Attached files

file filename
EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020180331.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220180331.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120180331.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, 2018
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 23, 2018:
 
 
48,264,966




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2018
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,
2018
 
December 31, 2017
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
51,824

 
$
61,713

Short-term interest-bearing deposits in other financial institutions
243,080

 
231,743

Total cash and cash equivalents
294,904

 
293,456

Securities available for sale, at fair value
431,413

 
419,717

Securities held to maturity (fair value: March 31, 2018 — $156,034,
December 31, 2017— $174,926)
156,898

 
173,509

Loans held for sale, at fair value
31,123

 
16,707

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $74,508 at March 31, 2018 and $71,301 at December 31, 2017)
6,502,245

 
6,418,271

Loans held for investment - Warehouse Purchase Program
1,019,840

 
1,320,846

Total loans held for investment
7,522,085

 
7,739,117

Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost
46,842

 
64,790

Bank-owned life insurance
57,999

 
57,684

Premises and equipment, net
70,427

 
69,693

Goodwill
178,559

 
178,559

Other assets
75,374

 
72,964

Total assets
$
8,865,624

 
$
9,086,196

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,681,067

 
$
1,635,622

Interest-bearing demand
996,737

 
1,029,375

Savings and money market
2,707,046

 
2,735,296

Time
1,569,557

 
1,367,390

Total deposits
6,954,407

 
6,767,683

FHLB advances
604,562

 
1,043,163

Repurchase agreements
76,610

 
84,676

Subordinated debt
134,645

 
134,522

Accrued expenses and other liabilities
115,906

 
96,278

Total liabilities
7,886,130

 
8,126,322

Commitments and contingent liabilities (See Note 10)


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — March 31, 2018 and December 31, 2017

 

Common stock, $.01 par value; 90,000,000 shares authorized; 48,264,966 shares issued —
March 31, 2018 and 48,117,390 shares issued — December 31, 2017
483

 
481

Additional paid-in capital
609,046

 
603,884

Retained earnings
389,653

 
370,858

Accumulated other comprehensive income (loss), net
(7,899
)
 
(3,429
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,178,855 shares at March 31, 2018 and 1,192,093 shares at December 31, 2017
(11,789
)
 
(11,920
)
Total shareholders’ equity
979,494

 
959,874

Total liabilities and shareholders’ equity
$
8,865,624

 
$
9,086,196

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,
 
2018
 
2017
Interest and dividend income
 
 
 
Loans, including fees
$
90,631

 
$
83,103

Taxable securities
2,911

 
2,562

Nontaxable securities
675

 
755

Interest-bearing deposits in other financial institutions
969

 
732

FHLB and FRB stock and other
480

 
384

 
95,666

 
87,536

Interest expense
 
 
 
Deposits
12,032

 
7,110

FHLB advances
2,680

 
1,632

Repurchase agreements and other borrowings
2,341

 
2,246

 
17,053

 
10,988

Net interest income
78,613

 
76,548

Provision for credit losses
15,663

 
22,301

Net interest income after provision for credit losses
62,950

 
54,247

Non-interest income
 
 
 
Service charges and other fees
7,927

 
8,431

Net gain on sale of mortgage loans held for sale
1,809

 
1,628

Bank-owned life insurance income
447

 
422

Net gain (loss) on securities transactions
(128
)
 
(19
)
Gain on sale and disposition of assets
2,213

 
1,399

Other
630

 
269

 
12,898

 
12,130

Non-interest expense
 
 
 
Salaries and employee benefits
27,076

 
24,444

Advertising
888

 
817

Occupancy and equipment
3,860

 
3,654

Outside professional services
1,250

 
1,156

Regulatory assessments
1,154

 
985

Data processing
4,703

 
3,895

Office operations
2,300

 
2,276

Other
2,648

 
2,525

 
43,879

 
39,752

Income before income tax expense
31,969

 
26,625

Income tax expense
6,207

 
8,435

Net income
$
25,762

 
$
18,190

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.55

 
$
0.39

Diluted
$
0.54

 
$
0.38

Dividends declared per share
$
0.16

 
$
0.15

 
 
 
 
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,
 
2018
 
2017
Net income
$
25,762

 
$
18,190

Change in unrealized gains (losses) on securities available for sale
(4,845
)
 
999

Reclassification of amount realized through securities transactions
128

 
19

Tax effect
988

 
(356
)
Reclassification of income tax effects of the Tax Cuts and Jobs Act
(see Note 9 for more information)
(741
)
 

Other comprehensive income (loss), net of tax
(4,470
)
 
662

Comprehensive income
$
21,292

 
$
18,852

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, 2017
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
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 (loss), 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

For the three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
481

 
$
603,884

 
$
370,858

 
$
(3,429
)
 
$
(11,920
)
 
$
959,874

Net income

 

 
25,762

 

 

 
25,762

Other comprehensive income (loss), net of tax

 

 

 
(4,470
)
 

 
(4,470
)
Reclassification of income tax effects of the Tax Cuts and Jobs Act
(see Note 9 for more information)

 

 
741

 

 

 
741

Dividends declared, ($0.16 per share)

 

 
(7,708
)
 

 

 
(7,708
)
ESOP shares earned, (13,238 shares)

 
447

 

 

 
131

 
578

Share-based compensation expense

 
2,055

 

 

 

 
2,055

Activity in employee stock plans, (147,576 shares)
2

 
2,660

 

 

 

 
2,662

Balance at March 31, 2018
$
483

 
$
609,046

 
$
389,653

 
$
(7,899
)
 
$
(11,789
)
 
$
979,494


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,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
25,762

 
$
18,190

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
15,663

 
22,301

Depreciation and amortization
1,738

 
1,790

Deferred tax benefit
(460
)
 
(2,541
)
Premium amortization and accretion of securities, net
1,031

 
1,106

Accretion related to acquired loans
(513
)
 
(943
)
Net (gain) loss on securities transactions
128

 
19

ESOP compensation expense
578

 
552

Share-based compensation expense
2,055

 
1,562

Excess tax benefit on vesting of stock awards
528

 
832

Net gain on loans held for sale
(1,809
)
 
(1,628
)
Loans originated or purchased for sale
(49,428
)
 
(39,927
)
Proceeds from sale of loans held for sale
36,821

 
43,519

FHLB stock dividends
(171
)
 
(120
)
Bank-owned life insurance income
(447
)
 
(422
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
64

 
(1,359
)
Net change in deferred loan fees/costs
(1,250
)
 
(5,073
)
Net change in accrued interest receivable
274

 
1,125

Net change in other assets
(2,338
)
 
(913
)
Net change in other liabilities
19,979

 
58,515

Net cash provided by operating activities
48,205

 
96,585

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
118,661

 
766,985

Purchases
(136,007
)
 
(794,153
)
Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
16,385

 
9,591

Originations of Warehouse Purchase Program loans
(4,972,238
)
 
(4,258,685
)
Proceeds from pay-offs of Warehouse Purchase Program loans
5,273,244

 
4,467,053

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(97,968
)
 
(218,855
)
Redemption of FHLB and Federal Reserve Bank stock and other
18,119

 
230

Purchases of premises and equipment
(2,320
)
 
(781
)
Proceeds from sale of assets
356

 
3,388

Net cash provided by (used in) investing activities
218,232

 
(25,227
)

7


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

 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from financing activities
 
 
 
Net change in deposits
186,724

 
14,170

Proceeds from FHLB advances
390,000

 

Repayments on FHLB advances
(828,601
)
 
(3,487
)
Repayments of borrowings
(8,066
)
 
(9,811
)
Payment of dividends
(7,708
)
 
(7,183
)
Activity in employee stock plans
2,662

 
769

Net cash (used in) financing activities
(264,989
)
 
(5,542
)
Net change in cash and cash equivalents
1,448

 
65,816

Beginning cash and cash equivalents
293,456

 
289,212

Ending cash and cash equivalents
$
294,904

 
$
355,028

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
122

 
$
3,737

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, 2017 (“2017 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 2017 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 - Revenue Recognition

Revenue recognized from contracts with customers, which is accounted for under ASC 606, is entirely included in the Company's non-interest income. Interest income and certain types of non-interest income are not accounted for under ASC 606 as it is accounted for under other accounting standards. Significant revenue streams recognized by the Company from contracts with customers accounted for under ASC 606 for the three months ended March 31, 2018 and March 31, 2017, are below:    

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Card services income
(a)
$
3,058

 
$
2,842

Service charges on deposits
(b)
1,773

 
1,838

Title income
(c)
1,057

 
1,434

Gains (losses) on the sale of other real estate owned
(d)
(40
)
 
45


(a) Card services income -                         
Card services income includes interchange income, which is income earned by the Company for each transaction a cardholder performs at a merchant. This performance obligation is settled on a daily basis as transactions are processed. Card services income also includes revenue earned from companies who provide our customers with debit cards and/or provide card processing services in exchange for the Company’s promotion of their card programs to the Company's depositors. These payments are remitted based on contractual terms that dictate how much payment is remitted based on volume expectations. This performance obligation settles on a daily basis as our customers use cards and card processing services at merchants.    

(b) Service charges on deposits -                         
The Company receives non-interest income for providing services related to deposit accounts, including fee income generated from non-sufficient funds transactions, wire transfers, ATM activity, and treasury management services. This income is recorded when incurred in the case of deposit account service charges or when collected in the case of miscellaneous one-time fees, like wire transfer fees. Since most deposit agreements have a day-to-day term, the performance obligation between the Company and the depositor is satisfied on a daily basis, or as incurred.                        

(c) Title income -                         
Title services offered by the Company through its wholly-owned subsidiary, LegacyTexas Title, consists of referring title insurance policies to other title companies and performing real estate closing duties for a set fee. The performance obligation (referring title policies to other title insurance agencies and handling customary closing services) settles daily at each real estate closing.                        

(d) Gains/losses on the sale of other real estate owned -                         
The performance obligation in the sale of other real estate owned typically will be delivery of control over the property to the buyer. If the Company is not providing financing, the transaction price is typically identified in the purchase and sale agreement. However, if the Company provides seller financing, the Company must determine a transaction price, depending on if the sale contract is at market terms and taking into account the credit risk inherent in the sales arrangement.

The performance obligations described in (b), (c), and (d) above are typically related to contracts that have an original expected duration of less than one year.                         

In regards to card services income, because the Company has a right to consideration from card service providers in the form of transaction-based and support income, and from cardholders in the form of interchange income in an amount that corresponds directly with the value to the card service provider and cardholder of the Company's performance completed to date, the Company recognizes revenue as incurred when transactions with merchants settle on a daily basis.                

The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.

The Company has applied ASC 606 using the modified retrospective approach effective on January 1, 2018 to all existing contracts with customers covered under the scope of the standard. The Company did not have an aggregate effect of

10

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

modification resulting from adoption of ASC 606, and no financial statement line items were affected by this change in accounting standard.                         

  


11

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, 2018 and 2017 is as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Basic earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
25,762

 
$
18,190

Distributed and undistributed earnings to participating securities
(75
)
 
(79
)
Income available to common shareholders
$
25,687

 
$
18,111

Denominator:
 
 
 
Weighted average common shares outstanding
48,197,596

 
47,897,062

Less: Average unallocated ESOP shares
(1,187,533
)
 
(1,240,486
)
  Average unvested restricted stock awards
(137,730
)
 
(202,918
)
Average shares for basic earnings per share
46,872,333

 
46,453,658

Basic earnings per common share
$
0.55

 
$
0.39

Diluted earnings per share:
 
 
 
Numerator:
 
 
 
Income available to common shareholders
$
25,687

 
$
18,111

Denominator:
 
 
 
Average shares for basic earnings per share
46,872,333

 
46,453,658

Dilutive effect of share-based compensation plan
692,254

 
606,648

Average shares for diluted earnings per share
47,564,587

 
47,060,306

Diluted earnings per common share
$
0.54

 
$
0.38

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
184,000

 
129,008



12

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, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
181,361

 
$
350

 
$
4,407

 
$
177,304

Agency commercial mortgage-backed securities 1
9,344

 

 
211

 
9,133

Agency residential collateralized mortgage obligations 1
216,747

 
34

 
5,449

 
211,332

US government and agency securities
1,500

 
46

 

 
1,546

Municipal bonds
32,460

 
45

 
407

 
32,098

Total securities
$
441,412

 
$
475

 
$
10,474

 
$
431,413

December 31, 2017
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
191,216

 
$
419

 
$
2,169

 
$
189,466

Agency commercial mortgage-backed securities 1
9,360

 

 
125

 
9,235

Agency residential collateralized mortgage obligations 1
187,637

 
4

 
3,425

 
184,216

US government and agency securities
1,590

 
81

 

 
1,671

Municipal bonds
35,196

 
241

 
308

 
35,129

Total securities
$
424,999

 
$
745

 
$
6,027

 
$
419,717

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, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
53,674

 
$
421

 
$
1,246

 
$
52,849

Agency commercial mortgage-backed securities 1
20,681

 
42

 
248

 
20,475

Agency residential collateralized mortgage obligations 1
24,630

 
159

 
141

 
24,648

Municipal bonds
57,913

 
772

 
623

 
58,062

Total securities
$
156,898

 
$
1,394

 
$
2,258

 
$
156,034

December 31, 2017
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
57,334

 
$
616

 
$
646

 
$
57,304

Agency commercial mortgage-backed securities 1
27,435

 
589

 
98

 
27,926

Agency residential collateralized mortgage obligations 1
27,112

 
265

 
99

 
27,278

Municipal bonds
61,628

 
1,079

 
289

 
62,418

Total securities
$
173,509

 
$
2,549

 
$
1,132

 
$
174,926

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


13

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, 2018 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
$
460

 
$
463

 
$
2,845

Due after one to five years
12,555

 
12,783

 
11,209

Due after five to ten years
42,803

 
42,779

 
15,770

Due after ten years
2,095

 
2,037

 
3,820

Agency residential mortgage-backed securities
53,674

 
52,849

 
177,304

Agency commercial mortgage-backed securities
20,681

 
20,475

 
9,133

Agency residential collateralized mortgage obligations
24,630

 
24,648

 
211,332

Total
$
156,898

 
$
156,034

 
$
431,413


Securities with a carrying value of $245,494 and $256,451 at March 31, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At March 31, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies of U.S. Government Sponsored Enterprises, in an amount greater than 10% of shareholders' equity.
There were no sales of securities during the three months ended March 31, 2018 or 2017.

















14

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

Securities with unrealized losses at March 31, 2018 and December 31, 2017, 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, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
58,594

 
$
1,326

 
$
91,249

 
$
3,081

 
$
149,843

 
$
4,407

Agency commercial mortgage-backed securities 1
9,134

 
211

 

 

 
9,134

 
211

Agency residential collateralized mortgage obligations 1
141,955

 
3,235

 
52,868

 
2,214

 
194,823

 
5,449

Municipal bonds
18,694

 
284

 
3,719

 
123

 
22,413

 
407

Total temporarily impaired
$
228,377

 
$
5,056

 
$
147,836

 
$
5,418

 
$
376,213

 
$
10,474

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
59,545

 
$
412

 
$
100,214

 
$
1,757

 
$
159,759

 
$
2,169

Agency commercial mortgage-backed securities 1
9,235

 
125

 

 

 
9,235

 
125

Agency residential collateralized mortgage obligations 1
128,869

 
1,860

 
49,171

 
1,565

 
178,040

 
3,425

Municipal bonds
10,114

 
72

 
6,583

 
236

 
16,697

 
308

Total temporarily impaired
$
207,763

 
$
2,469

 
$
155,968

 
$
3,558

 
$
363,731

 
$
6,027


HTM
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
19,773

 
$
530

 
$
15,838

 
$
716

 
$
35,611

 
$
1,246

Agency commercial mortgage-backed securities 1
15,222

 
121

 
3,405

 
127

 
18,627

 
248

Agency residential collateralized mortgage obligations 1
9,274

 
106

 
2,003

 
35

 
11,277

 
141

Municipal bonds
11,469

 
243

 
10,296

 
380

 
21,765

 
623

Total temporarily impaired
$
55,738


$
1,000

 
$
31,542

 
$
1,258

 
$
87,280


$
2,258

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
20,397

 
$
206

 
$
16,909

 
$
440

 
$
37,306

 
$
646

Agency commercial mortgage-backed securities 1
3,685

 
26

 
3,484

 
72

 
7,169

 
98

Agency residential collateralized mortgage obligations 1
8,008

 
64

 
2,267

 
35

 
10,275

 
99

Municipal bonds
9,313

 
80

 
10,486

 
209

 
19,799

 
289

Total temporarily impaired
$
41,403

 
$
376

 
$
33,146

 
$
756

 
$
74,549

 
$
1,132

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, 2018, 298 securities had unrealized losses, 117 of which had been in an unrealized loss position for over 12 months at March 31, 2018. The Company does not believe these unrealized losses are other-than-temporary and expects full collection of the carrying amount of these securities. At March 31, 2018, the Company does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost. All principal and interest payments are being received on time and in full.


15

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. All periods presented in this note include a reclassification of three Warehouse relationships from the commercial and industrial category to the Warehouse Purchase Program category. At March 31, 2018 and December 31, 2017, these reclassified relationships totaled $144,270 and $166,258, respectively.
 
March 31,
2018
 
December 31, 2017
Loans held for sale, at fair value
$
31,123

 
$
16,707

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
3,053,750

 
$
3,019,339

Commercial and industrial
1,967,443

 
1,927,049

Construction and land
252,213

 
277,864

Consumer real estate
1,252,433

 
1,213,434

Other consumer
43,284

 
45,506

Gross loans held for investment, excluding Warehouse Purchase Program
6,569,123

 
6,483,192

Net of:
 
 
 
Deferred costs (fees) and discounts, net
7,630

 
6,380

Allowance for loan losses
(74,508
)
 
(71,301
)
Net loans held for investment, excluding Warehouse Purchase Program
6,502,245

 
6,418,271

Warehouse Purchase Program
1,019,840

 
1,320,846

Total loans held for investment
$
7,522,085

 
$
7,739,117


Activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017, 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 its Warehouse Purchase Program loans and no allowance for loan losses has been allocated to them. At March 31, 2018 and 2017, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $314 and $225, respectively.
For the three months ended March 31, 2018
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,587

 
$
39,005

 
$
4,644

 
$
4,838

 
$
1,227

 
$
71,301

Charge-offs
(3
)
 
(12,236
)
 

 

 
(288
)
 
(12,527
)
Recoveries

 
22

 

 
11

 
66

 
99

Provision expense (benefit)
(46
)
 
15,973

 
(706
)
 
180

 
234

 
15,635

Ending balance
$
21,538

 
$
42,764

 
$
3,938

 
$
5,029

 
$
1,239

 
$
74,508

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
56

 
$
11,250

 
$

 
$
226

 
$
30

 
$
11,562

Collectively evaluated for impairment
21,482

 
31,514

 
3,938

 
4,803

 
1,209

 
62,946

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
3,748

 
40,453

 

 
2,911

 
23

 
47,135

Collectively evaluated for impairment
3,047,695

 
1,926,847

 
252,213

 
1,248,769

 
43,080

 
6,518,604

PCI loans
2,307

 
143

 

 
753

 
181

 
3,384

Ending balance
$
3,053,750

 
$
1,967,443

 
$
252,213

 
$
1,252,433

 
$
43,284

 
$
6,569,123


16

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, 2017
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
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 (benefit)
866

 
21,912

 
(98
)
 
(76
)
 
96

 
22,700

Ending balance
$
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

 
1,735,969

 
289,948

 
1,105,793

 
49,520

 
5,957,794

PCI loans
5,577

 
208

 

 
883

 
229

 
6,897

Ending balance
$
2,786,477

 
$
1,830,671

 
$
290,258

 
$
1,109,459

 
$
50,722

 
$
6,067,587

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, 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

17

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

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,
 
2018
 
2017
Beginning Balance
$
929

 
$
1,573

Charge-offs on lending-related commitments

 

Provision (benefit) for credit losses on lending-related commitments
28

 
(399
)
Ending Balance
$
957

 
$
1,174

Impaired loans at March 31, 2018 and December 31, 2017, were as follows1:
March 31, 2018
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,069

 
$
3,748

 
$

 
$
3,748

 
$

Commercial and industrial
 
42,309

 
17,111

 
23,342

 
40,453

 
11,234

Consumer real estate
 
3,472

 
2,905

 
6

 
2,911

 
6

Other consumer
 
61

 
11

 
12

 
23

 
8

Total
 
$
49,911

 
$
23,775

 
$
23,360

 
$
47,135

 
$
11,248

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
4,411

 
$
4,134

 
$

 
$
4,134

 
$

Commercial and industrial
 
89,713

 
48,463

 
35,542

 
84,005

 
10,502

Consumer real estate
 
3,545

 
2,985

 
7

 
2,992

 
7

Other consumer
 
71

 
16

 
19

 
35

 
13

Total
 
$
97,740

 
$
55,598

 
$
35,568

 
$
91,166

 
$
10,522

1 
No Warehouse Purchase Program loans were impaired at March 31, 2018 or December 31, 2017. Loans reported do not include PCI loans.
Income on impaired loans for the three months ended March 31, 2018 and 2017, was as follows1:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
3,879

 
$
2

 
$
4,966

 
$
2

Commercial and industrial
 
63,294

 

 
88,076

 

Construction and land
 

 

 
7,388

 

Consumer real estate
 
2,952

 
8

 
3,042

 
3

Other consumer
 
29

 
1

 
297

 
1

Total
 
$
70,154

 
$
11

 
$
103,769

 
$
6

1 
Loans reported do not include PCI loans.

18

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

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, 2018 or December 31, 2017. At March 31, 2018, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at March 31, 2018 or December 31, 2017. Non-performing (nonaccrual) loans were as follows:
 
March 31, 2018
 
December 31, 2017
Commercial real estate
$
3,748

 
$
4,134

Commercial and industrial
40,455

 
84,003

Consumer real estate
5,548

 
6,190

Other consumer
85

 
76

Total
$
49,836

 
$
94,403

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 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, 2018
 
December 31, 2017
Nonaccrual TDRs(1)
$
17,117

 
$
17,294

Performing TDRs (2)
732

 
768

Total
$
17,849

 
$
18,062

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.

19

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

The following tables provide the recorded balances of loans modified as a TDR during the three months ended March 31, 2018 and 2017.
 
For the three months ended March 31, 2018
 
Principal Deferrals
 
Other
 
Total
Commercial and industrial
$
83

 
$

 
$
83

Total
$
83

 
$

 
$
83

 
For the three months ended March 31, 2017
 
Principal Deferrals
 
Other
 
Total
Commercial and industrial
$

 
$
14,592

(1) 
$
14,592

Total
$

 
$
14,592

 
$
14,592

1 
Reserve-based energy relationships where the primary modifications consisted of suspension of required borrowing base payments.
No loans modified as a TDR during the three months ended March 31, 2018 or 2017, experienced a subsequent payment default in the preceding twelve months. A payment default is defined as a loan that was 90 days or more past due.
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, 2018 and December 31, 2017 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, 2018
 
December 31, 2017
Carrying amount 1
$
3,070

 
$
3,295

Outstanding balance
3,804

 
3,992

1 
The carrying amounts are reported net of allowance for loan losses of $314 and $269 as of March 31, 2018 and December 31, 2017.
Changes in the accretable yield for PCI loans for the three months ended March 31, 2018 and 2017 are as follows:
 
Three Months Ended March 31,
 
2018
 
2017
Beginning balance
$
2,279

 
$
2,515

Reclassifications (to) from nonaccretable
51

 
198

Disposals
(64
)
 

Accretion
(99
)
 
(186
)
Balance at end of period
$
2,167

 
$
2,527


20

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

Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2018 and December 31, 2017. No Warehouse Purchase Program loans were delinquent at March 31, 2018 or December 31, 2017 and therefore are not included in the following tables.
March 31, 2018
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
$
40,817

 
$

 
$

 
$
40,817

 
$
3,012,933

 
$
3,053,750

Commercial and industrial
2,891

 
122

 
1,340

 
4,353

 
1,963,090

 
1,967,443

Construction and land
891

 

 

 
891

 
251,322

 
252,213

Consumer real estate
16,097

 
196

 
741

 
17,034

 
1,235,399

 
1,252,433

Other consumer
341

 
52

 

 
393

 
42,891

 
43,284

Total
$
61,037

 
$
370

 
$
2,081

 
$
63,488

 
$
6,505,635

 
$
6,569,123

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
9,414

 
$

 
$
250

 
$
9,664

 
$
3,009,675

 
$
3,019,339

Commercial and industrial
918

 
284

 
7,350

 
8,552

 
1,918,497

 
1,927,049

Construction and land
9,354

 

 

 
9,354

 
268,510

 
277,864

Consumer real estate
16,436

 
2,928

 
1,367

 
20,731

 
1,192,703

 
1,213,434

Other consumer
891

 
34

 
2

 
927

 
44,579

 
45,506

Total
$
37,013

 
$
3,246

 
$
8,969

 
$
49,228

 
$
6,433,964

 
$
6,483,192

1 
Includes acquired PCI loans with a total carrying value of $3,371 and $3,338 at March 31, 2018 and December 31, 2017, 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 makes “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.

21

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, 2018 and December 31, 2017, was as follows:
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
March 31, 2018
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
3,026,208

 
$
1,848,915

 
$
252,213

 
$
1,243,095

Special Mention
 
19,929

 
38,292

 

 
1,376

Substandard
 
7,613

 
80,196

 

 
7,196

Doubtful
 

 
40

 

 
766

Total
 
$
3,053,750

 
$
1,967,443

 
$
252,213

 
$
1,252,433

December 31, 2017
 
 
 
 
 
 
 
 
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
2,980,656