LegacyTexas Financial Group, Inc. - FORM 10-Q - July 25, 2017

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EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120170630.htm
EX-32.0 - EXHIBIT 32.0 - LegacyTexas Financial Group, Inc.exhibit32020170630.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220170630.htm
EX-3.2 - EXHIBIT 3.2 - LegacyTexas Financial Group, Inc.exhibit3220170630.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, 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 July 24, 2017:
 
 
48,009,379



LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
June 30, 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)
 
June 30,
2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
61,989

 
$
59,823

Short-term interest-bearing deposits in other financial institutions
256,251

 
229,389

Total cash and cash equivalents
318,240

 
289,212

Securities available for sale, at fair value
397,957

 
354,515

Securities held to maturity (fair value: June 30, 2017 — $194,862
December 31, 2016— $212,981)
191,578

 
210,387

Loans held for sale, at fair value
19,374

 
21,279

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $75,091 at June 30, 2017 and $64,576 at December 31, 2016)
6,338,617

 
5,998,596

Loans held for investment - Warehouse Purchase Program
1,256,742

 
1,055,341

Total loans held for investment
7,595,359

 
7,053,937

Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost
56,618

 
43,266

Bank-owned life insurance
57,078

 
56,477

Premises and equipment, net
71,068

 
74,226

Goodwill
178,559

 
178,559

Other assets
84,544

 
80,397

Total assets
$
8,970,375

 
$
8,362,255

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,522,856

 
$
1,383,951

Interest-bearing demand
893,544

 
903,314

Savings and money market
2,685,627

 
2,710,307

Time
1,460,479

 
1,367,904

Total deposits
6,562,506

 
6,365,476

FHLB advances
1,151,682

 
833,682

Repurchase agreements
73,433

 
86,691

Subordinated debt
134,277

 
134,032

Accrued expenses and other liabilities
123,194

 
57,009

Total liabilities
8,045,092

 
7,476,890

Commitments and contingent liabilities (See Note 9)


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2017 and December 31, 2016
—

 
—

Common stock, $.01 par value; 90,000,000 shares authorized; 48,009,379 shares issued —
June 30, 2017 and 47,876,198 shares issued December 31, 2016
480

 
479

Additional paid-in capital
595,730

 
589,408

Retained earnings
342,384

 
310,641

Accumulated other comprehensive income (loss), net
(1,125
)
 
(2,713
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,218,570 shares at June 30, 2017 and 1,245,046 shares at December 31, 2016
(12,186
)
 
(12,450
)
Total shareholders’ equity
925,283

 
885,365

Total liabilities and shareholders’ equity
$
8,970,375

 
$
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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
83,917

 
$
73,376

 
$
167,020

 
$
142,182

Taxable securities
2,725

 
2,359

 
5,287

 
4,671

Nontaxable securities
739

 
759

 
1,494

 
1,533

Interest-bearing deposits in other financial institutions
955

 
392

 
1,687

 
722

FHLB and Federal Reserve Bank stock and other
411

 
450

 
795

 
836

 
88,747

 
77,336

 
176,283

 
149,944

Interest expense
 
 
 
 
 
 
 
Deposits
8,359

 
4,422

 
15,469

 
8,544

FHLB advances
2,427

 
2,103

 
4,059

 
3,776

Repurchase agreements and other borrowings
2,241

 
1,457

 
4,487

 
2,919

 
13,027

 
7,982

 
24,015

 
15,239

Net interest income
75,720

 
69,354

 
152,268

 
134,705

Provision for credit losses
6,255

 
6,800

 
28,556

 
15,600

Net interest income after provision for credit losses
69,465

 
62,554

 
123,712

 
119,105

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
9,896

 
8,927

 
18,327

 
17,108

Net gain on sale of mortgage loans held for sale
2,156

 
2,250

 
3,784

 
3,830

Bank-owned life insurance income
440

 
441

 
862

 
867

Net gain (loss) on securities transactions
—

 
65

 
(19
)
 
65

Gain on sale and disposition of assets
157

 
1,186

 
1,556

 
5,258

Other
(324
)
 
853

 
(55
)
 
1,249

 
12,325

 
13,722

 
24,455

 
28,377

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
23,391

 
22,867

 
47,835

 
45,204

Advertising
1,179

 
1,035

 
1,996

 
2,071

Occupancy and equipment
3,656

 
3,779

 
7,310

 
7,470

Outside professional services
1,203

 
1,227

 
2,359

 
2,043

Regulatory assessments
1,271

 
1,330

 
2,256

 
2,463

Data processing
3,877

 
3,664

 
7,772

 
6,994

Office operations
2,404

 
2,541

 
4,680

 
5,009

Other
2,608

 
3,170

 
5,133

 
5,901

 
39,589

 
39,613

 
79,341

 
77,155

Income before income tax expense
42,201

 
36,663

 
68,826

 
70,327

Income tax expense
14,266

 
13,446

 
22,701

 
25,028

Net income
$
27,935

 
$
23,217

 
$
46,125

 
$
45,299

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.50

 
$
0.99

 
$
0.98

Diluted
$
0.59

 
$
0.50

 
$
0.98

 
$
0.97

Dividends declared per share
$
0.15

 
$
0.14

 
$
0.30

 
$
0.28

 
 
 
 
 
 
 
 
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,
 
2017
 
2016
 
2017
 
2016
Net income
$
27,935

 
$
23,217

 
$
46,125

 
$
45,299

Change in unrealized gains on securities available for sale
1,427

 
1,725

 
2,426

 
4,764

Reclassification of amount realized through securities transactions
—

 
(65
)
 
19

 
(65
)
Tax effect
(501
)
 
(583
)
 
(857
)
 
(1,648
)
Other comprehensive income, net of tax
926

 
1,077

 
1,588

 
3,051

Comprehensive income
$
28,861

 
$
24,294

 
$
47,713

 
$
48,350

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, 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
—

 
—

 
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

For the six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
479

 
$
589,408

 
$
310,641

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

Net income
—

 
—

 
46,125

 
—

 
—

 
46,125

Other comprehensive income, net of tax
—

 
—

 
—

 
1,588

 
—

 
1,588

Dividends declared ($0.30 per share)
—

 
—

 
(14,382
)
 
—

 
—

 
(14,382
)
ESOP shares earned (26,476 shares)
—

 
781

 
—

 
—

 
264

 
1,045

Share-based compensation expense
—

 
3,405

 
—

 
—

 
—

 
3,405

Activity in employee stock plans (133,181 shares)
1

 
2,136

 
—

 
—

 
—

 
2,137

Balance at June 30, 2017
$
480

 
$
595,730

 
$
342,384

 
$
(1,125
)
 
$
(12,186
)
 
$
925,283


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,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
46,125

 
$
45,299

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
28,556

 
15,600

Depreciation and amortization
3,603

 
3,506

Deferred tax benefit
(3,973
)
 
(5,063
)
Premium amortization and accretion of securities, net
2,177

 
2,082

Accretion related to acquired loans
(1,817
)
 
(2,532
)
Net (gain) loss on securities transactions
19

 
(65
)
ESOP compensation expense
1,045

 
1,568

Share-based compensation expense
3,405

 
2,223

Excess tax benefit on vesting of stock awards
1,177

 
—

Net gain on loans held for sale
(3,784
)
 
(3,830
)
Loans originated or purchased for sale
(96,238
)
 
(100,690
)
Proceeds from sale of loans held for sale
101,927

 
106,303

FHLB stock dividends
(227
)
 
(238
)
Bank-owned life insurance income
(862
)
 
(867
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
(1,373
)
 
(3,937
)
Disposition of insurance subsidiary goodwill upon sale of subsidiary operations
—

 
2,217

Net change in deferred loan fees/costs
(6,700
)
 
(4,259
)
Net change in accrued interest receivable
187

 
(2,448
)
Net change in other assets
1,110

 
(4,974
)
Net change in other liabilities
65,589

 
25,107

Net cash provided by operating activities
139,946

 
75,002

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
1,185,797

 
228,710

Purchases
(1,228,519
)
 
(246,485
)
Proceeds from sale of AFS securities
—

 
7,700

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
18,338

 
21,177

Purchases
—

 
(5,774
)
Originations of Warehouse Purchase Program loans
(10,232,407
)
 
(8,729,890
)
Proceeds from pay-offs of Warehouse Purchase Program loans
10,031,006

 
8,793,219

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(365,656
)
 
(635,097
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
(13,125
)
 
1,066

Purchases of premises and equipment
(1,278
)
 
(2,278
)
Proceeds from sale of assets
5,399

 
13,470

Net cash (used in) investing activities
(600,445
)
 
(554,182
)

7

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

 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Net change in deposits
197,030

 
395,971

Proceeds from FHLB advances
325,000

 
650,000

Repayments on FHLB advances
(7,000
)
 
(756,567
)
Proceeds from borrowings
—

 
24,894

Repayments of borrowings
(13,258
)
 
(15,220
)
Payment of dividends
(14,382
)
 
(13,341
)
Activity in employee stock plans
2,137

 
428

Net cash provided by financing activities
489,527

 
286,165

Net change in cash and cash equivalents
29,028

 
(193,015
)
Beginning cash and cash equivalents
289,212

 
615,639

Ending cash and cash equivalents
$
318,240

 
$
422,624

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
4,046

 
$
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 - 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 and six months ended June 30, 2017 and 2016 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
27,935

 
$
23,217

 
$
46,125

 
$
45,299

Distributed and undistributed earnings to participating securities
(98
)
 
(103
)
 
(181
)
 
(232
)
Income available to common shareholders
$
27,837

 
$
23,114

 
$
45,944

 
$
45,067

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,986,979

 
47,658,896

 
47,942,269

 
47,652,361

Less: Average unallocated ESOP shares
(1,227,250
)
 
(1,317,433
)
 
(1,233,831
)
 
(1,335,294
)
  Average unvested restricted stock awards
(163,262
)
 
(205,464
)
 
(182,981
)
 
(236,942
)
Average shares for basic earnings per share
46,596,467

 
46,135,999

 
46,525,457

 
46,080,125

Basic earnings per common share
$
0.60

 
$
0.50

 
$
0.99

 
$
0.98

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
27,837

 
$
23,114

 
$
45,944

 
$
45,067

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
46,596,467

 
46,135,999

 
46,525,457

 
46,080,125

Dilutive effect of share-based compensation plan
409,087

 
216,142

 
459,578

 
163,745

Average shares for diluted earnings per share
47,005,554

 
46,352,141

 
46,985,035

 
46,243,870

Diluted earnings per common share
$
0.59

 
$
0.50

 
$
0.98

 
$
0.97

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
511,375

 
830,600

 
523,758

 
946,166



10
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 3 - 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:
June 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
209,224

 
$
531

 
$
1,379

 
$
208,376

Agency commercial mortgage-backed securities 1
9,391

 
—

 
22

 
9,369

Agency residential collateralized mortgage obligations 1
141,650

 
158

 
1,195

 
140,613

US government and agency securities
1,867

 
110

 
—

 
1,977

Municipal bonds
37,557

 
341

 
276

 
37,622

Total securities
$
399,689

 
$
1,140

 
$
2,872

 
$
397,957

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:
June 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
66,033

 
$
962

 
$
435

 
$
66,560

Agency commercial mortgage-backed securities 1
27,731

 
939

 
49

 
28,621

Agency residential collateralized mortgage obligations 1
33,688

 
533

 
41

 
34,180

Municipal bonds
64,126

 
1,626

 
251

 
65,501

Total securities
$
191,578

 
$
4,060

 
$
776

 
$
194,862

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.


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 June 30, 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
$
1,791

 
$
1,806

 
$
2,807

Due after one to five years
8,760

 
9,068

 
12,885

Due after five to ten years
46,423

 
47,565

 
16,688

Due after ten years
7,152

 
7,062

 
7,219

Agency residential mortgage-backed securities
66,033

 
66,560

 
208,376

Agency commercial mortgage-backed securities
27,731

 
28,621

 
9,369

Agency residential collateralized mortgage obligations
33,688

 
34,180

 
140,613

Total
$
191,578

 
$
194,862

 
$
397,957


Securities with a carrying value of $264,968 and $224,674 at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
Sales activity of securities during the three and six months ended June 30, 2017 or 2016 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds
$
—

 
$
7,700

 
$
—

 
$
7,700

Gross gains
—

 
72

 
—

 
72

Gross losses
—

 
7

 
—

 
7

Tax expense of securities gains/losses
—

 
23

 
—

 
23


Securities with unrealized losses at June 30, 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
June 30, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
151,493

 
$
1,299

 
$
6,457

 
$
80

 
$
157,950

 
$
1,379

Agency commercial mortgage-backed securities 1
9,370

 
22

 
—

 
—

 
9,370

 
22

Agency residential collateralized mortgage obligations 1
105,592

 
1,154

 
2,477

 
41

 
108,069

 
1,195

Municipal bonds
7,578

 
96

 
4,243

 
180

 
11,821

 
276

Total temporarily impaired
$
274,033

 
$
2,571

 
$
13,177

 
$
301

 
$
287,210

 
$
2,872

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



12
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
June 30, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
34,676

 
$
435

 
$
—

 
$
—

 
$
34,676

 
$
435

Agency commercial mortgage-backed securities 1
3,552

 
49

 
—

 
—

 
3,552

 
49

Agency residential collateralized mortgage obligations 1
2,661

 
16

 
1,279

 
25

 
3,940

 
41

Municipal bonds
13,549

 
208

 
1,322

 
43

 
14,871

 
251

Total temporarily impaired
$
54,438


$
708

 
$
2,601

 
$
68

 
$
57,039


$
776

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 June 30, 2017, 193 securities had unrealized losses, 24 of which had been in an unrealized loss position for over 12 months at June 30, 2017. The Company does not believe these unrealized losses are other-than-temporary and, at June 30, 2017, believes that full recovery of the amortized cost basis is more likely than not. 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 4 - Loans
Loans consist of the following:
 
June 30,
2017
 
December 31, 2016
Loans held for sale, at fair value
$
19,374

 
$
21,279

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
2,817,443

 
$
2,670,455

Commercial and industrial
2,119,678

 
1,971,160

Construction and land
270,050

 
294,894

Consumer real estate
1,154,353

 
1,074,923

Other consumer
47,735

 
53,991

Gross loans held for investment, excluding Warehouse Purchase Program
6,409,259

 
6,065,423

Net of:
 
 
 
Deferred costs (fees) and discounts, net
4,449

 
(2,251
)
Allowance for loan losses
(75,091
)
 
(64,576
)
Net loans held for investment, excluding Warehouse Purchase Program
6,338,617

 
5,998,596

Warehouse Purchase Program
1,256,742

 
1,055,341

Total loans held for investment
$
7,595,359

 
$
7,053,937



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, 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 June 30, 2017 and 2016, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $232 and $148, respectively.
For the three months ended June 30, 2017
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
19,358

 
$
40,886

 
$
4,559

 
$
4,385

 
$
1,468

 
$
70,656

Charge-offs
—

 
(1,556
)
 
—

 
(17
)
 
(587
)
 
(2,160
)
Recoveries
—

 
206

 
75

 
12

 
102

 
395

Provision expense (benefit)
764

 
5,625

 
(578
)
 
133

 
256

 
6,200

Ending balance
$
20,122

 
$
45,161

 
$
4,056

 
$
4,513

 
$
1,239

 
$
75,091

For the six months ended June 30, 2017

 

 

 

 

 

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
18,303

 
$
35,464

 
$
5,075

 
$
4,484

 
$
1,250

 
$
64,576

Charge-offs
(16
)
 
(18,086
)
 
(418
)
 
(52
)
 
(834
)
 
(19,406
)
Recoveries
205

 
246

 
75

 
24

 
471

 
1,021

Provision expense (benefit)
1,630

 
27,537

 
(676
)
 
57

 
352

 
28,900

Ending balance
$
20,122

 
$
45,161

 
$
4,056

 
$
4,513

 
$
1,239

 
$
75,091

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
51

 
$
14,428

 
$
—

 
$
132

 
$
44

 
$
14,655

Collectively evaluated for impairment
20,071

 
30,733

 
4,056

 
4,381

 
1,195

 
60,436

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
4,201

 
87,599

 
—

 
2,556

 
55

 
94,411

Collectively evaluated for impairment
2,807,729

 
2,031,883

 
270,050

 
1,150,911

 
47,467

 
6,308,040

PCI loans
5,513

 
196

 
—

 
886

 
213

 
6,808

Ending balance
$
2,817,443

 
$
2,119,678

 
$
270,050

 
$
1,154,353

 
$
47,735

 
$
6,409,259


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, 2016
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
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
$
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
$
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
$
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

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,

16
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

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, estimated discounted cash flows are used to determine the amount of impairment, if any. 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.
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 9 - Commitments and Contingent Liabilities for more information.
 
Three Months ended June 30, 2017
 
Six Months ended June 30, 2017
Balance at beginning of period
$
1,174

 
$
1,573

Charge-offs on lending-related commitments
—

 
—

Provision for credit losses on lending-related commitments
55

 
(344
)
Balance at end of period
$
1,229

 
$
1,229

Impaired loans at June 30, 2017 and December 31, 2016, were as follows1:
June 30, 2017
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,386

 
$
4,201

 
$
—

 
$
4,201

 
$
—

Commercial and industrial
 
90,194

 
47,938

 
39,661

 
87,599

 
14,390

Consumer real estate
 
3,054

 
2,458

 
98

 
2,556

 
11

Other consumer
 
89

 
24

 
31

 
55

 
22

Total
 
$
97,723

 
$
54,621

 
$
39,790

 
$
94,411

 
$
14,423

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 June 30, 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 for the three and six months ended June 30, 2017 and 2016, was as follows1:
June 30, 2017
 
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
 
$
4,269

 
$
4,658

 
$
2

 
$
4

Commercial and industrial
 
91,039

 
88,852

 
—

 
—

Construction and land
 
77

 
4,222

 
—

 
—

Consumer real estate
 
2,708

 
2,888

 
3

 
6

Other consumer
 
741

 
454

 
1

 
2

Total
 
$
98,834

 
$
101,074

 
$
6

 
$
12

June 30, 2016
 
 
 
 
 
 
 
 
Commercial real estate
 
$
1,376

 
$
5,836

 
$
2

 
$
4

Commercial and industrial
 
30,351

 
25,076

 
—