss) on sale of available-for-sale securities
(3
)
 
(25
)
 
62

 
186

Gain (loss) on sale and disposition of assets
(1,490
)
 
228

 
3,768

 
685

Other
276

 
1,085

 
1,525

 
2,052

 
11,277

 
11,851

 
39,654

 
33,222

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
23,918

 
23,633

 
69,122

 
69,153

Merger and acquisition costs

 

 

 
1,553

Advertising
751

 
645

 
2,822

 
2,633

Occupancy and equipment
3,822

 
3,622

 
11,292

 
11,268

Outside professional services
940

 
934

 
2,983

 
2,309

Regulatory assessments
1,169

 
1,026

 
3,632

 
2,994

Data processing
3,989

 
2,830

 
10,983

 
8,162

Office operations
2,368

 
2,879

 
7,377

 
7,924

Other
2,717

 
2,258

 
8,618

 
6,516

 
39,674

 
37,827

 
116,829

 
112,512

Income before income tax expense
41,616

 
27,697

 
111,943

 
83,780

Income tax expense
14,399

 
9,802

 
39,427

 
29,310

Net income
$
27,217

 
$
17,895

 
$
72,516

 
$
54,470

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.39

 
$
1.56

 
$
1.18

Diluted
$
0.58

 
$
0.38

 
$
1.56

 
$
1.17

Dividends declared per share
$
0.15

 
$
0.14

 
$
0.43

 
$
0.40

 
 
 
 
 
 
 
 
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,
 
2016
 
2015
 
2016
 
2015
Net income
$
27,217

 
$
17,895

 
$
72,516

 
$
54,470

Change in unrealized gains (losses) on securities available for sale
(433
)
 
1,936

 
4,331

 
902

Reclassification of amount realized through sale of securities
3

 
25

 
(62
)
 
(186
)
Tax effect
151

 
(688
)
 
(1,497
)
 
(251
)
Other comprehensive income (loss), net of tax
(279
)
 
1,273

 
2,772

 
465

Comprehensive income
$
26,938

 
$
19,168

 
$
75,288

 
$
54,935

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, 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

 

 
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

Activity in 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

For the nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
476

 
$
576,753

 
$
240,496

 
$
(133
)
 
$
(13,516
)
 
$
804,076

Net income

 

 
72,516

 

 

 
72,516

Other comprehensive income, net of tax

 

 

 
2,772

 

 
2,772

Dividends declared ($0.43 per share)

 

 
(20,502
)
 

 

 
(20,502
)
ESOP shares earned, (107,173 shares)

 
1,775

 

 

 
934

 
2,709

Share-based compensation expense

 
3,855

 

 

 

 
3,855

Activity in employee stock plans, (127,334 shares)
2

 
1,417

 

 

 

 
1,419

 Balance at September 30, 2016
$
478

 
$
583,800

 
$
292,510

 
$
2,639

 
$
(12,582
)
 
$
866,845


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,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income
$
72,516

 
$
54,470

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
19,067

 
14,265

Depreciation and amortization
5,283

 
5,452

Deferred tax expense (benefit)
(3,007
)
 
3,189

Premium amortization and accretion of securities, net
3,154

 
3,166

Accretion related to acquired loans
(3,764
)
 
(8,565
)
Gain on sale of available for sale securities
(62
)
 
(186
)
ESOP compensation expense
2,709

 
3,584

Share-based compensation expense
3,855

 
4,569

Net gain on loans held for sale
(6,213
)
 
(6,137
)
Loans originated or purchased for sale
(160,895
)
 
(174,201
)
Proceeds from sale of loans held for sale
166,459

 
175,175

FHLB stock dividends
(399
)
 
(111
)
Bank-owned life insurance income
(1,308
)
 
(1,267
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
(3,930
)
 
(232
)
Disposition of insurance subsidiary goodwill upon sale of subsidiary operations
2,217

 

Net change in deferred loan fees/costs
(4,621
)
 
302

Net change in accrued interest receivable
(1,174
)
 
(1,791
)
Net change in other assets
275

 
7,065

Net change in other liabilities
47,437

 
9,891

Net cash provided by operating activities
137,599

 
88,638

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
2,146,619

 
998,967

Purchases
(2,274,549
)
 
(1,016,762
)
Proceeds from sale of AFS securities
8,065

 
17,947

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
31,324

 
38,891

Purchases
(12,664
)
 
(14,180
)
Originations of Warehouse Purchase Program loans
(14,748,675
)
 
(11,932,205
)
Proceeds from pay-offs of Warehouse Purchase Program loans
14,446,576

 
11,758,244

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(706,545
)
 
(651,141
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
8,624

 
(15,384
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.

 
128,598

Purchases of premises and equipment
(4,903
)
 
(4,164
)
Proceeds from sale of assets
13,532

 
8,511

Net cash (used in) investing activities
(1,092,596
)
 
(682,678
)

7


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

 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from financing activities
 
 
 
Net change in deposits
901,364

 
484,201

Proceeds from FHLB advances
454,300

 
1,040,000

Repayments on FHLB advances
(759,886
)
 
(749,991
)
Share repurchase

 
(7,989
)
Proceeds from borrowings
73,610

 

Repayments of borrowings
(33,060
)
 
(44,579
)
Payment of dividends
(20,502
)
 
(19,077
)
Activity in employee stock plans
1,419

 
1,168

Net cash provided by financing activities
617,245

 
703,733

Net change in cash and cash equivalents
(337,752
)
 
109,693

Beginning cash and cash equivalents
615,639

 
132,021

Ending cash and cash equivalents
$
277,887

 
$
241,714

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
10,750

 
$
906

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 interim 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.
The Company evaluates goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount, in accordance with ASC 350-20. During the three months ended September 30, 2016, the Company changed its annual goodwill impairment testing date from December 31 to October 1. The Company believes that this new date is preferable as it provides additional time prior to the Company’s year-end to complete the annual goodwill impairment test, especially in the event of future acquisitions and growth. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to previously issued financial statements. There were no impairments of goodwill recorded during the three or nine month periods ended September 30, 2016 and 2015.

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 September 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 nine months ended September 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 nine months ended September 30, 2016 and 2015 is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
27,217

 
$
17,895

 
$
72,516

 
$
54,470

Distributed and undistributed earnings to participating securities
(133
)
 
(127
)
 
(366
)
 
(426
)
Income available to common shareholders
$
27,084

 
$
17,768

 
$
72,150

 
$
54,044

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,737,341

 
47,633,320

 
47,680,894

 
47,664,665

Less: Average unallocated ESOP shares
(1,281,843
)
 
(1,441,870
)
 
(1,317,347
)
 
(1,487,465
)
  Average unvested restricted stock awards
(227,764
)
 
(328,610
)
 
(233,860
)
 
(361,099
)
Average shares for basic earnings per share
46,227,734

 
45,862,840

 
46,129,687

 
45,816,101

Basic earnings per common share
$
0.59

 
$
0.39

 
$
1.56

 
$
1.18

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
27,084

 
$
17,768

 
$
72,150

 
$
54,044

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
46,227,734

 
45,862,840

 
46,129,687

 
45,816,101

Dilutive effect of share-based compensation plan
318,798

 
325,621

 
233,480

 
257,158

Average shares for diluted earnings per share
46,546,532

 
46,188,461

 
46,363,167

 
46,073,259

Diluted earnings per common share
$
0.58

 
$
0.38

 
$
1.56

 
$
1.17

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
968,618

 
920,000

 
1,410,184

 
1,012,971



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, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
216,381

 
$
2,722

 
$
65

 
$
219,038

Agency commercial mortgage-backed securities 1
9,438

 
165

 

 
9,603

Agency residential collateralized mortgage obligations 1
52,678

 
346

 
65

 
52,959

US government and agency securities
114,446

 
203

 

 
114,649

Municipal bonds
36,596

 
864

 
106

 
37,354

Total securities
$
429,539

 
$
4,300

 
$
236

 
$
433,603

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 amortized cost (carrying amount), unrealized gains and losses, and fair value of securities held to maturity were as follows:
September 30, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
80,526

 
$
2,401

 
$
9

 
$
82,918

Agency commercial mortgage-backed securities 1
28,167

 
1,740

 

 
29,907

Agency residential collateralized mortgage obligations 1
45,409

 
1,139

 
37

 
46,511

Municipal bonds
66,817

 
3,086

 
45

 
69,858

Total securities
$
220,919

 
$
8,366

 
$
91

 
$
229,194

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 amortized cost (carrying amount) and fair value of held to maturity debt securities and the fair value of available for sale debt securities at September 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
 
Amortized Cost
 
Fair Value
 
Fair Value
Due in one year or less
$
1,953

 
$
1,980

 
$
114,256

Due after one to five years
9,035

 
9,454

 
12,360

Due after five to ten years
48,356

 
50,836

 
16,486

Due after ten years
7,473

 
7,588

 
8,901

Agency residential mortgage-backed securities
80,526

 
82,918

 
219,038

Agency commercial mortgage-backed securities
28,167

 
29,907

 
9,603

Agency residential collateralized mortgage obligations
45,409

 
46,511

 
52,959

Total
$
220,919

 
$
229,194

 
$
433,603


Securities with a carrying value of $210,606 and $280,629 at September 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 and call activity of securities for the three and nine months ended September 30, 2016 and 2015 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds
$
365

 
$
1,366

 
$
8,065

 
$
17,947

Gross gains

 

 
72

 
211

Gross losses
3

 
25

 
10

 
25

Tax expense (benefit) of securities gains/losses reclassified from accumulated other comprehensive income
(1
)
 
(9
)
 
22

 
65

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, 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
September 30, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
13,344

 
$
17

 
$
5,708

 
$
48

 
$
19,052

 
$
65

Agency residential collateralized mortgage obligations 1
9,082

 
19

 
3,767

 
46

 
12,849

 
65

Municipal bonds
3,848

 
41

 
2,591

 
65

 
6,439

 
106

Total temporarily impaired
$
26,274

 
$
77

 
$
12,066

 
$
159

 
$
38,340

 
$
236

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
September 30, 2016
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
2,192

 
$
9

 
$

 
$

 
$
2,192

 
$
9

Agency residential collateralized mortgage obligations 1
2,509

 
10

 
1,808

 
27

 
4,317

 
37

Municipal bonds
1,423

 
23

 
1,073

 
22

 
2,496

 
45

Total temporarily impaired
$
6,124


$
42

 
$
2,881

 
$
49

 
$
9,005


$
91

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 September 30, 2016, 45 securities had unrealized losses, 20 of which had been in an unrealized loss position for over 12 months at September 30, 2016. The Company does not believe these unrealized losses are other-than-temporary and, at September 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:
 
September 30, 2016
 
December 31, 2015
Loans held for sale
$
23,184

 
$
22,535

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,533,404

 
$
2,177,543

Commercial and industrial
1,812,558

 
1,612,669

Construction and land
307,734

 
269,708

Consumer real estate
1,046,397

 
936,757

Other consumer
57,131

 
69,830

Gross loans held for investment, excluding Warehouse Purchase Program
5,757,224

 
5,066,507

Net of:
 
 
 
Deferred costs (fees) and discounts, net
2,761

 
(1,860
)
Allowance for loan losses
(57,318
)
 
(47,093
)
Net loans held for investment, excluding Warehouse Purchase Program
5,702,667

 
5,017,554

Warehouse Purchase Program
1,345,818

 
1,043,719

Total loans held for investment
$
7,048,485

 
$
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 nine months ended September 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 or similar arrangement for each loan. 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, 2016 and 2015, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $164 and $139, respectively.
For the three months ended September 30, 2016
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - July 1, 2016
$
16,166

 
$
36,379

 
$
3,950

 
$
4,589

 
$
1,110

 
$
62,194

Charge-offs
(79
)
 
(7,216
)
 

 
(7
)
 
(264
)
 
(7,566
)
Recoveries
7

 
227

 

 
47

 
109

 
390

Provision expense (benefit)
1,374

 
398

 
527

 
(238
)
 
239

 
2,300

Ending balance - September 30, 2016
$
17,468

 
$
29,788

 
$
4,477

 
$
4,391

 
$
1,194

 
$
57,318

For the nine months ended September 30, 2016

 

 

 

 

 

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

 
$
24,975

 
$
3,013

 
$
3,992

 
$
990

 
$
47,093

Charge-offs
(79
)
 
(7,681
)
 

 
(77
)
 
(655
)
 
(8,492
)
Recoveries
16

 
441

 

 
99

 
261

 
817

Provision expense
3,408

 
12,053

 
1,464

 
377

 
598

 
17,900

Ending balance - September 30, 2016
$
17,468

 
$
29,788

 
$
4,477

 
$
4,391

 
$
1,194

 
$
57,318

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
301

 
$
2,002

 
$

 
$
121

 
$
58

 
$
2,482

Collectively evaluated for impairment
17,167

 
27,786

 
4,477

 
4,270

 
1,136

 
54,836

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
5,336

 
28,282

 
27

 
2,931

 
85

 
36,661

Collectively evaluated for impairment
2,522,417

 
1,784,023

 
307,707

 
1,042,585

 
56,810

 
5,713,542

PCI loans
5,651

 
253

 

 
881

 
236

 
7,021

Ending balance
$
2,533,404

 
$
1,812,558

 
$
307,734

 
$
1,046,397

 
$
57,131

 
$
5,757,224


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 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
 
 
 
 
 
 
 
 
 
 
 
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

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 incurred 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 are not yet 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 adversely rated 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.
Changes in the allowance for off-balance sheet credit losses on lending-related commitments, included in "accrued expenses and other liabilities" on the consolidated balance sheets, are summarized in the following table. Please see Note 10 - Commitments and Contingent Liabilities for more information.
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Balance at beginning of period
$

 
$

Charge-offs on lending-related commitments

 

Provision for credit losses on lending-related commitments
1,167

 
1,167

Balance at end of period
$
1,167

 
$
1,167

Impaired loans at September 30, 2016 and December 31, 2015, were as follows 1:
September 30, 2016
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
5,475

 
$
4,566

 
$
770

 
$
5,336

 
$
272

Commercial and industrial
 
30,231

 
17,110

 
11,172

 
28,282

 
1,999

Construction and land
 
34

 
27

 

 
27

 

Consumer real estate
 
4,124

 
2,920

 
11

 
2,931

 
11

Other consumer
 
118

 
37

 
48

 
85

 
36

Total
 
$
39,982

 
$
24,660

 
$
12,001

 
$
36,661

 
$
2,318

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 September 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 September 30, 2016 and 2015, was as follows1:
September 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
 
$
3,223

 
$
5,240

 
$
3

 
$
7

Commercial and industrial
 
24,835

 
24,350

 

 
1

Construction and land
 
27

 
30

 

 

Consumer real estate
 
4,452

 
5,372

 
3

 
11

Other consumer
 
87

 
100

 
1

 
3

Total
 
$
32,624

 
$
35,092

 
$
7