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EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020170930.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220170930.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120170930.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, 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 October 20, 2017:
 
 
48,040,059




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
September 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)
 
September 30,
2017
 
December 31, 2016
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
58,776

 
$
59,823

Short-term interest-bearing deposits in other financial institutions
268,567

 
229,389

Total cash and cash equivalents
327,343

 
289,212

Securities available for sale, at fair value
410,450

 
354,515

Securities held to maturity (fair value: September 30, 2017 — $183,810
December 31, 2016— $212,981)
180,968

 
210,387

Loans held for sale, at fair value
25,955

 
21,279

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $70,044 at September 30, 2017 and $64,576 at December 31, 2016)
6,553,260

 
5,998,596

Loans held for investment - Warehouse Purchase Program
1,127,929

 
1,055,341

Total loans held for investment
7,681,189

 
7,053,937

Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost
50,333

 
43,266

Bank-owned life insurance
57,383

 
56,477

Premises and equipment, net
70,052

 
74,226

Goodwill
178,559

 
178,559

Other assets
86,380

 
80,397

Total assets
$
9,068,612

 
$
8,362,255

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,529,052

 
$
1,383,951

Interest-bearing demand
889,627

 
903,314

Savings and money market
2,967,672

 
2,710,307

Time
1,374,017

 
1,367,904

Total deposits
6,760,368

 
6,365,476

FHLB advances
998,146

 
833,682

Repurchase agreements
81,073

 
86,691

Subordinated debt
134,400

 
134,032

Accrued expenses and other liabilities
144,533

 
57,009

Total liabilities
8,118,520

 
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 — September 30, 2017 and December 31, 2016

 

Common stock, $.01 par value; 90,000,000 shares authorized; 48,040,059 shares issued —
September 30, 2017 and 47,876,198 shares issued December 31, 2016
480

 
479

Additional paid-in capital
598,820

 
589,408

Retained earnings
363,890

 
310,641

Accumulated other comprehensive income (loss), net
(1,045
)
 
(2,713
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,205,331 shares at September 30, 2017 and 1,245,046 shares at December 31, 2016
(12,053
)
 
(12,450
)
Total shareholders’ equity
950,092

 
885,365

Total liabilities and shareholders’ equity
$
9,068,612

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
89,084

 
$
78,966

 
$
256,104

 
$
221,148

Taxable securities
2,694

 
2,314

 
7,981

 
6,985

Nontaxable securities
713

 
763

 
2,207

 
2,296

Interest-bearing deposits in other financial institutions
1,524

 
463

 
3,211

 
1,185

FHLB and Federal Reserve Bank stock and other
448

 
405

 
1,243

 
1,241

 
94,463

 
82,911

 
270,746

 
232,855

Interest expense
 
 
 
 
 
 
 
Deposits
10,271

 
5,756

 
25,740

 
14,300

FHLB advances
2,944

 
1,865

 
7,003

 
5,641

Repurchase agreements and other borrowings
2,284

 
1,810

 
6,771

 
4,729

 
15,499

 
9,431

 
39,514

 
24,670

Net interest income
78,964

 
73,480

 
231,232

 
208,185

Provision for credit losses
7,157

 
3,467

 
35,713

 
19,067

Net interest income after provision for credit losses
71,807

 
70,013

 
195,519

 
189,118

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
9,291

 
9,670

 
27,618

 
26,778

Net gain on sale of mortgage loans held for sale
1,982

 
2,383

 
5,766

 
6,213

Bank-owned life insurance income
435

 
441

 
1,297

 
1,308

Net gain (loss) on securities transactions
(20
)
 
(3
)
 
(39
)
 
62

Gain (loss) on sale and disposition of assets
352

 
(1,490
)
 
1,908

 
3,768

Other
186

 
276

 
131

 
1,525

 
12,226

 
11,277

 
36,681

 
39,654

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
24,175

 
23,918

 
72,010

 
69,122

Advertising
980

 
751

 
2,976

 
2,822

Occupancy and equipment
3,299

 
3,822

 
10,609

 
11,292

Outside professional services
1,230

 
940

 
3,589

 
2,983

Regulatory assessments
1,011

 
1,169

 
3,267

 
3,632

Data processing
4,287

 
3,989

 
12,059

 
10,983

Office operations
2,378

 
2,368

 
7,058

 
7,377

Other
2,935

 
2,717

 
8,068

 
8,618

 
40,295

 
39,674

 
119,636

 
116,829

Income before income tax expense
43,738

 
41,616

 
112,564

 
111,943

Income tax expense
15,029

 
14,399

 
37,730

 
39,427

Net income
$
28,709

 
$
27,217

 
$
74,834

 
$
72,516

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.61

 
$
0.59

 
$
1.60

 
$
1.56

Diluted
$
0.61

 
$
0.58

 
$
1.58

 
$
1.56

Dividends declared per share
$
0.15

 
$
0.15

 
$
0.45

 
$
0.43

 
 
 
 
 
 
 
 
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,
 
2017
 
2016
 
2017
 
2016
Net income
$
28,709

 
$
27,217

 
$
74,834

 
$
72,516

Change in unrealized gains (losses) on securities available for sale
103

 
(433
)
 
2,529

 
4,331

Reclassification of amount realized through securities transactions
20

 
3

 
39

 
(62
)
Tax effect
(43
)
 
151

 
(900
)
 
(1,497
)
Other comprehensive income (loss), net of tax
80

 
(279
)
 
1,668

 
2,772

Comprehensive income
$
28,789

 
$
26,938

 
$
76,502

 
$
75,288

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, 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

 

 
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

For the nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
$
479

 
$
589,408

 
$
310,641

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

Net income

 

 
74,834

 

 

 
74,834

Other comprehensive income, net of tax

 

 

 
1,668

 

 
1,668

Dividends declared ($0.45 per share)

 

 
(21,585
)
 

 

 
(21,585
)
ESOP shares earned (39,715 shares)

 
1,147

 

 

 
397

 
1,544

Share-based compensation expense

 
5,419

 

 

 

 
5,419

Activity in employee stock plans (163,861 shares)
1

 
2,846

 

 

 

 
2,847

Balance at September 30, 2017
$
480

 
$
598,820

 
$
363,890

 
$
(1,045
)
 
$
(12,053
)
 
$
950,092


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,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net income
$
74,834

 
$
72,516

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
35,713

 
19,067

Depreciation and amortization
5,369

 
5,283

Deferred tax benefit
(4,277
)
 
(3,007
)
Premium amortization and accretion of securities, net
3,273

 
3,154

Accretion related to acquired loans
(2,567
)
 
(3,764
)
Net (gain) loss on securities transactions
39

 
(62
)
ESOP compensation expense
1,544

 
2,709

Share-based compensation expense
5,419

 
3,855

Excess tax benefit on vesting of stock awards
1,307

 

Net gain on loans held for sale
(5,766
)
 
(6,213
)
Loans originated or purchased for sale
(148,853
)
 
(160,895
)
Proceeds from sale of loans held for sale
149,943

 
166,459

FHLB stock dividends
(375
)
 
(399
)
Bank-owned life insurance income
(1,297
)
 
(1,308
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
(1,723
)
 
(3,930
)
Disposition of insurance subsidiary goodwill upon sale of subsidiary operations

 
2,217

Net change in deferred loan fees/costs
(7,663
)
 
(4,621
)
Net change in accrued interest receivable
(1,256
)
 
(1,174
)
Net change in other assets
1,275

 
275

Net change in other liabilities
87,013

 
47,437

Net cash provided by operating activities
191,952

 
137,599

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
2,010,107

 
2,146,984

Purchases
(2,066,094
)
 
(2,274,549
)
Proceeds from sale of AFS securities

 
7,700

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
28,729

 
31,324

Purchases

 
(12,664
)
Originations of Warehouse Purchase Program loans
(16,110,560
)
 
(14,748,675
)
Proceeds from pay-offs of Warehouse Purchase Program loans
16,037,972

 
14,446,576

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(586,200
)
 
(706,545
)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other
(6,692
)
 
8,624

Purchases of premises and equipment
(2,321
)
 
(4,903
)
Proceeds from sale of assets
6,238

 
13,532

Net cash (used in) by investing activities
(688,821
)
 
(1,092,596
)

7


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

 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from financing activities
 
 
 
Net change in deposits
394,892

 
901,364

Proceeds from FHLB advances
175,000

 
454,300

Repayments on FHLB advances
(10,536
)
 
(759,886
)
Proceeds from borrowings

 
73,610

Repayments of borrowings
(5,618
)
 
(33,060
)
Payment of dividends
(21,585
)
 
(20,502
)
Activity in employee stock plans
2,847

 
1,419

Net cash provided by financing activities
535,000

 
617,245

Net change in cash and cash equivalents
38,131

 
(337,752
)
Beginning cash and cash equivalents
289,212

 
615,639

Ending cash and cash equivalents
$
327,343

 
$
277,887

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
4,360

 
$
10,750

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 nine months ended September 30, 2017 and 2016 is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
28,709

 
$
27,217

 
$
74,834

 
$
72,516

Distributed and undistributed earnings to participating securities
(92
)
 
(133
)
 
(275
)
 
(366
)
Income available to common shareholders
$
28,617

 
$
27,084

 
$
74,559

 
$
72,150

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
48,028,265

 
47,737,341

 
47,971,249

 
47,680,894

Less: Average unallocated ESOP shares
(1,214,061
)
 
(1,281,843
)
 
(1,227,169
)
 
(1,317,347
)
  Average unvested restricted stock awards
(149,971
)
 
(227,764
)
 
(171,856
)
 
(233,860
)
Average shares for basic earnings per share
46,664,233

 
46,227,734

 
46,572,224

 
46,129,687

Basic earnings per common share
$
0.61

 
$
0.59

 
$
1.60

 
$
1.56

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
28,617

 
$
27,084

 
$
74,559

 
$
72,150

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
46,664,233

 
46,227,734

 
46,572,224

 
46,129,687

Dilutive effect of share-based compensation plan
494,496

 
318,798

 
515,604

 
233,480

Average shares for diluted earnings per share
47,158,729

 
46,546,532

 
47,087,828

 
46,363,167

Diluted earnings per common share
$
0.61

 
$
0.58

 
$
1.58

 
$
1.56

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
514,487

 
968,618

 
563,116

 
1,410,184



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:
September 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
201,449

 
$
671

 
$
1,087

 
$
201,033

Agency commercial mortgage-backed securities 1
9,376

 

 
40

 
9,336

Agency residential collateralized mortgage obligations 1
164,228

 
160

 
1,486

 
162,902

US government and agency securities
1,732

 
104

 

 
1,836

Municipal bonds
35,274

 
331

 
262

 
35,343

Total securities
$
412,059

 
$
1,266

 
$
2,875

 
$
410,450

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:
September 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
61,473

 
$
885

 
$
366

 
$
61,992

Agency commercial mortgage-backed securities 1
27,586

 
837

 
51

 
28,372

Agency residential collateralized mortgage obligations 1
30,242

 
437

 
40

 
30,639

Municipal bonds
61,667

 
1,401

 
261

 
62,807

Total securities
$
180,968

 
$
3,560

 
$
718

 
$
183,810

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 September 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
$
1,366

 
$
1,382

 
$
1,679

Due after one to five years
10,697

 
11,066

 
12,880

Due after five to ten years
44,091

 
44,898

 
16,869

Due after ten years
5,513

 
5,461

 
5,751

Agency residential mortgage-backed securities
61,473

 
61,992

 
201,033

Agency commercial mortgage-backed securities
27,586

 
28,372

 
9,336

Agency residential collateralized mortgage obligations
30,242

 
30,639

 
162,902

Total
$
180,968

 
$
183,810

 
$
410,450


Securities with a carrying value of $257,979 and $224,674 at September 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 nine months ended September 30, 2017 or 2016 was as follows. All securities sold were classified as available for sale, and gains and losses are recorded using the specific-identification method.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Proceeds
$

 
$

 
$

 
$
7,700

Gross gains

 

 

 
71

Gross losses

 

 

 
7

Tax expense of securities gains/losses

 

 

 
22


Securities with unrealized losses at September 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
September 30, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
108,742

 
$
755

 
$
23,696

 
$
332

 
$
132,438

 
$
1,087

Agency commercial mortgage-backed securities 1
9,335

 
40

 

 

 
9,335

 
40

Agency residential collateralized mortgage obligations 1
104,632

 
1,019

 
24,271

 
467

 
128,903

 
1,486

Municipal bonds
3,908

 
24

 
5,745

 
238

 
9,653

 
262

Total temporarily impaired
$
226,617

 
$
1,838

 
$
53,712

 
$
1,037

 
$
280,329

 
$
2,875

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
September 30, 2017
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
29,191

 
$
260

 
$
3,772

 
$
106

 
$
32,963

 
$
366

Agency commercial mortgage-backed securities 1

 

 
3,528

 
51

 
3,528

 
51

Agency residential collateralized mortgage obligations 1
4,654

 
22

 
815

 
18

 
5,469

 
40

Municipal bonds
8,236

 
53

 
9,527

 
208

 
17,763

 
261

Total temporarily impaired
$
42,081


$
335

 
$
17,642

 
$
383

 
$
59,723


$
718

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 September 30, 2017, 191 securities had unrealized losses, 63 of which had been in an unrealized loss position for over 12 months at September 30, 2017. The Company does not believe these unrealized losses are other-than-temporary and, at September 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:
 
September 30,
2017
 
December 31, 2016
Loans held for sale, at fair value
$
25,955

 
$
21,279

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
3,016,533

 
$
2,670,455

Commercial and industrial
2,074,635

 
1,971,160

Construction and land
282,536

 
294,894

Consumer real estate
1,197,911

 
1,074,923

Other consumer
46,277

 
53,991

Gross loans held for investment, excluding Warehouse Purchase Program
6,617,892

 
6,065,423

Net of:
 
 
 
Deferred costs (fees) and discounts, net
5,412

 
(2,251
)
Allowance for loan losses
(70,044
)
 
(64,576
)
Net loans held for investment, excluding Warehouse Purchase Program
6,553,260

 
5,998,596

Warehouse Purchase Program
1,127,929

 
1,055,341

Total loans held for investment
$
7,681,189

 
$
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 nine months ended September 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 September 30, 2017 and 2016, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $233 and $164, respectively.
For the three months ended September 30, 2017
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
20,122

 
$
45,161

 
$
4,056

 
$
4,513

 
$
1,239

 
$
75,091

Charge-offs

 
(12,265
)
 

 

 
(231
)
 
(12,496
)
Recoveries

 
50

 

 
10

 
89

 
149

Provision expense
1,374

 
5,233

 
236

 
314

 
143

 
7,300

Ending balance
$
21,496

 
$
38,179

 
$
4,292

 
$
4,837

 
$
1,240

 
$
70,044

For the nine months ended September 30, 2017

 

 

 

 

 

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
18,303

 
$
35,464

 
$
5,075

 
$
4,484

 
$
1,250

 
$
64,576

Charge-offs
(16
)
 
(30,351
)
 
(418
)
 
(52
)
 
(1,065
)
 
(31,902
)
Recoveries
205

 
296

 
75

 
34

 
560

 
1,170

Provision expense (benefit)
3,004

 
32,770

 
(440
)
 
371

 
495

 
36,200

Ending balance
$
21,496

 
$
38,179

 
$
4,292

 
$
4,837

 
$
1,240

 
$
70,044

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
55

 
$
8,325

 
$

 
$
130

 
$
39

 
$
8,549

Collectively evaluated for impairment
21,441

 
29,854

 
4,292

 
4,707

 
1,201

 
61,495

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
4,064

 
65,560

 

 
2,475

 
45

 
72,144

Collectively evaluated for impairment
3,006,971

 
2,008,893

 
282,536

 
1,194,547

 
46,035

 
6,538,982

PCI loans
5,498

 
182

 

 
889

 
197

 
6,766

Ending balance
$
3,016,533

 
$
2,074,635

 
$
282,536

 
$
1,197,911

 
$
46,277

 
$
6,617,892


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

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Beginning Balance
$
1,229

 
$

 
$
1,573

 
$

Charge-offs on lending-related commitments

 

 

 

Provision (benefit) for credit losses on lending-related commitments
(143
)
 
1,167

 
(487
)
 
1,167

Ending Balance
$
1,086

 
$
1,167

 
$
1,086

 
$
1,167

Impaired loans at September 30, 2017 and December 31, 2016, were as follows1:
September 30, 2017
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,295

 
$
4,064

 
$

 
$
4,064

 
$

Commercial and industrial
 
68,367

 
30,036

 
35,524

 
65,560

 
8,291

Consumer real estate
 
3,011

 
2,467

 
8

 
2,475

 
8

Other consumer
 
80

 
20

 
25

 
45

 
17

Total
 
$
75,753

 
$
36,587

 
$
35,557

 
$
72,144

 
$
8,316

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 September 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 nine months ended September 30, 2017 and 2016, was as follows1:
 
 
Three Months Ended September 30,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
4,132

 
$
2

 
$
3,223

 
$
3

Commercial and industrial
 
80,717

 

 
24,835

 

Construction and land
 

 

 
27

 

Consumer real estate
 
2,515

 
3

 
4,452

 
3

Other consumer
 
50

 
1

 
87

 
1

Total
 
$
87,414