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EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020170331.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220170331.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120170331.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, 2017
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
 
 
 
27-2176993
(State or other jurisdiction of incorporation or organization)
 
 
 
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 24, 2017:
 
 
47,940,133




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2017
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,
2017
 
December 31,
2016
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
60,073

 
$
59,823

Short-term interest-bearing deposits in other financial institutions
294,955

 
229,389

Total cash and cash equivalents
355,028

 
289,212

Securities available for sale, at fair value
381,831

 
354,515

Securities held to maturity (fair value: March 31, 2017 — $203,394,
December 31, 2016— $212,981)
200,541

 
210,387

Loans held for sale, at fair value
19,315

 
21,279

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $70,656 at March 31, 2017 and $64,576 at December 31, 2016)
6,197,429

 
5,998,596

Loans held for investment - Warehouse Purchase Program
846,973

 
1,055,341

Total loans held for investment
7,044,402

 
7,053,937

Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost
43,156

 
43,266

Bank-owned life insurance
56,768

 
56,477

Premises and equipment, net
72,312

 
74,226

Goodwill
178,559

 
178,559

Other assets
84,630

 
80,397

Total assets
$
8,436,542

 
$
8,362,255

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,449,656

 
$
1,383,951

Interest-bearing demand
873,085

 
903,314

Savings and money market
2,679,538

 
2,710,307

Time
1,377,367

 
1,367,904

Total deposits
6,379,646

 
6,365,476

FHLB advances
830,195

 
833,682

Repurchase agreements
76,880

 
86,691

Subordinated debt
134,155

 
134,032

Accrued expenses and other liabilities
115,749

 
57,009

Total liabilities
7,536,625

 
7,476,890

Commitments and contingent liabilities (See Note 10)


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — March 31, 2017 and December 31, 2016

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,940,133 shares issued —
March 31, 2017 and 47,876,198 shares issued December 31, 2016
479

 
479

Additional paid-in capital
592,159

 
589,408

Retained earnings
321,648

 
310,641

Accumulated other comprehensive income (loss), net
(2,051
)
 
(2,713
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,231,808 shares at March 31, 2017 and 1,245,046 shares at December 31, 2016
(12,318
)
 
(12,450
)
Total shareholders’ equity
899,917

 
885,365

Total liabilities and shareholders’ equity
$
8,436,542

 
$
8,362,255

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,
 
2017
 
2016
Interest and dividend income
 
 
 
Loans, including fees
$
83,103

 
$
68,806

Taxable securities
2,562

 
2,312

Nontaxable securities
755

 
774

Interest-bearing deposits in other financial institutions
732

 
330

FHLB and Federal Reserve Bank stock and other
384

 
386

 
87,536

 
72,608

Interest expense
 
 
 
Deposits
7,110

 
4,122

FHLB advances
1,632

 
1,673

Repurchase agreements and other borrowings
2,246

 
1,462

 
10,988

 
7,257

Net interest income
76,548

 
65,351

Provision for credit losses
22,301

 
8,800

Net interest income after provision for credit losses
54,247

 
56,551

Non-interest income
 
 
 
Service charges and other fees
8,431

 
8,181

Net gain on sale of mortgage loans held for sale
1,628

 
1,580

Bank-owned life insurance income
422

 
426

Net gain (loss) on securities transactions
(19
)
 

Gain on sale and disposition of assets
1,399

 
4,072

Other
269

 
396

 
12,130

 
14,655

Non-interest expense
 
 
 
Salaries and employee benefits
24,444

 
22,337

Advertising
817

 
1,036

Occupancy and equipment
3,654

 
3,691

Outside professional services
1,156

 
816

Regulatory assessments
985

 
1,133

Data processing
3,895

 
3,290

Office operations
2,276

 
2,468

Other
2,525

 
2,771

 
39,752

 
37,542

Income before income tax expense
26,625

 
33,664

Income tax expense
8,435

 
11,582

Net income
$
18,190

 
$
22,082

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.39

 
$
0.48

Diluted
$
0.38

 
$
0.48

Dividends declared per share
$
0.15

 
$
0.14

 
 
 
 
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,
 
2017
 
2016
Net income
$
18,190

 
$
22,082

Change in unrealized gains on securities available for sale
999

 
3,039

Reclassification of amount realized through securities transactions
19

 

Tax effect
(356
)
 
(1,065
)
Other comprehensive income, net of tax
662

 
1,974

Comprehensive income
$
18,852

 
$
24,056

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, 2016
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
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 (35,742 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

For the three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
479

 
$
589,408

 
$
310,641

 
$
(2,713
)
 
$
(12,450
)
 
$
885,365

Net income

 

 
18,190

 

 

 
18,190

Other comprehensive income, net of tax

 

 

 
662

 

 
662

Dividends declared ($0.15 per share)

 

 
(7,183
)
 

 

 
(7,183
)
ESOP shares earned (13,238 shares)

 
420

 

 

 
132

 
552

Share-based compensation expense

 
1,562

 

 

 

 
1,562

Activity in employee stock plans (63,935 shares)

 
769

 

 

 

 
769

 Balance at March 31, 2017
$
479

 
$
592,159

 
$
321,648

 
$
(2,051
)
 
$
(12,318
)
 
$
899,917


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,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
18,190

 
$
22,082

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
22,301

 
8,800

Depreciation and amortization
1,790

 
1,761

Deferred tax benefit
(2,541
)
 
(3,622
)
Premium amortization and accretion of securities, net
1,106

 
1,030

Accretion related to acquired loans
(943
)
 
(1,246
)
Net loss on securities transactions
19

 

ESOP compensation expense
552

 
697

Share-based compensation expense
1,562

 
997

Excess tax benefit on vesting of stock awards
832

 

Net gain on loans held for sale
(1,628
)
 
(1,580
)
Loans originated or purchased for sale
(39,927
)
 
(43,061
)
Proceeds from sale of loans held for sale
43,519

 
49,561

FHLB stock dividends
(120
)
 
(134
)
Bank-owned life insurance income
(422
)
 
(426
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
(1,359
)
 
(3,940
)
Net change in deferred loan fees/costs
(5,073
)
 
(2,343
)
Net change in accrued interest receivable
1,125

 
(321
)
Net change in other assets
(913
)
 
952

Net change in other liabilities
58,515

 
26,468

Net cash provided by operating activities
96,585

 
55,675

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
766,985

 
14,266

Purchases
(794,153
)
 
(21,123
)
Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
9,591

 
11,565

Originations of Warehouse Purchase Program loans
(4,258,685
)
 
(3,746,783
)
Proceeds from pay-offs of Warehouse Purchase Program loans
4,467,053

 
3,761,941

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(218,855
)
 
(212,558
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
230

 
8,561

Purchases of premises and equipment
(781
)
 
(780
)
Proceeds from sale of assets
3,388

 
13,466

Net cash (used in) investing activities
(25,227
)
 
(171,445
)

7


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

 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Net change in deposits
14,170

 
76,138

Proceeds from FHLB advances

 
515,000

Repayments on FHLB advances
(3,487
)
 
(753,272
)
Repayments of borrowings
(9,811
)
 
(14,190
)
Payment of dividends
(7,183
)
 
(6,670
)
Activity in employee stock plans
769

 
(104
)
Net cash (used in) financing activities
(5,542
)
 
(183,098
)
Net change in cash and cash equivalents
65,816

 
(298,868
)
Beginning cash and cash equivalents
289,212

 
615,639

Ending cash and cash equivalents
$
355,028

 
$
316,771

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
3,737

 
$
10,590

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, 2016 (“2016 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 2016 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.

9

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


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, 2017, 441,750 shares have been repurchased under this stock repurchase program, leaving 1,537,121 shares available for future repurchases under the program. The Company has a trading plan with Sandler O’Neill & Partners, LP, which complies 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, 2017.

10

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 restricted stock 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 Accounting Standards Codification ("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, 2017 and 2016 is as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Basic earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
18,190

 
$
22,082

Distributed and undistributed earnings to participating securities
(79
)
 
(128
)
Income available to common shareholders
$
18,111

 
$
21,954

Denominator:
 
 
 
Weighted average common shares outstanding
47,897,062

 
47,645,826

Less: Average unallocated ESOP shares
(1,240,486
)
 
(1,353,156
)
  Average unvested restricted stock awards
(202,918
)
 
(268,420
)
Average shares for basic earnings per share
46,453,658

 
46,024,250

Basic earnings per common share
$
0.39

 
$
0.48

Diluted earnings per share:
 
 
 
Numerator:
 
 
 
Income available to common shareholders
$
18,111

 
$
21,954

Denominator:
 
 
 
Average shares for basic earnings per share
46,453,658

 
46,024,250

Dilutive effect of share-based compensation plan
606,648

 
128,051

Average shares for diluted earnings per share
47,060,306

 
46,152,301

Diluted earnings per common share
$
0.38

 
$
0.48

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
129,008

 
1,696,399



11

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 ("AFS") were as follows:
March 31, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
217,460

 
$
535

 
$
2,090

 
$
215,905

Agency commercial mortgage-backed securities 1
9,407

 

 
94

 
9,313

Agency residential collateralized mortgage obligations 1
118,471

 
48

 
1,411

 
117,108

US government and agency securities
2,008

 
102

 

 
2,110

Municipal bonds
37,644

 
144

 
393

 
37,395

Total securities
$
384,990

 
$
829

 
$
3,988

 
$
381,831

December 31, 2016
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
220,744

 
$
635

 
$
2,828

 
$
218,551

Agency commercial mortgage-backed securities 1
9,422

 

 
75

 
9,347

Agency residential collateralized mortgage obligations 1
87,959

 
22

 
1,452

 
86,529

US government and agency securities
2,150

 
101

 

 
2,251

Municipal bonds
38,417

 
47

 
627

 
37,837

Total securities
$
358,692

 
$
805

 
$
4,982

 
$
354,515

1 Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
The amortized cost (carrying amount), unrealized gains and losses, and fair value of securities held to maturity ("HTM") were as follows:
March 31, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
70,110

 
$
1,055

 
$
620

 
$
70,545

Agency commercial mortgage-backed securities 1
27,874

 
769

 
125

 
28,518

Agency residential collateralized mortgage obligations 1
37,086

 
642

 
37

 
37,691

Municipal bonds
65,471

 
1,678

 
509

 
66,640

Total securities
$
200,541

 
$
4,144

 
$
1,291

 
$
203,394

December 31, 2016
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
74,881

 
$
1,147

 
$
817

 
$
75,211

Agency commercial mortgage-backed securities 1
28,023

 
836

 
166

 
28,693

Agency residential collateralized mortgage obligations 1
40,707

 
697

 
33

 
41,371

Municipal bonds
66,776

 
1,635

 
705

 
67,706

Total securities
$
210,387

 
$
4,315

 
$
1,721

 
$
212,981

1 Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


12

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 March 31, 2017 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.
 
HTM
 
AFS
 
Amortized Cost
 
Fair Value
 
Fair Value
Due in one year or less
$
2,437

 
$
2,464

 
$
2,505

Due after one to five years
9,419

 
9,753

 
13,367

Due after five to ten years
46,453

 
47,443

 
16,514

Due after ten years
7,162

 
6,980

 
7,119

Agency residential mortgage-backed securities
70,110

 
70,545

 
215,905

Agency commercial mortgage-backed securities
27,874

 
28,518

 
9,313

Agency residential collateralized mortgage obligations
37,086

 
37,691

 
117,108

Total
$
200,541

 
$
203,394

 
$
381,831


Securities with a carrying value of $220,489 and $224,674 at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law. There were no sales of securities during the three months ended March 31, 2017 or 2016.

Securities with unrealized losses at March 31, 2017 and December 31, 2016, 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, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
160,912

 
$
2,018

 
$
7,012

 
$
72

 
$
167,924

 
$
2,090

Agency commercial mortgage-backed securities 1
9,313

 
94

 

 

 
9,313

 
94

Agency residential collateralized mortgage obligations 1
97,625

 
1,382

 
2,034

 
29

 
99,659

 
1,411

Municipal bonds
16,044

 
290

 
2,901

 
103

 
18,945

 
393

Total temporarily impaired
$
283,894

 
$
3,784

 
$
11,947

 
$
204

 
$
295,841

 
$
3,988

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
167,503

 
$
2,770

 
$
7,516

 
$
58

 
$
175,019

 
$
2,828

Agency commercial mortgage-backed securities 1
9,347

 
75

 

 

 
9,347

 
75

Agency residential collateralized mortgage obligations 1
72,822

 
1,420

 
2,649

 
32

 
75,471

 
1,452

Municipal bonds
26,911

 
512

 
3,412

 
115

 
30,323

 
627

Total temporarily impaired
$
276,583

 
$
4,777

 
$
13,577

 
$
205

 
$
290,160

 
$
4,982















13

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

HTM
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
42,034

 
$
620

 
$

 
$

 
$
42,034

 
$
620

Agency commercial mortgage-backed securities 1
7,270

 
125

 

 

 
7,270

 
125

Agency residential collateralized mortgage obligations 1
5,527

 
13

 
1,720

 
24

 
7,247

 
37

Municipal bonds
19,249

 
464

 
1,323

 
45

 
20,572

 
509

Total temporarily impaired
$
74,080


$
1,222

 
$
3,043

 
$
69

 
$
77,123


$
1,291

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
41,375

 
$
817

 
$

 
$

 
$
41,375

 
$
817

Agency commercial mortgage-backed securities 1
7,273

 
166

 

 

 
7,273

 
166

Agency residential collateralized mortgage obligations 1
6,322

 
11

 
1,451

 
22

 
7,773

 
33

Municipal bonds
19,362

 
658

 
1,045

 
47

 
20,407

 
705

Total temporarily impaired
$
74,332

 
$
1,652

 
$
2,496

 
$
69

 
$
76,828

 
$
1,721

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, 2017, 223 securities had unrealized losses, 21 of which had been in an unrealized loss position for over 12 months at March 31, 2017. The Company does not believe these unrealized losses are other-than-temporary and, at March 31, 2017, 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.


14

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,
2017
 
December 31,
2016
Loans held for sale, at fair value
$
19,315

 
$
21,279

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,786,477

 
$
2,670,455

Commercial and industrial
2,028,347

 
1,971,160

Construction and land
290,258

 
294,894

Consumer real estate
1,109,459

 
1,074,923

Other consumer
50,722

 
53,991

Gross loans held for investment, excluding Warehouse Purchase Program
6,265,263

 
6,065,423

Net of:
 
 
 
Deferred costs (fees) and discounts, net
2,822

 
(2,251
)
Allowance for loan losses
(70,656
)
 
(64,576
)
Net loans held for investment, excluding Warehouse Purchase Program
6,197,429

 
5,998,596

Warehouse Purchase Program
846,973

 
1,055,341

Total loans held for investment
$
7,044,402

 
$
7,053,937


Activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016, segregated by portfolio segment and evaluation for impairment, is set forth below. The below activity does not include Warehouse Purchase Program loans, which are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. 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, 2017 and 2016, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $225 and $178, respectively.
For the three months ended March 31, 2017
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2017
$
18,303

 
$
35,464

 
$
5,075

 
$
4,484

 
$
1,250

 
$
64,576

Charge-offs
(16
)
 
(16,530
)
 
(418
)
 
(35
)
 
(247
)
 
(17,246
)
Recoveries
205

 
40

 

 
12

 
369

 
626

Provision expense
866

 
21,912

 
(98
)
 
(76
)
 
96

 
22,700

Ending balance - March 31, 2017
$
19,358

 
$
40,886

 
$
4,559

 
$
4,385

 
$
1,468

 
$
70,656

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
37

 
$
9,337

 
$

 
$
180

 
$
371

 
$
9,925

Collectively evaluated for impairment
19,321

 
31,549

 
4,559

 
4,205

 
1,097

 
60,731

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
4,336

 
94,494

 
310

 
2,783

 
973

 
102,896

Collectively evaluated for impairment
2,776,564

 
1,933,645

 
289,948

 
1,105,793

 
49,520

 
6,155,470

PCI loans
5,577

 
208

 

 
883

 
229

 
6,897

Ending balance
$
2,786,477

 
$
2,028,347

 
$
290,258

 
$
1,109,459

 
$
50,722

 
$
6,265,263


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 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

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, inclusive of estimated loss emergence periods. 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 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 credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

16

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

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
Changes in the allowance for off-balance sheet credit losses on lending-related commitments and guarantees on credit card debt, 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 March 31, 2017
Balance at beginning of period
$
1,573

Charge-offs on lending-related commitments

Provision for credit losses on lending-related commitments
(399
)
Balance at end of period
$
1,174

Impaired loans at March 31, 2017 and December 31, 2016, were as follows 1:
March 31, 2017
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,474

 
$
4,336

 
$

 
$
4,336

 
$

Commercial and industrial
 
105,152

 
61,727

 
32,767

 
94,494

 
9,336

Construction and land
 
311

 
310

 

 
310

 

Consumer real estate
 
3,282

 
2,681

 
102

 
2,783

 
15

Other consumer
 
1,002

 
29

 
944

 
973

 
349

Total
 
$
114,221

 
$
69,083

 
$
33,813

 
$
102,896

 
$
9,700

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
5,388

 
$
4,429

 
$
766

 
$
5,195

 
$
272

Commercial and industrial
 
87,756

 
73,377

 
13,287

 
86,664

 
4,519

Construction and land
 
11,384

 
11,385

 

 
11,385

 

Consumer real estate
 
3,766

 
3,290

 
10

 
3,300

 
10

Other consumer
 
107

 
33

 
42

 
75

 
30

Total
 
$
108,401

 
$
92,514

 
$
14,105

 
$
106,619

 
$
4,831

1 
No Warehouse Purchase Program loans were impaired at March 31, 2017 or December 31, 2016. 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 March 31, 2017 and 2016, was as follows1:
March 31, 2017
 
 Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
4,966

 
$
2

Commercial and industrial
 
88,076

 

Construction and land
 
7,388

 

Consumer real estate
 
3,042

 
3

Other consumer
 
297

 
1

Total
 
$
103,769

 
$
6

March 31, 2016
 
 
 
 
Commercial real estate
 
$
9,204

 
$
2

Commercial and industrial
 
21,063

 
1

Construction and land
 
32

 

Consumer real estate
 
5,935

 
4

Other consumer
 
112

 
1

Total
 
$
36,346

 
$
8

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 status 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. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
No loans past due over 90 days were still accruing interest at March 31, 2017. At December 31, 2016, $141 of loans past due over 90 days were still accruing interest, which consisted entirely of PCI loans. At March 31, 2017, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at March 31, 2017 or December 31, 2016. Non-performing (nonaccrual) loans were as follows:
 
March 31, 2017
 
December 31, 2016
Commercial real estate
$
4,337

 
$
5,195

Commercial and industrial
94,503

 
86,664

Construction and land
310

 
11,385

Consumer real estate
7,193

 
7,987

Other consumer
1,061

 
158

Total
$
107,404

 
$
111,389

A loan that has been modified 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

18

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

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, 2017
 
December 31, 2016
Nonaccrual TDRs(1)
$
25,034

 
$
11,701

Performing TDRs (2)
446

 
454

Total
$
25,480

 
$
12,155

Specific reserves on TDRs
$
2,749

 
$
1,686

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, 2017 and 2016.
 
Three Months Ended March 31, 2017
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
Commercial and industrial
$

 
$

 
$
14,592

(2) 
$
14,592

 
Three Months Ended March 31, 2016
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

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 
Reserve-based energy relationships where the primary modifications consisted of suspension of required borrowing base payments.
Loans modified as a TDR during the three months ended March 31, 2017 or 2016 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,
 
2017
 
2016
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, 2017 and December 31, 2016 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, 2017
 
December 31, 2016
Carrying amount 1
$
6,672

 
$
6,793

Outstanding balance
7,465

 
7,597

1 
The carrying amounts are reported net of allowance for loan losses of $225 and $180 as of March 31, 2017 and December 31, 2016.

19

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, 2017 and 2016 are as follows:
 
Three Months Ended March 31,
 
2017
 
2016
Beginning balance
$
2,515

 
$
3,356

Reclassifications from nonaccretable
198

 
237

Disposals

 
(268
)
Accretion
(186
)
 
(269
)
Balance at end of period
$
2,527

 
$
3,056

Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2017 and December 31, 2016. No Warehouse Purchase Program loans were delinquent at March 31, 2017 or December 31, 2016 and therefore are not included in the following table.
March 31, 2017
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
$
241

 
$
2,516

 
$
43

 
$
2,800

 
$
2,783,677

 
$
2,786,477

Commercial and industrial
2,573

 
1,345

 
7,598

 
11,516

 
2,016,831

 
2,028,347

Construction and land
142

 

 
310

 
452

 
289,806

 
290,258

Consumer real estate
15,765

 
1,307

 
428

 
17,500

 
1,091,959

 
1,109,459

Other consumer
536

 
14

 
916

 
1,466

 
49,256

 
50,722

Total
$
19,257

 
$
5,182

 
$
9,295

 
$
33,734

 
$
6,231,529

 
$
6,265,263

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,829

 
$
72

 
$
766

 
$
2,667

 
$
2,667,788

 
$
2,670,455

Commercial and industrial
20,910

 
495

 
46

 
21,451

 
1,949,709

 
1,971,160

Construction and land
19,517

 
283

 

 
19,800

 
275,094

 
294,894

Consumer real estate
10,487

 
1,916

 
1,199

 
13,602

 
1,061,321

 
1,074,923

Other consumer
1,523

 
31

 
6

 
1,560

 
52,431

 
53,991

Total
$
54,266

 
$
2,797

 
$
2,017

 
$
59,080

 
$
6,006,343

 
$
6,065,423

1 
Includes acquired PCI loans with a total carrying value of $6,840 and $6,729 at March 31, 2017 and December 31, 2016, 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 other consumer loans (non-real estate), credit exposure is monitored by payment history of the loans. Non-performing other consumer loans are on nonaccrual status and are generally greater than 90 days past due.

20

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, 2017 and December 31, 2016, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
March 31, 2017
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
2,765,852

 
$
1,833,111

 
$
289,864

 
$
1,098,546

Special Mention
 
7,906

 
93,216

 

 
1,511

Substandard
 
12,719

 
101,865

 
394

 
7,443

Doubtful
 

 
155

 

 
1,959

Total
 
$
2,786,477

 
$
2,028,347

 
$
290,258

 
$
1,109,459

December 31, 2016
 
 
 
 
 
 
 
 
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
2,648,842

 
$
1,712,171

 
$
283,423

 
$
1,062,549

Special Mention
 
7,972

 
155,110

 

 
2,083

Substandard
 
12,875

 
103,815

 
11,471

 
8,252

Doubtful
 
766

 
64

 

 
2,039

Total
 
$
2,670,455

 
$
1,971,160

 
$
294,894