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EX-32 - EXHIBIT 32 - LegacyTexas Financial Group, Inc.exhibit32020180630.htm
EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit31220180630.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit31120180630.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, 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 July 23, 2018:
 
 
48,355,874




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
June 30, 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)
 
June 30,
2018
 
December 31, 2017
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
60,104

 
$
61,713

Short-term interest-bearing deposits in other financial institutions
199,807

 
231,743

Total cash and cash equivalents
259,911

 
293,456

Securities available for sale, at fair value
445,613

 
419,717

Securities held to maturity (fair value: June 30, 2018 — $153,758;
December 31, 2017— $174,926)
155,252

 
173,509

Loans held for sale, at fair value
33,548

 
16,707

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $64,445 at June 30, 2018 and $71,301 at December 31, 2017)
6,615,818

 
6,418,271

Loans held for investment - Warehouse Purchase Program
1,291,129

 
1,320,846

Total loans held for investment
7,906,947

 
7,739,117

Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost
66,061

 
64,790

Bank-owned life insurance
58,345

 
57,684

Premises and equipment, net
70,893

 
69,693

Goodwill
178,559

 
178,559

Other assets
73,957

 
72,964

Total assets
$
9,249,086

 
$
9,086,196

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,721,380

 
$
1,635,622

Interest-bearing demand
867,323

 
1,029,375

Savings and money market
2,580,017

 
2,735,296

Time
1,712,628

 
1,367,390

Total deposits
6,881,348

 
6,767,683

FHLB advances
1,065,941

 
1,043,163

Repurchase agreements
41,330

 
84,676

Subordinated debt
134,767

 
134,522

Accrued expenses and other liabilities
124,250

 
96,278

Total liabilities
8,247,636

 
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 — June 30, 2018 and December 31, 2017

 

Common stock, $.01 par value; 90,000,000 shares authorized; 48,311,220 shares issued —
June 30, 2018 and 48,117,390 shares issued — December 31, 2017
483

 
481

Additional paid-in capital
611,967

 
603,884

Retained earnings
409,765

 
370,858

Accumulated other comprehensive income (loss), net
(9,109
)
 
(3,429
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,165,617 shares at June 30, 2018 and 1,192,093 shares at December 31, 2017
(11,656
)
 
(11,920
)
Total shareholders’ equity
1,001,450

 
959,874

Total liabilities and shareholders’ equity
$
9,249,086

 
$
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 June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
98,570

 
$
83,917

 
$
189,201

 
$
167,020

Taxable securities
3,132

 
2,725

 
6,043

 
5,287

Nontaxable securities
641

 
739

 
1,316

 
1,494

Interest-bearing deposits in other financial institutions
1,097

 
955

 
2,066

 
1,687

FHLB and FRB stock and other
551

 
411

 
1,031

 
795

 
103,991

 
88,747

 
199,657

 
176,283

Interest expense
 
 
 
 
 
 
 
Deposits
13,732

 
8,359

 
25,764

 
15,469

FHLB advances
4,131

 
2,427

 
6,811

 
4,059

Repurchase agreements and other borrowings
2,199

 
2,241

 
4,540

 
4,487

 
20,062

 
13,027

 
37,115

 
24,015

Net interest income
83,929

 
75,720

 
162,542

 
152,268

Provision for credit losses
17,478

 
6,255

 
33,141

 
28,556

Net interest income after provision for credit losses
66,451

 
69,465

 
129,401

 
123,712

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
8,844

 
9,896

 
16,771

 
18,327

Net gain on sale of mortgage loans held for sale
1,668

 
2,156

 
3,477

 
3,784

Bank-owned life insurance income
479

 
440

 
926

 
862

Net gain (loss) on securities transactions

 

 
(128
)
 
(19
)
Gain (loss) on sale and disposition of assets
(153
)
 
157

 
2,060

 
1,556

Other
14

 
(324
)
 
644

 
(55
)
 
10,852

 
12,325

 
23,750

 
24,455

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
24,313

 
23,391

 
51,389

 
47,835

Advertising
1,358

 
1,179

 
2,246

 
1,996

Occupancy and equipment
3,980

 
3,656

 
7,840

 
7,310

Outside professional services
1,382

 
1,203

 
2,632

 
2,359

Regulatory assessments
731

 
1,271

 
1,885

 
2,256

Data processing
5,145

 
3,877

 
9,848

 
7,772

Office operations
2,224

 
2,404

 
4,524

 
4,680

Other
3,058

 
2,608

 
5,706

 
5,133

 
42,191

 
39,589

 
86,070

 
79,341

Income before income tax expense
35,112

 
42,201

 
67,081

 
68,826

Income tax expense
7,275

 
14,266

 
13,482

 
22,701

Net income
$
27,837

 
$
27,935

 
$
53,599

 
$
46,125

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.60

 
$
1.14

 
$
0.99

Diluted
$
0.58

 
$
0.59

 
$
1.12

 
$
0.98

Dividends declared per share
$
0.16

 
$
0.15

 
$
0.32

 
$
0.30

 
 
 
 
 
 
 
 
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,
 
2018
 
2017
 
2018
 
2017
Net income
$
27,837

 
$
27,935

 
$
53,599

 
$
46,125

Change in unrealized gains (losses) on securities available for sale
(1,532
)
 
1,427

 
(6,377
)
 
2,426

Reclassification of amount realized through securities transactions

 

 
128

 
19

Tax effect
322

 
(501
)
 
1,310

 
(857
)
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
(1,210
)
 
926

 
(5,680
)
 
1,588

Comprehensive income
$
26,627

 
$
28,861

 
$
47,919

 
$
47,713

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, 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

 

 
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

For the six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
$
481

 
$
603,884

 
$
370,858

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

Net income

 

 
53,599

 

 

 
53,599

Other comprehensive income (loss), net of tax

 

 

 
(5,680
)
 

 
(5,680
)
Reclassification of income tax effects of the Tax Cuts and Jobs Act
(see Note 9 for more information)

 

 
741

 

 

 
741

Dividends declared, ($0.32 per share)

 

 
(15,433
)
 

 

 
(15,433
)
ESOP shares earned, (26,476 shares)

 
874

 

 

 
264

 
1,138

Share-based compensation expense

 
3,453

 

 

 

 
3,453

Activity in employee stock plans, (193,830 shares)
2

 
3,756

 

 

 

 
3,758

Balance at June 30, 2018
$
483

 
$
611,967

 
$
409,765

 
$
(9,109
)
 
$
(11,656
)
 
$
1,001,450


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,
 
2018
 
2017
Cash flows from operating activities
 
 
 
Net income
$
53,599

 
$
46,125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
33,141

 
28,556

Depreciation and amortization
3,401

 
3,603

Deferred tax benefit
2,226

 
(3,973
)
Premium amortization and accretion of securities, net
1,986

 
2,177

Accretion related to acquired loans
(1,147
)
 
(1,817
)
Net (gain) loss on securities transactions
128

 
19

ESOP compensation expense
1,138

 
1,045

Share-based compensation expense
3,453

 
3,405

Excess tax benefit on vesting of stock awards
681

 
1,177

Net gain on loans held for sale
(3,477
)
 
(3,784
)
Loans originated or purchased for sale
(100,470
)
 
(96,238
)
Proceeds from sale of loans held for sale
87,106

 
101,927

FHLB stock dividends
(391
)
 
(227
)
Bank-owned life insurance income
(926
)
 
(862
)
(Gain) on sale and disposition of repossessed assets, premises and equipment
190

 
(1,373
)
Net change in deferred loan fees/costs
(2,744
)
 
(6,700
)
Net change in accrued interest receivable
(1,093
)
 
187

Net change in other assets
(3,246
)
 
1,110

Net change in other liabilities
28,904

 
65,589

Net cash provided by operating activities
102,459

 
139,946

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
1,087,449

 
1,185,797

Purchases
(1,121,303
)
 
(1,228,519
)
Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
23,236

 
18,338

Purchases
(5,388
)
 

Originations of Warehouse Purchase Program loans
(10,980,262
)
 
(10,232,407
)
Proceeds from pay-offs of Warehouse Purchase Program loans
11,009,979

 
10,031,006

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(227,028
)
 
(365,656
)
Purchase of FHLB and Federal Reserve Bank stock and other
(880
)
 
(13,125
)
Purchases of premises and equipment
(4,454
)
 
(1,278
)
Proceeds from sale of assets
1,225

 
5,399

Net cash (used in) investing activities
(217,426
)
 
(600,445
)

7


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

 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from financing activities
 
 
 
Net change in deposits
113,665

 
197,030

Proceeds from FHLB advances
1,055,000

 
325,000

Repayments on FHLB advances
(1,032,222
)
 
(7,000
)
Repayments of borrowings
(43,346
)
 
(13,258
)
Payment of dividends
(15,433
)
 
(14,382
)
Activity in employee stock plans
3,758

 
2,137

Net cash provided by financing activities
81,422

 
489,527

Net change in cash and cash equivalents
(33,545
)
 
29,028

Beginning cash and cash equivalents
293,456

 
289,212

Ending cash and cash equivalents
$
259,911

 
$
318,240

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
25

 
$
4,046

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 Accounting Standards Codification ("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 and six months ended June 30, 2018 and June 30, 2017, are below:    

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Card services income
(a)
$
3,295

 
$
3,102

 
$
6,353

 
$
5,944

Service charges on deposits
(b)
1,957

 
1,800

 
3,730

 
3,638

Title income
(c)
1,196

 
1,563

 
2,253

 
2,997

Gains (losses) on the sale of other real estate owned
(d)
9

 
139

 
(31
)
 
184


(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.


10

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

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 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 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, 2018 and 2017 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
27,837

 
$
27,935

 
$
53,599

 
$
46,125

Distributed and undistributed earnings to participating securities
(67
)
 
(98
)
 
(143
)
 
(181
)
Income available to common shareholders
$
27,770

 
$
27,837

 
$
53,456

 
$
45,944

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
48,287,755

 
47,986,979

 
48,242,925

 
47,942,269

Less: Average unallocated ESOP shares
(1,174,297
)
 
(1,227,250
)
 
(1,180,879
)
 
(1,233,831
)
  Average unvested restricted stock awards
(113,053
)
 
(163,262
)
 
(125,323
)
 
(182,981
)
Average shares for basic earnings per share
47,000,405

 
46,596,467

 
46,936,723

 
46,525,457

Basic earnings per common share
$
0.59

 
$
0.60

 
$
1.14

 
$
0.99

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
27,770

 
$
27,837

 
$
53,456

 
$
45,944

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
47,000,405

 
46,596,467

 
46,936,723

 
46,525,457

Dilutive effect of share-based compensation plan
617,752

 
409,087

 
651,373

 
459,578

Average shares for diluted earnings per share
47,618,157

 
47,005,554

 
47,588,096

 
46,985,035

Diluted earnings per common share
$
0.58

 
$
0.59

 
$
1.12

 
$
0.98

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
479,531

 
511,375

 
553,390

 
523,758



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:
June 30, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
171,549

 
$
324

 
$
4,934

 
$
166,939

Agency commercial mortgage-backed securities 1
9,328

 

 
206

 
9,122

Agency residential collateralized mortgage obligations 1
242,375

 
73

 
6,432

 
236,016

US government and agency securities
1,500

 
37

 

 
1,537

Municipal bonds
32,392

 
43

 
436

 
31,999

Total securities
$
457,144

 
$
477

 
$
12,008

 
$
445,613

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:
June 30, 2018
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
53,774

 
$
308

 
$
1,410

 
$
52,672

Agency commercial mortgage-backed securities 1
22,123

 
30

 
356

 
21,797

Agency residential collateralized mortgage obligations 1
22,116

 
132

 
162

 
22,086

Municipal bonds
57,239

 
591

 
627

 
57,203

Total securities
$
155,252

 
$
1,061

 
$
2,555

 
$
153,758

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 June 30, 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

 
$
460

 
$
2,839

Due after one to five years
12,135

 
12,311

 
11,187

Due after five to ten years
42,552

 
42,399

 
15,723

Due after ten years
2,092

 
2,033

 
3,787

Agency residential mortgage-backed securities
53,774

 
52,672

 
166,939

Agency commercial mortgage-backed securities
22,123

 
21,797

 
9,122

Agency residential collateralized mortgage obligations
22,116

 
22,086

 
236,016

Total
$
155,252

 
$
153,758

 
$
445,613


Securities with a carrying value of $207,865 and $256,451 at June 30, 2018 and December 31, 2017, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At June 30, 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 and six months ended June 30, 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 June 30, 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
June 30, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
55,205

 
$
1,458

 
$
87,083

 
$
3,476

 
$
142,288

 
$
4,934

Agency commercial mortgage-backed securities 1
9,122

 
206

 

 

 
9,122

 
206

Agency residential collateralized mortgage obligations 1
137,172

 
3,109

 
71,331

 
3,323

 
208,503

 
6,432

Municipal bonds
18,617

 
281

 
3,679

 
155

 
22,296

 
436

Total temporarily impaired
$
220,116

 
$
5,054

 
$
162,093

 
$
6,954

 
$
382,209

 
$
12,008

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
June 30, 2018
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
25,360

 
$
650

 
$
14,895

 
$
760

 
$
40,255

 
$
1,410

Agency commercial mortgage-backed securities 1
16,614

 
205

 
3,358

 
151

 
19,972

 
356

Agency residential collateralized mortgage obligations 1
8,351

 
132

 
1,587

 
30

 
9,938

 
162

Municipal bonds
11,403

 
222

 
10,874

 
405

 
22,277

 
627

Total temporarily impaired
$
61,728


$
1,209

 
$
30,714

 
$
1,346

 
$
92,442


$
2,555

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 June 30, 2018, 316 securities had unrealized losses, 127 of which had been in an unrealized loss position for over 12 months at June 30, 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 June 30, 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.
 
June 30,
2018
 
December 31, 2017
Loans held for sale, at fair value
$
33,548

 
$
16,707

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
3,021,148

 
$
3,019,339

Commercial and industrial
2,051,955

 
1,927,049

Construction and land
265,745

 
277,864

Consumer real estate
1,287,703

 
1,213,434

Other consumer
44,588

 
45,506

Gross loans held for investment, excluding Warehouse Purchase Program
6,671,139

 
6,483,192

Net of:
 
 
 
Deferred costs (fees) and discounts, net
9,124

 
6,380

Allowance for loan losses
(64,445
)
 
(71,301
)
Net loans held for investment, excluding Warehouse Purchase Program
6,615,818

 
6,418,271

Warehouse Purchase Program
1,291,129

 
1,320,846

Total loans held for investment
$
7,906,947

 
$
7,739,117



16

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, 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 June 30, 2018 and 2017, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $310 and $232, respectively.
For the three months ended June 30, 2018
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,538

 
$
42,764

 
$
3,938

 
$
5,029

 
$
1,239

 
$
74,508

Charge-offs
(236
)
 
(27,289
)
 

 

 
(212
)
 
(27,737
)
Recoveries

 
28

 

 
9

 
37

 
74

Provision expense (benefit)
374

 
17,369

 
(264
)
 
(41
)
 
162

 
17,600

Ending balance
$
21,676

 
$
32,872

 
$
3,674

 
$
4,997

 
$
1,226

 
$
64,445

For the six months ended June 30, 2018

 

 

 

 

 

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,587

 
$
39,005

 
$
4,644

 
$
4,838

 
$
1,227

 
$
71,301

Charge-offs
(239
)
 
(39,525
)
 

 

 
(500
)
 
(40,264
)
Recoveries

 
50

 

 
20

 
103

 
173

Provision expense (benefit)
328

 
33,342

 
(970
)
 
139

 
396

 
33,235

Ending balance
$
21,676

 
$
32,872

 
$
3,674

 
$
4,997

 
$
1,226

 
$
64,445

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
69

 
$
1,749

 
$

 
$
225

 
$
28

 
$
2,071

Collectively evaluated for impairment
21,607

 
31,123

 
3,674

 
4,772

 
1,198

 
62,374

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
3,656

 
10,222

 

 
2,784

 
16

 
16,678

Collectively evaluated for impairment
3,015,188

 
2,041,619

 
265,745

 
1,284,168

 
44,402

 
6,651,122

PCI loans
2,304

 
114

 

 
751

 
170

 
3,339

Ending balance
$
3,021,148

 
$
2,051,955

 
$
265,745

 
$
1,287,703

 
$
44,588

 
$
6,671,139


17

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, 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

 
1,791,414

 
270,050

 
1,150,911

 
47,467

 
6,067,571

PCI loans
5,513

 
196

 

 
886

 
213

 
6,808

Ending balance
$
2,817,443

 
$
1,879,209

 
$
270,050

 
$
1,154,353

 
$
47,735

 
$
6,168,790

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,

18

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 10 - Commitments and Contingent Liabilities for more information.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Beginning Balance
$
957

 
$
1,174

 
$
929

 
$
1,573

Charge-offs on lending-related commitments

 

 

 

Provision (benefit) for credit losses on lending-related commitments
(122
)
 
55

 
(94
)
 
(344
)
Ending Balance
$
835

 
$
1,229

 
$
835

 
$
1,229

Impaired loans at June 30, 2018 and December 31, 2017, were as follows1:
June 30, 2018
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,006

 
$
3,656

 
$

 
$
3,656

 
$

Commercial and industrial
 
26,533

 
6,879

 
3,343

 
10,222

 
1,749

Consumer real estate
 
3,322

 
2,778

 
6

 
2,784

 
6

Other consumer
 
51

 
7

 
9

 
16

 
6

Total
 
$
33,912

 
$
13,320

 
$
3,358

 
$
16,678

 
$
1,761

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 June 30, 2018 or December 31, 2017. Loans reported do not include PCI loans.

19

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, 2018 and 2017, was as follows1:
 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
6,025

 
$