Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34737

LEGACYTEXAS FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)



Maryland				27-2176993
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

5851 Legacy Circle, Plano, Texas				75024
(Address of Principal Executive Offices)				(Zip Code)

Registrant’s telephone number, including area code: (972) 578-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Class: Common Stock		Shares Outstanding as of October 22, 2018:
		48,492,319

LEGACYTEXAS FINANCIAL GROUP, INC.

FORM 10-Q

September 30, 2018

INDEX



PART I -- FINANCIAL INFORMATION	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets at September 30, 2018 (unaudited) and December 31, 2017	3
Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2018 and 2017	4
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2018 and 2017	5
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the nine months ended September 30, 2018 and 2017	6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017	8
Condensed Notes to Unaudited Consolidated Interim Financial Statements	10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3. Quantitative and Qualitative Disclosures about Market Risk	55

Item 4. Controls and Procedures	58

PART II—OTHER INFORMATION	59

Item 1. Legal Proceedings	59

Item 1.A. Risk Factors	59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3. Defaults Upon Senior Securities	59

Item 4. Mine Safety Disclosures	59

Item 5. Other Information	59

Item 6. Exhibits	60

SIGNATURE PAGE	62

PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)



	September 30, 2018			December 31, 2017
ASSETS	(unaudited)
Cash and due from financial institutions	$	64,681		$	61,713
Short-term interest-bearing deposits in other financial institutions	189,634			231,743
Total cash and cash equivalents	254,315			293,456
Securities available for sale, at fair value	455,454			419,717
Securities held to maturity (fair value: September 30, 2018 — $142,746; December 31, 2017— $174,926)	145,148			173,509
Loans held for sale, at fair value	22,175			16,707
Loans held for investment:
Loans held for investment (net of allowance for loan losses of $66,354 at September 30, 2018 and $71,301 at December 31, 2017)	6,707,553			6,418,271
Loans held for investment - Warehouse Purchase Program	1,054,505			1,320,846
Total loans held for investment	7,762,058			7,739,117
Federal Home Loan Bank ("FHLB") stock and other restricted securities, at cost	60,596			64,790
Bank-owned life insurance	58,692			57,684
Premises and equipment, net	72,291			69,693
Goodwill	178,559			178,559
Other assets	73,504			72,964
Total assets	$	9,082,792		$	9,086,196
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	1,798,109		$	1,635,622
Interest-bearing demand	780,474			1,029,375
Savings and money market	2,562,399			2,735,296
Time	1,638,776			1,367,390
Total deposits	6,779,758			6,767,683
FHLB advances	932,317			1,043,163
Repurchase agreements	40,408			84,676
Subordinated debt	134,890			134,522
Accrued expenses and other liabilities	155,820			96,278
Total liabilities	8,043,193			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 — September 30, 2018 and December 31, 2017	—			—
Common stock, $.01 par value; 90,000,000 shares authorized; 48,491,169 shares issued — September 30, 2018 and 48,117,390 shares issued — December 31, 2017	485			481
Additional paid-in capital	617,270			603,884
Retained earnings	444,848			370,858
Accumulated other comprehensive income (loss), net	(11,481		)	(3,429		)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,152,378 shares at September 30, 2018 and 1,192,093 shares at December 31, 2017	(11,523		)	(11,920		)
Total shareholders’ equity	1,039,599			959,874
Total liabilities and shareholders’ equity	$	9,082,792		$	9,086,196
See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest and dividend income
Loans, including fees	$	102,267		$	89,084		$	291,468		$	256,104
Taxable securities	3,254			2,694			9,297			7,981
Nontaxable securities	614			713			1,930			2,207
Interest-bearing deposits in other financial institutions	1,368			1,524			3,434			3,211
FHLB and FRB stock and other	644			448			1,675			1,243
	108,147			94,463			307,804			270,746
Interest expense
Deposits	15,077			10,271			40,841			25,740
FHLB advances	5,198			2,944			12,009			7,003
Repurchase agreements and other borrowings	2,205			2,284			6,745			6,771
	22,480			15,499			59,595			39,514
Net interest income	85,667			78,964			248,209			231,232
Provision for credit losses	2,656			7,157			35,797			35,713
Net interest income after provision for credit losses	83,011			71,807			212,412			195,519
Non-interest income
Service charges and other fees	8,626			9,291			25,397			27,618
Net gain on sale of mortgage loans held for sale	1,597			1,982			5,074			5,766
Bank-owned life insurance income	482			435			1,408			1,297
Net gain (loss) on securities transactions	(10		)	(20		)	(138		)	(39		)
Gain on sale and disposition of assets	977			352			3,037			1,908
Other	1,555			186			2,199			131
	13,227			12,226			36,977			36,681
Non-interest expense
Salaries and employee benefits	25,053			24,175			76,442			72,010
Advertising	824			980			3,070			2,976
Occupancy and equipment	3,960			3,299			11,800			10,609
Outside professional services	1,151			1,230			3,783			3,589
Regulatory assessments	750			1,011			2,635			3,267
Data processing	5,362			4,287			15,210			12,059
Office operations	2,232			2,378			6,756			7,058
Other	2,860			2,935			8,566			8,068
	42,192			40,295			128,262			119,636
Income before income tax expense	54,046			43,738			121,127			112,564
Income tax expense	11,225			15,029			24,707			37,730
Net income	$	42,821		$	28,709		$	96,420		$	74,834

Earnings per share:
Basic	$	0.91		$	0.61		$	2.05		$	1.60
Diluted	$	0.89		$	0.61		$	2.02		$	1.58
Dividends declared per share	$	0.16		$	0.15		$	0.48		$	0.45

See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net income	$	42,821		$	28,709		$	96,420		$	74,834
Change in unrealized gains (losses) on securities available for sale	(3,013		)	103			(9,390		)	2,529
Reclassification of amount realized through securities transactions	10			20			138			39
Tax effect	631			(43		)	1,941			(900		)
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	(2,372		)	80			(8,052		)	1,668
Comprehensive income	$	40,449		$	28,789		$	88,368		$	76,502

See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

(Dollars in thousands, except share and per share data)



	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Total Shareholders’ Equity
For the nine months ended September 30, 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 (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
Net income	—		—		27,837			—			—			27,837
Other comprehensive (loss), net of tax	—		—		—			(1,210		)	—			(1,210		)
Dividends declared, ($0.16 per share)	—		—		(7,725		)	—			—			(7,725		)
ESOP shares earned, (13,238 shares)	—		427		—			—			133			560
Share-based compensation expense	—		1,398		—			—			—			1,398
Activity in employee stock plans, (46,254 shares)	—		1,096		—			—			—			1,096
Balance at June 30, 2018	$	483	$	611,967	$	409,765		$	(9,109	)	$	(11,656	)	$	1,001,450
Net income	—		—		42,821			—			—			42,821
Other comprehensive (loss), net of tax	—		—		—			(2,372		)	—			(2,372		)
Dividends declared, ($0.16 per share)	—		—		(7,738		)	—			—			(7,738		)
ESOP shares earned, (13,238 shares)	—		450		—			—			133			583
Share-based compensation expense	—		2,385		—			—			—			2,385
Activity in employee stock plans, (179,949 shares)	2		2,468		—			—			—			2,470
Balance at September 30, 2018	$	485	$	617,270	$	444,848		$	(11,481	)	$	(11,523	)	$	1,039,599



	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net			Unearned ESOP Shares			Total Shareholders’ Equity
For the nine months ended September 30, 2017
Balance at January 1, 2017	$	479	$	589,408	$	310,641		$	(2,713	)	$	(12,450	)	$	885,365
Net income	—		—		18,190			—			—			18,190
Other comprehensive income, net of tax	—		—		—			662			—			662
Dividends declared, ($0.15 per share)	—		—		(7,183		)	—			—			(7,183		)
ESOP shares earned, (13,238 shares)	—		420		—			—			132			552
Share-based compensation expense	—		1,562		—			—			—			1,562
Activity in employee stock plans, (63,935 shares)	—		769		—			—			—			769
Balance at March 31, 2017	$	479	$	592,159	$	321,648		$	(2,051	)	$	(12,318	)	$	899,917
Net income	—		—		27,935			—			—			27,935
Other comprehensive income, net of tax	—		—		—			926			—			926
Dividends declared, ($0.15 per share)	—		—		(7,199		)	—			—			(7,199		)
ESOP shares earned, (13,238 shares)	—		361		—			—			132			493
Share-based compensation expense	—		1,843		—			—			—			1,843
Activity in employee stock plans, (69,246 shares)	1		1,367		—			—			—			1,368
Balance at June 30, 2017	$	480	$	595,730	$	342,384		$	(1,125	)	$	(12,186	)	$	925,283
Net income	—		—		28,709			—			—			28,709
Other comprehensive income, net of tax	—		—		—			80			—			80
Dividends declared, ($0.15 per share)	—		—		(7,203		)	—			—			(7,203		)
ESOP shares earned, (13,238 shares)	—		366		—			—			133			499
Share-based compensation expense	—		2,014		—			—			—			2,014
Activity in employee stock plans, (30,680 shares)	—		710		—			—			—			710
Balance at September 30, 2017	$	480	$	598,820	$	363,890		$	(1,045	)	$	(12,053	)	$	950,092

See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net income	$	96,420		$	74,834
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	35,797			35,713
Depreciation and amortization	5,125			5,369
Deferred tax benefit	2,489			(4,277		)
Premium amortization and accretion of securities, net	2,949			3,273
Accretion related to acquired loans	(1,478		)	(2,567		)
Net (gain) loss on securities transactions	138			39
ESOP compensation expense	1,721			1,544
Share-based compensation expense	5,838			5,419
Excess tax benefit on vesting of stock awards	894			1,307
Net gain on loans held for sale	(5,074		)	(5,766		)
Loans originated or purchased for sale	(138,702		)	(148,853		)
Proceeds from sale of loans held for sale	138,308			149,943
FHLB stock dividends	(675		)	(375		)
Bank-owned life insurance income	(1,408		)	(1,297		)
(Gain) on sale and disposition of repossessed assets, premises and equipment	(811		)	(1,723		)
Net change in deferred loan fees/costs	(3,475		)	(7,663		)
Net change in accrued interest receivable	(4,782		)	(1,256		)
Net change in other assets	(6,257		)	1,275
Net change in other liabilities	61,317			87,013
Net cash provided by operating activities	188,334			191,952
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls	1,859,278			2,010,107
Purchases	(1,906,774		)	(2,066,094		)
Held-to-maturity securities:
Maturities, prepayments and calls	33,132			28,729
Purchases	(5,388		)	—
Originations of Warehouse Purchase Program loans	(16,416,019		)	(16,110,560		)
Proceeds from pay-offs of Warehouse Purchase Program loans	16,682,360			16,037,972
Net change in loans held for investment, excluding Warehouse Purchase Program loans	(320,481		)	(586,200		)
Redemption (purchase) of FHLB and Federal Reserve Bank stock and other	4,869			(6,692		)
Purchases of premises and equipment	(7,681		)	(2,321		)
Proceeds from sale of assets	9,211			6,238
Net cash (used in) investing activities	(67,493		)	(688,821		)

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

	Nine Months Ended September 30,
	2018			2017
Cash flows from financing activities
Net change in deposits	12,075			394,892
Proceeds from FHLB advances	925,000			175,000
Repayments on FHLB advances	(1,035,846		)	(10,536		)
Repayments of borrowings	(44,268		)	(5,618		)
Payment of dividends	(23,171		)	(21,585		)
Activity in employee stock plans	6,228			2,847
Net cash provided by (used in) financing activities	(159,982		)	535,000
Net change in cash and cash equivalents	(39,141		)	38,131
Beginning cash and cash equivalents	293,456			289,212
Ending cash and cash equivalents	$	254,315		$	327,343
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	25		$	4,360
See accompanying notes to consolidated financial statements.

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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.

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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 nine months ended September 30, 2018 and 2017, are below:



		Three Months Ended September 30,					Nine Months Ended September 30,
		2018		2017			2018		2017
Card services income	(a)	$	3,270	$	3,015		$	9,623	$	8,959
Service charges on deposits	(b)	2,129		1,858			5,859		5,496
Title income	(c)	836		1,260			3,089		4,257
Gains (losses) on the sale of other real estate owned	(d)	1,263		(15		)	1,232		169

(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.

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.

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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.

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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 nine months ended September 30, 2018 and 2017 is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Basic earnings per share:
Numerator:
Net income	$	42,821		$	28,709		$	96,420		$	74,834
Distributed and undistributed earnings to participating securities	(149		)	(92		)	(284		)	(275		)
Income available to common shareholders	$	42,672		$	28,617		$	96,136		$	74,559
Denominator:
Weighted average common shares outstanding	48,431,637			48,028,265			48,306,520			47,971,249
Less: Average unallocated ESOP shares	(1,161,108		)	(1,214,061		)	(1,174,216		)	(1,227,169		)
Average unvested restricted stock awards	(164,874		)	(149,971		)	(138,651		)	(171,856		)
Average shares for basic earnings per share	47,105,655			46,664,233			46,993,653			46,572,224
Basic earnings per common share	$	0.91		$	0.61		$	2.05		$	1.60
Diluted earnings per share:
Numerator:
Income available to common shareholders	$	42,672		$	28,617		$	96,136		$	74,559
Denominator:
Average shares for basic earnings per share	47,105,655			46,664,233			46,993,653			46,572,224
Dilutive effect of share-based compensation plan	649,786			494,496			646,829			515,604
Average shares for diluted earnings per share	47,755,441			47,158,729			47,640,482			47,087,828
Diluted earnings per common share	$	0.89		$	0.61		$	2.02		$	1.58
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	133,310			514,487			349,753			563,116

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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:



September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency residential mortgage-backed securities ¹	$	161,897	$	291	$	5,655	$	156,533
Agency commercial mortgage-backed securities ¹	9,078		—		225		8,853
Agency residential collateralized mortgage obligations ¹	266,393		—		8,379		258,014
US government and agency securities	1,500		20		—		1,520
Municipal bonds	31,119		10		595		30,534
Total securities	$	469,987	$	321	$	14,854	$	455,454
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), related gross unrealized gains and losses and fair value of securities held to maturity ("HTM") were as follows:



September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Agency residential mortgage-backed securities ¹	$	49,966	$	233	$	1,642	$	48,557
Agency commercial mortgage-backed securities ¹	21,999		19		487		21,531
Agency residential collateralized mortgage obligations ¹	19,607		14		195		19,426
Municipal bonds	53,576		372		716		53,232
Total securities	$	145,148	$	638	$	3,040	$	142,746
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.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The amortized cost (carrying amount) and fair value of held to maturity debt securities and the fair value of available for sale debt securities at September 30, 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	$	252	$	254	$	3,331
Due after one to five years	14,876		15,022		13,018
Due after five to ten years	37,551		37,085		13,358
Due after ten years	897		871		2,347
Agency residential mortgage-backed securities	49,966		48,557		156,533
Agency commercial mortgage-backed securities	21,999		21,531		8,853
Agency residential collateralized mortgage obligations	19,607		19,426		258,014
Total	$	145,148	$	142,746	$	455,454

Securities with a carrying value of $216,213 and $256,451 at September 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 September 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 nine months ended September 30, 2018 or 2017.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Securities with unrealized losses at September 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
September 30, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Agency residential mortgage-backed securities ¹	$	21,137	$	527	$	112,214	$	5,128	$	133,351	$	5,655
Agency commercial mortgage-backed securities ¹	—		—		8,853		225		8,853		225
Agency residential collateralized mortgage obligations ¹	141,702		2,544		116,312		5,835		258,014		8,379
Municipal bonds	19,717		299		7,688		296		27,405		595
Total temporarily impaired	$	182,556	$	3,370	$	245,067	$	11,484	$	427,623	$	14,854
December 31, 2017
Agency residential mortgage-backed securities ¹	$	59,545	$	412	$	100,214	$	1,757	$	159,759	$	2,169
Agency commercial mortgage-backed securities¹	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
September 30, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Agency residential mortgage-backed securities ¹	$	10,642	$	209	$	26,893	$	1,433	$	37,535	$	1,642
Agency commercial mortgage-backed securities¹	16,420		309		3,308		178		19,728		487
Agency residential collateralized mortgage obligations ¹	11,185		37		6,200		158		17,385		195
Municipal bonds	8,573		128		15,469		588		24,042		716
Total temporarily impaired	$	46,820	$	683	$	51,870	$	2,357	$	98,690	$	3,040
December 31, 2017
Agency residential mortgage-backed securities ¹	$	20,397	$	206	$	16,909	$	440	$	37,306	$	646
Agency commercial mortgage-backed securities¹	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 September 30, 2018, 354 securities had unrealized losses, 192 of which had been in an unrealized loss position for over 12 months at September 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 September 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.

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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.



	September 30, 2018			December 31, 2017
Loans held for sale, at fair value	$	22,175		$	16,707

Loans held for investment:
Commercial real estate	$	3,012,352		$	3,019,339
Commercial and industrial	2,111,510			1,927,049
Construction and land	278,278			277,864
Consumer real estate	1,318,038			1,213,434
Other consumer	43,874			45,506
Gross loans held for investment, excluding Warehouse Purchase Program	6,764,052			6,483,192
Net of:
Deferred costs (fees) and discounts, net	9,855			6,380
Allowance for loan losses	(66,354		)	(71,301		)
Net loans held for investment, excluding Warehouse Purchase Program	6,707,553			6,418,271
Warehouse Purchase Program	1,054,505			1,320,846
Total loans held for investment	$	7,762,058		$	7,739,117

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Activity in the allowance for loan losses for the three and nine months ended September 30, 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 September 30, 2018 and 2017, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $248 and $233, respectively.



For the three months ended September 30, 2018	Commercial Real Estate			Commercial and Industrial			Construction and Land			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance	$	21,676		$	32,872		$	3,674		$	4,997		$	1,226		$	64,445
Charge-offs	—			(591		)	—			(56		)	(275		)	(922		)
Recoveries	—			54			—			9			68			131
Provision expense (benefit)	(468		)	1,743			454			764			207			2,700
Ending balance	$	21,208		$	34,078		$	4,128		$	5,714		$	1,226		$	66,354
For the nine months ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	21,587		$	39,005		$	4,644		$	4,838		$	1,227		$	71,301
Charge-offs	(239		)	(40,116		)	—			(56		)	(775		)	(41,186		)
Recoveries	—			104			—			29			171			304
Provision expense (benefit)	(140		)	35,085			(516		)	903			603			35,935
Ending balance	$	21,208		$	34,078		$	4,128		$	5,714		$	1,226		$	66,354
Allowance ending balance:
Individually evaluated for impairment	$	7		$	1,089		$	—		$	224		$	26		$	1,346
Collectively evaluated for impairment	21,201			32,989			4,128			5,490			1,200			65,008
Loans:
Individually evaluated for impairment	3,739			7,176			—			2,416			7			13,338
Collectively evaluated for impairment	3,008,379			2,104,231			278,278			1,314,933			43,696			6,749,517
PCI loans	234			103			—			689			171			1,197
Ending balance	$	3,012,352		$	2,111,510		$	278,278		$	1,318,038		$	43,874		$	6,764,052

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)



For the three months ended September 30, 2017	Commercial Real Estate			Commercial and Industrial			Construction and Land			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance	$	20,122		$	45,161		$	4,056		$	4,513		$	1,239		$	75,091
Charge-offs	—			(12,265		)	—			—			(231		)	(12,496		)
Recoveries	—			50			—			10			89			149
Provision expense	1,374			5,233			236			314			143			7,300
Ending balance	$	21,496		$	38,179		$	4,292		$	4,837		$	1,240		$	70,044
For the nine months ended September 30, 2017
Allowance for loan losses:
Beginning balance	$	18,303		$	35,464		$	5,075		$	4,484		$	1,250		$	64,576
Charge-offs	(16		)	(30,351		)	(418		)	(52		)	(1,065		)	(31,902		)
Recoveries	205			296			75			34			560			1,170
Provision expense (benefit)	3,004			32,770			(440		)	371			495			36,200
Ending balance	$	21,496		$	38,179		$	4,292		$	4,837		$	1,240		$	70,044
Allowance ending balance:
Individually evaluated for impairment	$	55		$	8,325		$	—		$	130		$	39		$	8,549
Collectively evaluated for impairment	21,441			29,854			4,292			4,707			1,201			61,495
Loans:
Individually evaluated for impairment	4,064			65,560			—			2,475			45			72,144
Collectively evaluated for impairment	3,006,971			1,776,603			282,536			1,194,547			46,035			6,306,692
PCI loans	5,498			182			—			889			197			6,766
Ending balance	$	3,016,533		$	1,842,345		$	282,536		$	1,197,911		$	46,277		$	6,385,602

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,

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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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	835		$	1,229		$	929		$	1,573
Charge-offs on lending-related commitments	—			—			—			—
(Benefit) for credit losses on lending-related commitments	(44		)	(143		)	(138		)	(487		)
Ending balance	$	791		$	1,086		$	791		$	1,086

Impaired loans at September 30, 2018 and December 31, 2017, were as follows¹:



September 30, 2018	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial real estate	$	4,137	$	3,739	$	—	$	3,739	$	—
Commercial and industrial	13,432		5,785		1,391		7,176		1,089
Consumer real estate	2,888		2,411		5		2,416		5
Other consumer	42		3		4		7		4
Total	$	20,499	$	11,938	$	1,400	$	13,338	$	1,098
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 September 30, 2018 or December 31, 2017. Loans reported do not include PCI loans.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Income on impaired loans for the three and nine months ended September 30, 2018 and 2017, was as follows¹:



	Three Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	3,721	$	2	$	4,132	$	2
Commercial and industrial	9,221		—		80,717		—
Consumer real estate	2,644		11		2,515		3
Other consumer	11		1		50		1
Total	$	15,597	$	14	$	87,414	$	6
	Nine Months Ended September 30,
	2018				2017
Commercial real estate	$	4,709	$	6	$	4,493	$	6
Commercial and industrial	37,116		—		85,724		—
Construction and land	—		—		2,955		—
Consumer real estate	2,807		27		2,772		9
Other consumer	20		3		332		3
Total	$	44,652	$	36	$	96,276	$	18


¹	Loans reported do not include PCI loans.

Past due status is based on the contractual terms of the loan. Loans that are past due 30 days are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.

All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

No loans past due over 90 days were still accruing interest at September 30, 2018 or December 31, 2017. At September 30, 2018, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at September 30, 2018 or December 31, 2017. Non-performing (nonaccrual) loans were as follows:



	September 30, 2018		December 31, 2017
Commercial real estate	$	3,739	$	4,134
Commercial and industrial	7,178		84,003
Consumer real estate	6,617		6,190
Other consumer	50		76
Total	$	17,584	$	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

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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:



	September 30, 2018		December 31, 2017
Nonaccrual TDRs⁽¹⁾	$	6,401	$	17,294
Performing TDRs ⁽²⁾	929		768
Total	$	7,330	$	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.

The following tables provide the recorded balances of loans modified as a TDR during the three and nine months ended September 30, 2018. No loans were modified as a TDR during the three months and nine months ended September 30, 2017.



	Three Months ended September 30, 2018						Nine Months Ended September 30, 2018
	Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Total		Principal Deferrals		Combination of Rate Reduction and Principal Deferral		Total
Commercial real estate	$	3,573	$	—	$	3,573	$	3,573	$	—	$	3,573
Commercial and industrial	274		47		321		346		47		393
Total	$	3,847	$	47	$	3,894	$	3,919	$	47	$	3,966

No loans modified as a TDR during the three and nine months ended September 30, 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 September 30, 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.



	September 30, 2018		December 31, 2017
Carrying amount ¹	$	949	$	3,295
Outstanding balance	1,210		3,992


¹	The carrying amounts are reported net of allowance for loan losses of $248 and $269 as of September 30, 2018 and December 31, 2017.

Changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2018 and 2017 are as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	2,098		$	2,480		$	2,279		$	2,515
Reclassifications from nonaccretable	77			103			138			425
Disposals	(1,446		)	(18		)	(1,493		)	(9		)
Accretion	(76		)	(177		)	(271		)	(543		)
Balance at end of period	$	653		$	2,388		$	653		$	2,388

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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 September 30, 2018 and December 31, 2017. No Warehouse Purchase Program loans were delinquent at September 30, 2018 or December 31, 2017 and therefore are not included in the following tables.



September 30, 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	$	556	$	364	$	—	$	920	$	3,011,432	$	3,012,352
Commercial and industrial	26,064		326		979		27,369		2,084,141		2,111,510
Construction and land	3,754		—		—		3,754		274,524		278,278
Consumer real estate	892		3,396		1,938		6,226		1,311,812		1,318,038
Other consumer	218		52		—		270		43,604		43,874
Total	$	31,484	$	4,138	$	2,917	$	38,539	$	6,725,513	$	6,764,052
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 $1,197 and $3,338 at September 30, 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.

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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 September 30, 2018 and December 31, 2017, was as follows:

Real Estate and Commercial and Industrial Credit Exposure

Credit Risk Profile by Internally Assigned Grade



September 30, 2018	Commercial Real Estate		Commercial and Industrial		Construction and Land		Consumer Real Estate
Grade: ¹
Pass	$	2,990,106	$	2,003,250	$	278,278	$	1,308,804
Special Mention	16,750		59,867		—		1,278
Substandard	5,496		48,390		—		7,580
Doubtful	—		3		—		376
Total	$	3,012,352	$	2,111,510	$	278,278	$	1,318,038
December 31, 2017
Grade: ¹
Pass	$	2,980,656	$	1,787,238	$	277,864	$	1,203,236
Special Mention	30,656		43,161		—		1,408
Substandard	8,027		96,546		—		7,762
Doubtful	—		104		—		1,028
Total	$	3,019,339	$	1,927,049	$	277,864	$	1,213,434


¹	PCI loans are included in the substandard or doubtful categories. These categories are consistent with the "substandard" and "doubtful" categories as defined by regulatory authorities.

Warehouse Purchase Program Credit Exposure

All Warehouse Purchase Program loans were graded pass as of September 30, 2018 and December 31, 2017.

Other Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity



	September 30, 2018		December 31, 2017
Performing	$	43,824	$	45,430
Non-performing	50		76
Total	$	43,874	$	45,506

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 6 - Fair Value

ASC 820, “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below.



	Fair Value Measurements Using Level 2
	September 30, 2018		December 31, 2017
Assets:
Agency residential mortgage-backed securities	$	156,533	$	189,466
Agency commercial mortgage-backed securities	8,853		9,235
Agency residential collateralized mortgage obligations	258,014		184,216
US government and agency securities	1,520		1,671
Municipal bonds	30,534		35,129
Total securities available for sale	$	455,454	$	419,717

Loans held for sale ¹	$	22,175	$	16,707
Derivative financial instruments:
Interest rate lock commitments	491		358
Forward mortgage-backed securities trades	69		7
Loan customer counterparty	42		—
Financial institution counterparty	2,744		1,735
Liabilities:
Derivative financial instruments:
Interest rate lock commitments	—		—
Forward mortgage-backed securities trades	10		18
Loan customer counterparty	2,744		1,735
Financial institution counterparty	42		—


¹	At September 30, 2018 and December 31, 2017, loans held for sale had an aggregate outstanding principal balance of $21,617 and $16,242, respectively. There were no mortgage loans held for sale that were 90 days or greater past due or on non-accrual at September 30, 2018 or December 31, 2017.

The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis:

Securities available for sale - The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Residential mortgage loans held for sale - Mortgage loans held for sale, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted to credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans held for sale in the consolidated income statement. The Company has no continuing involvement in any residential mortgage loans sold.

Derivative instruments:

Interest rate lock commitments ("IRLCs") - The estimated fair values of IRLCs utilize current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (Pull-through rate). The fair value of IRLCs is subject to change primarily due to changes in interest rates and the estimated Pull-through rate. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on observable market inputs.

Forward mortgage-backed securities trades - These forward mortgage-backed securities trades are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract; therefore these contracts are classified as Level 2. The estimated fair values are subject to change primarily due to changes in interest rates.

Loan customer counterparty and financial institution counterparty - The Company also enters into certain interest rate derivative positions that are not designated as hedging instruments. The estimated fair value of these commercial loan interest rate swaps are obtained from a pricing service that provides the swaps' unwind value (Level 2 inputs). Please see Note 7 - Derivative Financial Instruments for more information.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2018 or December 31, 2017.



	Fair Value Measurements Using Level 3
	September 30, 2018		December 31, 2017
Assets:
Impaired loans	$	302	$	25,046
Foreclosed assets:
Commercial real estate	—		6,694
Construction and land	—		859
Consumer real estate	—		192
Other	698		687

Methodologies used to measure the fair value of financial assets and liabilities valued on a non-recurring basis are shown below:

Impaired loans - Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Impaired loans secured by real estate, receivables or inventory had discounts determined by management on an individual loan basis. Impaired loans that are not collateral dependent are measured for impairment by a discounted cash flow analysis using a net present value calculation that utilizes data from the loan file before and after the modification.

Foreclosed assets - These loans are measured at the lower of book or fair value less costs to sell using third party appraisals, listing agreements or sale contracts, which may be adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Management may also consider additional adjustments on specific properties due to the age of the appraisal, expected holding period, lack of comparable sales, or if the other real estate owned is a special use property. At September 30, 2018, the Company had $558 in residential mortgage loans in the process of

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

foreclosure.

The Credit Risk Management department evaluates the valuations on impaired loans and foreclosed assets at least quarterly. The valuations on impaired loans are reviewed at least quarterly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs, such as discounts to collateral, are monitored and adjusted if market conditions change.

Fair value of financial instruments not recorded at fair value

The carrying amount and fair value information of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company's consolidated balance sheets at September 30, 2018 and at December 31, 2017, were as follows:



			Fair Value Measurement Using
September 30, 2018	Carrying Amount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	254,315	$	254,315	$	—	$	—
Securities held to maturity	145,148		—		142,746		—
Loans held for investment, net	6,707,553		—		—		6,697,449
Loans held for investment - Warehouse Purchase Program	1,054,505		—		—		1,054,590
FHLB and other restricted securities, at cost	60,596		—		60,596		—
Accrued interest receivable	29,378		29,378		—		—
Financial liabilities
Deposits	$	6,779,758	$	—	$	—	$	6,219,470
FHLB advances	932,317		—		—		932,404
Repurchase agreements	40,408		—		—		37,079
Subordinated debt	134,890		—		—		140,048
Accrued interest payable	5,727		5,727		—		—
December 31, 2017
Financial assets
Cash and cash equivalents	$	293,456	$	293,456	$	—	$	—
Securities held to maturity	173,509		—		174,926		—
Loans held for investment, net	6,418,271		—		—		6,484,949
Loans held for investment - Warehouse Purchase Program	1,320,846		—		—		1,337,612
FHLB and other restricted securities, at cost	64,790		—		64,790		—
Accrued interest receivable	24,596		24,596		—		—
Financial liabilities
Deposits	$	6,767,683	$	—	$	—	$	6,326,572
FHLB advances	1,043,163		—		—		1,043,416
Repurchase agreement	84,676		—		—		81,041
Subordinated debt	134,522		—		—		141,972
Accrued interest payable	2,729		2,729		—		—

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The following methods and assumptions were used to estimate the fair values of each class of financial instrument presented:

Cash and cash equivalents - Due to their short term nature, the carrying amount approximates the estimated fair value.

Securities held to maturity - The fair values of these securities is determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

Loans held for investment (including Warehouse Purchase Program loans) - Pursuant to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, for values reported for the 2018 period, fair value is based on cash flows, adjusted for credit and prepayments, discounted using current market yields. For values reported prior to 2018, fair value is based on cash flows, adjusted for prepayments, discounted using then- current market offering rates, including a credit spread.

FHLB stock and other restricted securities - The fair value on these securities is their cost basis due to restrictions on transferability.

Accrued interest receivable - Due to their short term nature, the carrying amount approximates the estimated fair value.

Deposits - Fair value is calculated using the FHLB advance curve to discount cash flows based on the estimated life of the deposits.

FHLB advances - Fair value is calculated using the FHLB advance curve to discount cash flows based on the contractual repayment schedule.

Repurchase agreement - The fair value is based on discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar terms and remaining maturities.

Subordinated debt - The estimated fair value is based on current market rates on similar debt in the market.

Accrued interest payable - Due to their short term nature, the carrying amount approximates the estimated fair value.

The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 7 - Derivative Financial Instruments

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at September 30, 2018 and December 31, 2017.



	September 30, 2018						December 31, 2017
	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value		Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
IRLCs	$	16,010	$	491	$	—	$	10,337	$	358	$	—
Forward mortgage-backed securities trades	27,633		69		10		19,788		7		18
Commercial loan interest rate swaps and caps:
Loan customer counterparty	$	132,188	$	42	$	2,744	$	114,594	$	—	$	1,735
Financial institution counterparty	132,188		2,744		42		114,594		1,735		—

These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers' financing needs. All derivatives are carried at fair value in either other assets or other liabilities.

IRLCs - In the normal course of business, the Company enters into IRLCs with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.

Forward mortgage-backed securities trades - The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the IRLC is made.

Interest rate swaps and caps - These derivative positions relate to transactions in which we enter into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution. An interest rate swap transaction allows our customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. In connection with each interest rate cap, we sell a cap to the customer and agree to pay interest if the underlying index exceeds the strike price defined in the cap agreement. Simultaneously we purchase a cap with matching terms from another financial institution which agrees to pay us if the underlying index exceeds the strike price.

The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at September 30, 2018 and December 31, 2017 are presented in the following table.



	Weighted-Average Interest Rate
	September 30, 2018				December 31, 2017
	Received		Paid		Received		Paid
Loan customer counterparty	2.65	%	3.18	%	2.52	%	2.54	%

Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $42 at September 30, 2018 and $32 at December 31, 2017. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was approximately $2,792 at September 30, 2018. A credit support annex is in place and allows the bank to call collateral from upstream financial institution counter-parties. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. Our cash collateral pledged for interest rate swaps and included in our interest-bearing deposits, which totaled $1,990 at September 30, 2018 and $1,950 at December 31, 2017, is in excess of our credit exposure.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-back securities are recorded in net gain on sale of mortgage loans. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps and caps, because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. Income (loss) for the three and nine months ended September 30, 2018 and 2017 was as follows:



Derivatives not designated as hedging instruments	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives not designated as hedging instruments	2018		2017			2018		2017
IRLCs	$	55	$	(89	)	$	133	$	112
Forward mortgage-backed securities trades	88		(226		)	539		(485		)

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 8 - Share-based Compensation

Compensation cost charged to income for share-based compensation is presented below.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Restricted stock	$	1,438	$	902	$	3,080	$	2,627
Stock options	947		1,112		2,758		2,792
Income tax benefit	501		705		1,226		1,897

A summary of activity in the Company's active share-based compensation plans ("Plans") for the nine months ended September 30, 2018 is presented below.



	Time-Vested Restricted Shares Outstanding				Performance-Based Restricted Shares Outstanding					Stock Options Outstanding
	Number of Shares		Weighted-Average Grant Date Fair Value per Share ¹		Number of Shares			Weighted-Average Grant Date Fair Value per Share ²		Number of Shares		Weighted- Average Exercise Price per Share
Beginning balance	128,588		$	27.27	73,008			$	42.21	2,207,243		$	26.88
Granted	121,710		43.46		26,550		³	42.82		1,200		43.12
Vested/exercised	(56,940	)	22.18		(20,600	)		44.04		(253,674	)	24.55
Forfeited/expired	(1,605	)	43.89		—			—		(101,014	)	30.86
Ending balance	191,753		$	38.92	78,958			$	42.60	1,853,755		$	26.99


¹	For restricted stock awards with time-based vesting conditions, the grant date fair value is based upon the closing stock price as quoted on the Nasdaq Stock Market on the grant date.

For restricted stock awards with performance-based vesting conditions, the value of the award is based upon the closing stock price as quoted on the Nasdaq Stock Market on the date of vesting. Until the final value is determined on the vesting date, the Company estimates the fair value based upon the closing stock price as quoted on the Nasdaq Stock Market near the last business day of each month.


³	The 26,550 performance-based shares granted are represented in the table at target; however, if certain performance metrics are met at vesting, the shares may be awarded at up to 200% of their target amount, with an additional 20% increase or decrease in the total share award at vesting depending on the Company's Total Shareholder Return percentage for the determined period.

The total unrecognized compensation expense as of September 30, 2018, related to the Plans is presented below.



	Unrecognized Compensation Expense		Weighted-Average Period of Expense
Non-vested restricted shares	$	6,904	1.8
Non-vested stock options	$	4,410	1.5

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 9 - Income Taxes

The Tax Cuts and Jobs Act (the "Act"), which was enacted on December 22, 2017, made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. As ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21%. The Company is still analyzing certain aspects of the Act, and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount recorded in the 2017 period related to the remeasurement of our deferred tax asset was $13,493.

During the first quarter of 2018, the Company elected early adoption of the provisions of ASU 2018-02, which allowed the Company to reclassify the income tax effects of the Act on items within accumulated other comprehensive income to retained earnings. This reclassification, which reduced other comprehensive income and increased retained earnings by $741 related entirely to unrealized gains and losses on available for sale securities.

A summary of the net deferred tax assets as of September 30, 2018 and December 31, 2017, is presented below:



	September 30, 2018			December 31, 2017
Net deferred tax assets	$	19,692		$	20,240
Estimated annual effective tax rate	21		%

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 10 - Commitments and Contingent Liabilities

In the normal course of business, the Company enters into various transactions which, in accordance with US GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit which involve, to varying degrees, elements of credit and interest rate risk. Credit losses up to the face amount of these instruments could occur, although material losses are not anticipated. The Company's credit policies applied to loan originations are also applied to these commitment requests, including obtaining collateral at the exercise of the commitment.

The contractual amounts of financial instruments with off‑balance sheet risk at September 30, 2018 and December 31, 2017, are summarized below. Please see Part I-Item 2-"Off-Balance Sheet Arrangements, Contractual Obligations and Commitments" of this Form 10-Q for information related to commitment maturities.



	September 30, 2018		December 31, 2017
Unused commitments to extend credit	$	1,700,471	$	1,600,794
Unused capacity on Warehouse Purchase Program loans	881,495		738,412
Standby letters of credit	42,410		34,091
Total unused commitments/capacity	$	2,624,376	$	2,373,297

Unused commitments to extend credit - The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Company. Substantially all of the Company's commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding.

Unused capacity on Warehouse Purchase Program loans - In regard to unused capacity on Warehouse Purchase Program loans, the Company has established maximum purchase facility amounts, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by each customer, for any reason in the Company's sole and absolute discretion.

Standby letters of credit - Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

In addition to the commitments above, the Company guarantees the credit card debt of certain customers to the merchant bank that issues the credit cards. These guarantees are in place for as long as the guaranteed credit card is open. At September 30, 2018 and December 31, 2017, these credit card guarantees totaled $2,023 and $5,257, respectively. This amount represents the maximum potential amount of future payments under the guarantee, which the Company is responsible for in the event of customer non-payment.

The Company funds an allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt through a charge to provision for credit losses on the Company's consolidated statement of income. At September 30, 2018 and December 31, 2017, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in "other liabilities" on the Company's consolidated balance sheets, totaled $791 and $929, respectively.

In addition to the commitments above, the Company had overdraft protection available in the amounts of $85,573 and $84,727 at September 30, 2018 and December 31, 2017, respectively.

The Company, at September 30, 2018 and December 31, 2017, had FHLB letters of credit of $897,565 and $944,370, respectively, pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

At September 30, 2018 and December 31, 2017, the Company had $830 and $1,680, respectively, of unfunded commitments recorded in other liabilities in its consolidated balance sheet related to investments in community development-oriented private equity funds used for Community Reinvestment Act purposes.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 11 - Recent Accounting Developments

Effect of Newly Issued But Not Yet Effective Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. This ASU changes the guidance on sale-leaseback transactions, initial direct costs and lease execution costs, and, for lessors, modifies the classification criteria and the accounting for sales-type and direct financing leases. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. We expect to adopt the guidance in the first quarter of 2019 using an optional transition method with a cumulative effect adjustment to retained earnings without restating the 2018 and 2017 financial statements for comparable amounts. The Company has implemented a lease management system to assist in centralizing, maintaining and accounting for all leases and is finalizing its evaluation of the standard on its financial statements and disclosures, as well as any additional changes to processes and internal controls to ensure we meet the standard's reporting and disclosure requirements. While the increase to our consolidated total assets related to operating lease right-of-use assets will increase our risk-weighted assets and decrease our capital ratios, we do not expect these changes to be material.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current US GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. This revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available for sale debt securities. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. The Company has begun testing of its financial models to calculate lifetime expected credit losses and is continuing to evaluate the impact of this ASU on its financial statements and disclosures.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements, by expanding an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, this ASU also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2018. The Company is finalizing its evaluation of the impact of this ASU on its disclosures, and does not expect this ASU to have a significant impact on its financial statements.

In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this ASU is not expected to have a significant impact on the Company's financial statements and disclosures.

Table of Contents

LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 12 — Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on September 30, 2018 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated October 24, 2018. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.



Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

This document and other filings by the Company with the Securities and Exchange Commission (the “SEC”), as well as press releases or other public or stockholder communications released by the Company, may contain forward-looking statements, including, but not limited to, (i) statements regarding our financial condition, results of operations and business, (ii) statements about our plans, objectives, expectations and intentions and other statements that are not historical facts and (iii) other statements identified by the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions that are intended to identify "forward-looking statements", within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current beliefs and expectations of the Company’s management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: the expected cost savings, synergies and other financial benefits from acquisition or disposition transactions might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters might be greater than expected; changes in economic conditions; fluctuations in interest rates; the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses; our ability to access cost-effective funding; fluctuations in real estate values and both residential and commercial real estate market conditions; demand for loans and deposits in our market area; fluctuations in the price of oil, natural gas and other commodities; competition; changes in management's business strategies; our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we have acquired or may acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; results of examinations of us by the Board of Governors of the Federal Reserve System ("FRB") and our bank subsidiary by the Texas Department of Banking ("TDOB") or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; legislative or regulatory changes that adversely affect our business including the revenue impact from, and any mitigation actions taken in response, to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; changes in the regulatory and tax environments in which the Company operates, including the impact of the "Tax Cuts and Jobs Act" (the "TCJA") on the Company's deferred tax asset, and the anticipated impact of the TCJA on the Company's future earnings; and the other risks set forth under Risk Factors under Item 1A. of the Company's Form 10-K for the year ended December 31, 2017 ("2017 Form 10-K").

The factors listed above could materially affect our financial performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

We do not undertake - and specifically decline any obligation - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. When considering forward-looking statements, you should keep in mind these risks and uncertainties. You should not place undue reliance on any forward-looking statement, which speaks only as of the date made. You should refer to our periodic and current reports filed with the SEC for specific risks that could cause actual results to be significantly different from those expressed or implied by any forward-looking statements.

Overview

LegacyTexas Financial Group, Inc. is a Maryland corporation and LegacyTexas Bank is its wholly owned principal operating subsidiary. Unless the context otherwise requires, references in this document to the “Company” refer to LegacyTexas Financial Group, Inc., and references to the “Bank” refer to LegacyTexas Bank. References to “we,” “us,” and “our” mean LegacyTexas Financial Group, Inc. and LegacyTexas Bank, as the context requires.

The Bank is regulated by the TDOB and the FRB with back-up oversight by the Federal Deposit Insurance Corporation ("FDIC"). Additionally, the Bank is a Federal Reserve member bank required to have certain reserves and stock set by the FRB and a member of the Federal Home Loan Bank of Dallas, one of the 12 regional banks in the Federal Home Loan Bank System (“FHLB”). The Company is regulated by the FRB.

Business Strategies

Our principal business consists of attracting retail deposits from the general public and the business community and investing those funds, along with borrowed funds, in commercial real estate loans, secured and unsecured commercial and industrial loans, as well as permanent loans secured by first and second mortgages on one- to four-family residences and consumer loans. Additionally, the Warehouse Purchase Program loans allow mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. Our operating revenues are derived principally from interest earned on interest-earning assets, including loans and investment securities and service charges and fees on deposits and other account services. Our primary sources of funds are deposits, FHLB advances and other borrowings, and payments received on loans and securities. We offer a variety of deposit accounts that provide a wide range of interest rates and terms, generally including savings, money market, term certificate and demand accounts.

Our principal objective is to be an independent, commercially-oriented, customer-focused financial services company, providing outstanding service and innovative products in our primary market area of North Texas. Our Board of Directors has adopted a strategy designed to maintain growth and profitability, a strong capital position and high asset quality.

Performance Highlights

•

Net income for the three months ended September 30, 2018 was $42.8 million, an increase of $14.1 million, or 49.2%, from net income of $28.7 million for the three months ended September 30, 2017. The increase in net income was driven by higher interest income on loans, increased non-interest income and a lower provision for credit losses, which was partially offset by higher interest and non-interest expense.


•	The net interest margin for the three months ended September 30, 2018 was 3.90%, a 19 basis point increase from the three months ended September 30, 2017.


•	Assets totaled $9.08 billion at September 30, 2018, which generated basic earnings per share for the three months ended September 30, 2018 of $0.91 and $2.05 for the nine months ended September 30, 2018.


•	Gross loans held for investment at September 30, 2018, excluding Warehouse Purchase Program loans, grew $280.9 million from December 31, 2017, while Warehouse Purchase Program loans, which totaled $1.05 billion at September 30, 2018, decreased by $266.3 million from December 31, 2017.


•	Total deposits at September 30, 2018 grew $12.1 million from December 31, 2017, as the Company's efforts to grow non-interest-bearing demand deposits resulted in a $162.5 million increase in these deposits to $1.80 billion at September 30, 2018. Non-interest-bearing deposits totaled 26.5% of total deposits at September 30, 2018.


•	Non-performing loans declined by $76.8 million from December 31, 2017, totaling $17.6 million at September 30, 2018.

Critical Accounting Estimates

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for loan losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2017 Form 10-K.

Allowance for Loan Loss. 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 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 more susceptible to fluctuations in industry, market and economic conditions. While management uses available information to recognize losses on loans, 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. Management believes that the allowance for loan losses is maintained at a level that represents coverage of our best estimate of credit losses in the loan portfolio as of September 30, 2018.

Management evaluates current information and events regarding a borrower's ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

General. Total assets decreased by $3.4 million to $9.08 billion at September 30, 2018 from $9.09 billion at December 31, 2017, primarily due to a $266.3 million, or 20.2%, decrease in Warehouse Purchase Program loans and a $39.1 million, or 13.3%, decrease in cash and cash equivalents, which was partially offset by a $280.9 million, or 4.3%, increase in gross loans held for investment, excluding Warehouse Purchase Program loans.

Loans. Gross loans held for investment increased by $14.5 million, or 0.2%, to $7.82 billion at September 30, 2018 from $7.80 billion at December 31, 2017, while loans held for sale increased by $5.5 million, or 32.7%, for the same period.



	September 30, 2018		December 31, 2017		Dollar Change			Percent Change
	(Dollars in thousands)
Commercial real estate	$	3,012,352	$	3,019,339	$	(6,987	)	(0.2	)%
Commercial and industrial	2,111,510		1,927,049		184,461			9.6
Construction and land	278,278		277,864		414			0.1
Consumer real estate	1,318,038		1,213,434		104,604			8.6
Other consumer	43,874		45,506		(1,632		)	(3.6	)
Gross loans held for investment, excluding Warehouse Purchase Program loans	6,764,052		6,483,192		280,860			4.3
Warehouse Purchase Program	1,054,505		1,320,846		(266,341		)	(20.2	)
Gross loans held for investment	7,818,557		7,804,038		14,519			0.2
Loans held for sale	22,175		16,707		5,468			32.7
Gross loans	$	7,840,732	$	7,820,745	$	19,987		0.3	%

Gross loans held for investment at September 30, 2018, excluding Warehouse Purchase Program loans, grew $280.9 million, or 4.3%, from December 31, 2017, which included growth in the commercial and industrial, consumer real estate, and construction and land loan portfolios. Commercial and industrial and consumer real estate loans at September 30, 2018 increased by $184.5 million and $104.6 million, respectively, from December 31, 2017, while construction and land loans increased by $414,000 for the same period. These increases were partially offset by decreases of $7.0 million and $1.6 million in commercial real estate and other consumer loans, respectively, from December 31, 2017.

Reserve-based energy loans, which are reported as commercial and industrial loans, totaled $547.4 million at September 30, 2018, up $15.7 million from $531.7 million at December 31, 2017. Substantially all of the reserve-based energy loans are secured by deeds of trust on properties containing proven oil and natural gas reserves.

At September 30, 2018, our reserve-based energy portfolio (reported above at $547.4 million) was secured by collateral that consisted of 60% crude oil reserves and 40% natural gas reserves. We encourage, and in some cases even require, borrowers to utilize commodity hedges, in order to stabilize cash flows during volatile commodity price environments. Hedges are used to guard against falling prices, and the goal is that the duration of the hedge will last long enough for prices to come back from any significant decline. Hedges will typically include minimum and maximum allowed percentage of production, a minimum and maximum allowed term, and a minimum price.

In addition to the reserve-based energy loans, the Bank has loans categorized as "Midstream and Other," which are typically related to the transmission of oil and natural gas and would only be indirectly impacted by declining commodity prices. At September 30, 2018, "Midstream and Other" loans had a total outstanding balance of $34.8 million, up $19.4 million from $15.4 million at December 31, 2017.

Warehouse Purchase Program loans decreased by $266.3 million, or 20.2%, to $1.05 billion at September 30, 2018 from $1.32 billion at December 31, 2017. Although not bound by any legally binding commitment, when a purchase decision is made, the Bank purchases a 100% participation interest in the loans originated by our mortgage banking company customers. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and, once all pertinent documents are received, the participation interest is delivered by the Bank to the investor selected by the originator and approved by us. Warehouse Purchase Program loans funded during the third quarter of 2018 consisted of 44% conforming, 42% government loans and 14% of other loan types, including Jumbo loans.

Allowance for Loan Losses. 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 more information about the Company's calculation of its allowance for loan losses, please see Item 1 (Financial Statements) - Note 5 - "Loans" under Part 1 of this report.

Acquired loans initially are recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. An allowance will be recorded in later periods if additional losses are subsequently anticipated. Methods utilized to estimate the required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is limited to the amount that the calculated allowance for loan losses exceeds the remaining purchase discount.

Purchased credit impaired ("PCI") loans are not considered non-performing loans, and accordingly, are not included in the non-performing loans to total loans ratio as a numerator, but are included in total loans reflected in the denominator. The result is a downward trend in the ratio when compared to prior periods, assuming all other factors stay the same. Similarly, other asset quality ratios, such as the allowance for loan losses to total loans ratio will reflect a downward trend, assuming all other factors stay the same, due to the impact of PCI loans on the denominator with no corresponding impact in the numerator.

Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually evaluated impaired loans. Loans generally are placed on nonaccrual status when the loan becomes 90 days or more delinquent. Non-performing loans include loans that are not contractually past due but have been placed on nonaccrual status due to the loan's designation as a troubled debt restructuring or if there is a distinct possibility that the Company will sustain some loss if deficiencies existing within a loan are not corrected. In all cases, loans are placed on nonaccrual status (or charged-off) at an earlier date when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status.

Non-performing loans to total loans held for investment, excluding Warehouse Purchase Program loans, was 0.26% at September 30, 2018 compared to 1.46% at December 31, 2017. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was 0.22% at September 30, 2018 compared to 1.21% at December 31, 2017. Non-performing loans decreased by $76.8 million to $17.6 million at September 30, 2018 from $94.4 million at December 31, 2017. During the second quarter of 2018, the Company recorded a $12.5 million charge-off on the resolution of an impaired $14.0 million energy relationship, as well as charge-offs totaling $14.7 million on two impaired corporate healthcare finance relationships, both of which remain classified as non-performing and impaired and totaled a combined $3.4 million at September 30, 2018. Also, during the first quarter of 2018, the Company recorded a $10.5 million charge-off in connection with the resolution of a $36.7 million reserve-based energy relationship, classified as non-performing and impaired at December 31, 2017, through a new loan to a new borrower, which was a substandard performing loan at September 30, 2018. For more information about the Company's non-performing loans, please see Note 5 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements contained in Item 1 of this report.

Our allowance for loan losses was $66.4 million at September 30, 2018 compared to $71.3 million at December 31, 2017, or 0.85% of total loans held for investment (including Warehouse Purchase Program loans) at September 30, 2018 compared to 0.91% at December 31, 2017. Despite the decrease, it was believed that the level of the allowance was acceptable because our allowance for loan losses to non-performing loans was 377.35% at September 30, 2018 compared to 75.53% at December 31, 2017. Net charge-offs for the nine months ended September 30, 2018 totaled $40.9 million, an increase of $10.2 million from the nine months ended September 30, 2017, due to the energy-related and healthcare-related loan charge-offs discussed above.

Classified Assets. Loans and other assets, such as securities and foreclosed assets, that are considered by management to be of lesser quality are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses of those classified as "substandard," with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as "loss" are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. PCI loans are included in the "substandard" and "doubtful" categories.

We regularly review the assets in our portfolio to determine whether any should be considered as classified. Total classified assets represented 6.0% of our total equity and 0.7% of our total assets at September 30, 2018 compared to 12.7% of our total equity and 1.3% of our total assets at December 31, 2017. The aggregate amount of classified assets at the dates indicated was as follows:



	September 30, 2018		December 31, 2017
	(Dollars in thousands)
Doubtful	$	379	$	1,134
Substandard	61,704		112,632
Total classified loans	62,083		113,766
Foreclosed assets	698		8,432
Total classified assets	$	62,781	$	122,198

Substandard loans at September 30, 2018 decreased by $50.9 million from December 31, 2017, with substandard non-performing energy loans totaling $1.3 million at September 30, 2018, down $57.1 million from December 31, 2017, which was primarily due to the resolution of the energy relationships discussed above in "Allowance for Loan Losses." The Company continues to take action to improve the risk profile of the criticized energy loans by instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support and/or requiring additional equity injections or asset sales. Foreclosed assets at September 30, 2018 decreased by $7.7 million from December 31, 2017 due to the sale of a foreclosed medical facility in the third quarter of 2018, which generated a $1.3 million gain.

The Company also has potential problem loans, considered "other loans of concern," that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we might sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and consisted of $43.2 million in loans that were classified as "substandard," but were still accruing interest and were not considered impaired at September 30, 2018 (excluding PCI loans), compared to $15.4 million at December 31, 2017. The $27.8 million increase in other loans of concern from December 31, 2017 was primarily due to a $28.8 million increase in classified performing energy loans. Other loans of concern have been considered in management's analysis of potential loan losses.

Securities. Our securities portfolio increased $7.4 million, or 1.2%, to $600.6 million at September 30, 2018 from $593.2 million at December 31, 2017. During the nine months ended September 30, 2018, purchases totaling $1.91 billion offset paydowns and maturities of securities totaling $1.89 billion.

Deposits. Total deposits increased $12.1 million, or 0.2%, to $6.78 billion at September 30, 2018 from $6.77 billion at December 31, 2017, primarily due to growth in non-interest-bearing demand and time deposits.



	September 30, 2018		December 31, 2017		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest-bearing demand	$	1,798,109	$	1,635,622	$	162,487		9.9	%
Interest-bearing demand	780,474		1,029,375		(248,901		)	(24.2	)
Savings and money market	2,562,399		2,735,296		(172,897		)	(6.3	)
Time	1,638,776		1,367,390		271,386			19.8
Total deposits	$	6,779,758	$	6,767,683	$	12,075		0.2	%

Time deposits increased by $271.4 million compared to December 31, 2017, while non-interest-bearing demand deposits increased by $162.5 million for the same period. These increases were partially offset by declines of $248.9 million and $172.9 million in interest-bearing demand and savings and money market deposits, respectively, compared to December 31, 2017.

Borrowings. FHLB advances decreased by $110.8 million, or 10.6%, to $932.3 million at September 30, 2018 from $1.04 billion at December 31, 2017, while overnight repurchase agreements decreased by $44.3 million, or 52.3%, to $40.4

million at September 30, 2018 from $84.7 million at December 31, 2017. At September 30, 2018, the Company was eligible to borrow an additional $2.09 billion from the FHLB.

The table below shows FHLB advances by maturity and weighted average rate at September 30, 2018:



	Balance		Weighted Average Rate
	(Dollars in thousands)
Less than 90 days	$	926,909	2.19	%
90 days to less than one year	958		5.50
One to three years	2,950		5.49
After three to five years	1,005		5.51
After five years	495		5.44
Total	$	932,317	2.21	%

Additionally, we have seven available federal funds lines of credit with other financial institutions totaling $250.0 million and were eligible to borrow $81.1 million from the Federal Reserve Bank discount window.

At September 30, 2018, subordinated debt totaled $134.9 million, which included $122.8 million of fixed-to-floating rate subordinated notes (reported net of $2.2 million in debt issuance costs.) The $134.9 million of subordinated debt also included $12.1 million of trust preferred securities that were acquired through the merger with LegacyTexas Group, Inc. All subordinated debt is reported net of purchase accounting fair value adjustments and debt issuance costs.

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased $59.5 million, or 61.8%, to $155.8 million at September 30, 2018 from $96.3 million at December 31, 2017. This increase was primarily due to timing of escrow payments.

Shareholders’ Equity. Total shareholders' equity increased by $79.7 million, or 8.3%, to $1.04 billion at September 30, 2018 from $959.9 million at December 31, 2017.



	September 30, 2018			December 31, 2017			Dollar Change			Percent Change
	(Dollars in thousands)
Common stock	$	485		$	481		$	4		0.8	%
Additional paid-in capital	617,270			603,884			13,386			2.2
Retained earnings	444,848			370,858			73,990			20.0
Accumulated other comprehensive income (loss), net	(11,481		)	(3,429		)	(8,052		)	234.8
Unearned ESOP shares	(11,523		)	(11,920		)	397			(3.3	)
Total shareholders’ equity	$	1,039,599		$	959,874		$	79,725		8.3	%

The increase in shareholders' equity at September 30, 2018, compared to December 31, 2017, was primarily due to net income of $96.4 million recognized during the nine months ended September 30, 2018, which was partially offset by the payment of quarterly dividends totaling $0.48 per common share, or $23.2 million, during the nine months ended September 30, 2018.

Comparison of Results of Operations for the Three Months Ended September 30, 2018 and 2017

General. Net income for the three months ended September 30, 2018 was $42.8 million, an increase of $14.1 million, or 49.2%, from net income of $28.7 million for the three months ended September 30, 2017. The increase in net income was driven by a $13.2 million increase in interest income on loans, a $4.5 million decrease in the provision for credit losses, and a $1.0 million increase in non-interest income, which was partially offset by a $7.0 million increase in interest expense and a $1.9 million increase in non-interest expense. Basic earnings per share for the three months ended September 30, 2018 was $0.91, a $0.30 increase from $0.61 for the three months ended September 30, 2017. Diluted earnings per share for the three months ended September 30, 2018 was $0.89, a $0.28 increase from $0.61 for the three months ended September 30, 2017.

Interest Income. Interest income increased by $13.7 million, or 14.5%, to $108.1 million for the three months ended September 30, 2018 from $94.5 million for the three months ended September 30, 2017.



	Three Months Ended September 30,				Dollar Change			Percent Change
	2018		2017		Dollar Change			Percent Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	102,267	$	89,084	$	13,183		14.8	%
Securities	3,868		3,407		461			13.5
Interest-bearing deposits in other financial institutions	1,368		1,524		(156		)	(10.2	)
FHLB and Federal Reserve Bank stock and other	644		448		196			43.8
	$	108,147	$	94,463	$	13,684		14.5	%

The $13.7 million increase in interest income for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to a $13.2 million increase in interest income on loans, which was driven by increased volume in the commercial real estate, commercial and industrial and consumer real estate loan portfolios, as well as higher yields earned on all loan portfolios. The average balance of commercial and industrial loans increased by $237.7 million from the third quarter of 2017, while the average yield earned on this portfolio increased by 78 basis points for the same period, resulting in a $7.1 million increase in interest income. The average yield earned on the commercial and industrial portfolio for the quarter ended September 30, 2018 was positively impacted by four increases in the Fed Funds rate totaling 100 basis points since September 2017, as well as the resolution of multiple non-performing relationships over the past year. The average balance of commercial real estate loans increased by $162.5 million from the third quarter of 2017, resulting in a $2.7 million increase in interest income, while the average balance of consumer real estate loans increased by $118.4 million for the same period, which led to a $1.8 million increase in interest income. Although the average balance of Warehouse Purchase Program loans decreased by $95.0 million from the third quarter of 2017, the average yield earned on this portfolio increased by 86 basis points, resulting in a $1.4 million increase in interest income compared to the third quarter of 2017.

Interest income on loans for the third quarter of 2018 included $330,000 in accretion of purchase accounting fair value adjustments on acquired loans, which primarily consisted of $132,000 on acquired commercial real estate loans, $77,000 on acquired commercial and industrial loans and $120,000 on acquired consumer loans.

Interest Expense. Interest expense increased by $7.0 million, or 45.0%, to $22.5 million for the three months ended September 30, 2018 from $15.5 million for the three months ended September 30, 2017.



	Three Months Ended September 30,				Dollar Change			Percent Change
	2018		2017		Dollar Change			Percent Change
	(Dollars in thousands)
Interest expense
Deposits	$	15,077	$	10,271	$	4,806		46.8	%
FHLB advances	5,198		2,944		2,254			76.6
Repurchase agreements and other borrowings	2,205		2,284		(79		)	(3.5	)
	$	22,480	$	15,499	$	6,981		45.0	%

The increase in interest expense for the three months ended September 30, 2018 compared to the same period in 2017 was primarily due to higher average rates on deposits and borrowings, as well as an increase of $265.4 million in the average balance of time deposits. A $24.0 million decrease in the average balance of borrowings from the third quarter of 2017 was

more than offset by a 79 basis point increase in the average rate, resulting in a $2.2 million year-over-year increase in interest expense on borrowed funds.

Net Interest Income. Net interest income increased by $6.7 million, or 8.5%, to $85.7 million for the three months ended September 30, 2018 from $79.0 million for the three months ended September 30, 2017. The net interest margin for the third quarter of 2018 was 3.90%, a 19 basis point increase from the third quarter of 2017. The average yield on earning assets for the third quarter of 2018 was 4.92%, a 48 basis point increase from the third quarter of 2017. The average cost of interest-bearing liabilities for the third quarter of 2018 was 1.43%, up 46 basis points from the third quarter of 2017.

Provision for Credit Losses. The Company recorded a provision for credit losses of $2.7 million for the quarter ended September 30, 2018, down $4.5 million from $7.2 million for the quarter ended September 30, 2017. The decrease in provision expense from the three months ended September 30, 2017 was primarily due to decreased charge-offs during the quarter ended September 30, 2018. Net charge-offs totaled $791,000 for the three months ended September 30, 2018, down $11.6 million from the three months ended September 30, 2017. For more information about the Company's allowance for loan losses, please see "Management's Discussion and Analysis - Comparison of Financial Condition at September 30, 2018 and December 31, 2017 - Allowance for Loan Losses" contained in Item 2 of this report.

Non-interest Income. Non-interest income increased by $1.0 million, or 8.2%, to $13.2 million for the three months ended September 30, 2018 from $12.2 million for the three months ended September 30, 2017.



	Three Months Ended September 30,						Dollar Change			Percent Change
	2018			2017			Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest income
Service charges and other fees	$	8,626		$	9,291		$	(665	)	(7.2	)%
Net gain on sale of mortgage loans held for sale	1,597			1,982			(385		)	(19.4	)
Bank-owned life insurance income	482			435			47			10.8
Net loss on securities transactions	(10		)	(20		)	10			50.0
Gain on sale and disposition of assets	977			352			625			177.6
Other	1,555			186			1,369			N/M¹
	$	13,227		$	12,226		$	1,001		8.2	%

¹N/M - not meaningful

The $1.0 million increase in non-interest income from the third quarter of 2017 was primarily due to a $1.4 million increase in other non-interest income, which included a $1.5 million net increase in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds") recorded in the third quarter of 2018, compared to a $134,000 net increase in the CRA funds recorded in the third quarter of 2017. Gain (loss) on sale and disposition of assets for the third quarter of 2018 included $1.3 million in gains on the sale of foreclosed properties, which was partially offset by a $471,000 loss recorded on the anticipated disposition of a leased branch location, with the branch expected to close in the fourth quarter of 2018. Service charges and other fees decreased by $665,000 from the third quarter of 2017, which was driven by decreases in title premiums, Warehouse Purchase Program fee income, commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees) and brokerage income, after the Company discontinued its brokerage services in the third quarter of 2017. These decreases in service charges and other fees were partially offset by increased commercial account analysis fee and debit card interchange income recorded in the 2018 period. Net gains on the sale of mortgage loans held for sale during the third quarter of 2018 decreased by $385,000 compared to the third quarter of 2017, which included gains recognized on $52.4 million of one-to four-family mortgage loans that were sold or committed for sale and fair value changes on mortgage derivatives and mortgage fees collected during the third quarter of 2017, compared to $38.7 million for the third quarter of 2018.

Non-interest Expense. Non-interest expense increased by $1.9 million, or 4.7%, to $42.2 million for the three months ended September 30, 2018, from $40.3 million for the three months ended September 30, 2017.



	Three Months Ended September 30,				Dollar Change			Percent Change
	2018		2017		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	25,053	$	24,175	$	878		3.6	%
Advertising	824		980		(156		)	(15.9	)
Occupancy and equipment	3,960		3,299		661			20.0
Outside professional services	1,151		1,230		(79		)	(6.4	)
Regulatory assessments	750		1,011		(261		)	(25.8	)
Data processing	5,362		4,287		1,075			25.1
Office operations	2,232		2,378		(146		)	(6.1	)
Other	2,860		2,935		(75		)	(2.6	)
	$	42,192	$	40,295	$	1,897		4.7	%

The $1.9 million increase in non-interest expense from the third quarter of 2017 was primarily due to a $1.1 million increase in data processing expense as the Company has outsourced certain segments of its data processing operations and invested in system upgrades. This outsourcing resulted in a reduction in full-time equivalent employees in the technology area, which partially offset the increase in salaries and employee benefits expense. Salaries and employee benefits expense increased by $878,000 from the third quarter of 2017, which was driven by an increase in performance incentive accruals based on decreased non-performing assets, increased share-based compensation expenses, and lower deferred salary costs related to loan originations that will be accounted for over the lives of the related loans. These increases in salaries and employee benefits expense were partially offset by lower health care costs, severance costs, and commissions related to lower mortgage loan production during the third quarter of 2018, as well as the above-mentioned reduction in staff in the technology area. Occupancy and equipment expense increased by $661,000 from the third quarter of 2017 primarily due to an early termination fee collected from a tenant in the third quarter of 2017 that was not repeated in the current period. These increases were partially offset by decreases from the third quarter of 2017 in regulatory assessments expense of $261,000, advertising expense of $156,000, and office operations expense of $146,000.

Income Tax Expense. For the three months ended September 30, 2018, we recognized income tax expense of $11.2 million on our pre-tax income, which was an effective tax rate of 20.8%, compared to income tax expense of $15.0 million for the three months ended September 30, 2017, which was an effective tax rate of 34.4%. The decrease in the effective tax rate was primarily due to the enactment of the Tax Cuts and Jobs Act ("TCJA"), which made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. Additionally, during the fourth quarter of 2017, the Company filed an advance consent application for change in accounting method with the Internal Revenue Service (the "IRS") to change the Company's tax method of accounting for its loan portfolio. The Company has received affirmative consent from the IRS, and this anticipated change will impact the Company's deferred tax asset and income tax expense in the fourth quarter of 2018.

The Company is still analyzing certain aspects of the TCJA and loan portfolio tax accounting change and refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. We expect to complete our analysis of the above-mentioned tax changes within the one-year transition period given in SEC Staff Accounting Bulletin 118.

Comparison of Results of Operations for the Nine Months Ended September 30, 2018 and 2017

General. Net income for the nine months ended September 30, 2018 was $96.4 million, an increase of $21.6 million, or 28.8%, from net income of $74.8 million for the nine months ended September 30, 2017. The increase in net income was driven by increased net interest income and decreased income tax expense, partially offset by increased non-interest expense. Basic earnings per share for the nine months ended September 30, 2018 was $2.05, an increase of $0.45 from $1.60 for the nine months ended September 30, 2017. Diluted earnings per share for the nine months ended September 30, 2018 was $2.02, an increase of $0.44 from $1.58 for the nine months ended September 30, 2017.

Interest Income. Interest income increased by $37.1 million, or 13.7%, to $307.8 million for the nine months ended September 30, 2018 from $270.7 million for the nine months ended September 30, 2017.



	Nine Months Ended September 30,				Dollar Change		Percent Change
	2018		2017		Dollar Change		Percent Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	291,468	$	256,104	$	35,364	13.8	%
Securities	11,227		10,188		1,039		10.2
Interest-bearing deposits in other financial institutions	3,434		3,211		223		6.9
FHLB and Federal Reserve Bank stock and other	1,675		1,243		432		34.8
	$	307,804	$	270,746	$	37,058	13.7	%

The $37.1 million increase in interest income for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to a $35.4 million, or 13.8%, increase in interest income on loans, which was driven by increased volume in all loan portfolios, with the exception of construction and land and other consumer loans, as well as higher yields earned on all loan portfolios. The average balance of commercial real estate loans increased by $234.6 million from the nine months ended September 30, 2017, resulting in a $9.9 million increase in interest income. The average balance of commercial and industrial loans increased by $157.8 million from the nine months ended September 30, 2017, while the average yield earned on this portfolio increased by 52 basis points, resulting in a $13.7 million increase in interest income. The average yield earned on the commercial and industrial portfolio for the nine months ended September 30, 2018 was positively impacted by four increases in the Fed Funds rate, totaling 100 basis points since September 2017, as well as the resolution of multiple non-performing relationships over the past year. The average balance of consumer real estate loans increased by $131.4 million from the nine months ended September 30, 2017, increasing interest income by $5.2 million. The average balance of Warehouse Purchase Program loans increased by $19.0 million compared to the nine months ended September 30, 2017, while the average yield earned increased by 79 basis points, resulting in a $6.7 million increase in interest income. These increases in interest income were partially offset by a $261,000 decline in interest income recorded on construction and land loans, the average balance of which declined by $15.2 million from the nine months ended September 30, 2017.

Interest Expense. Interest expense increased by $20.1 million, or 50.8%, to $59.6 million for the nine months ended September 30, 2018 from $39.5 million for the nine months ended September 30, 2017.



	Nine Months Ended September 30,				Dollar Change			Percent Change
	2018		2017		Dollar Change			Percent Change
	(Dollars in thousands)
Interest expense
Deposits	$	40,841	$	25,740	$	15,101		58.7	%
FHLB advances	12,009		7,003		5,006			71.5
Repurchase agreements and other borrowings	6,745		6,771		(26		)	(0.4	)
	$	59,595	$	39,514	$	20,081		50.8	%

The increase in interest expense for the nine months ended September 30, 2018 compared to the same period in 2017, was primarily due to an increase in interest expense on deposits, which was driven by increased rates paid on all deposit categories during the nine months ended September 30, 2018 compared to the same period in 2017, which included a 62 basis

point increase in the average rate paid on time deposits, a 20 basis point increase in the average rate paid on interest-bearing demand deposits, and a 25 basis point increase in the average rate paid on savings and money market deposits. Additionally, the average balance of time deposits increased by $220.9 million from the nine months ended September 30, 2017. Interest expense on borrowings for the nine months ended September 30, 2018 increased by $5.0 million compared to the nine months ended September 30, 2017, due to an 82 basis point increase in the average rate paid on borrowings, despite a $103.3 million decline in the average balance.

Net Interest Income. Net interest income increased by $17.0 million, or 7.3%, to $248.2 million for the nine months ended September 30, 2018 from $231.2 million for the nine months ended September 30, 2017. The net interest margin increased by seven basis point to 3.89% for the nine months ended September 30, 2018 from 3.82% for the same period last year. The net interest rate spread decreased by seven basis points to 3.54% for the nine months ended September 30, 2018 from 3.61% for the same period last year. The average yield on earning assets for the nine months ended September 30, 2018 was 4.83%, a 35 basis point increase from the nine months ended September 30, 2017, while the average cost of interest-bearing liabilities increased by 42 basis points.

Provision for Credit Losses. The provision for credit losses was $35.8 million for the nine months ended September 30, 2018, an increase of $84,000 from $35.7 million for the nine months ended September 30, 2017. Net charge-offs totaled $40.9 million for the nine months ended September 30, 2018, up $10.2 million from the nine months ended September 30, 2017. For more information about the Company's allowance for loan losses, please see "Management's Discussion and Analysis - Comparison of Financial Condition at September 30, 2018 and December 31, 2017 - Allowance for Loan Losses" contained in Item 2 of this report.

Non-interest Income. Non-interest income increased by $296,000, or 0.8%, to $37.0 million for the nine months ended September 30, 2018 from $36.7 million for the nine months ended September 30, 2017.



	Nine Months Ended September 30,						Dollar Change			Percent Change
	2018			2017			Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest income
Service charges and other fees	$	25,397		$	27,618		$	(2,221	)	(8.0	)%
Net gain on sale of mortgage loans held for sale	5,074			5,766			(692		)	(12.0	)
Bank-owned life insurance income	1,408			1,297			111			8.6
Net loss on securities transactions	(138		)	(39		)	(99		)	(253.8	)
Gain on sale and disposition of assets	3,037			1,908			1,129			59.2
Other	2,199			131			2,068			N/M¹
	$	36,977		$	36,681		$	296		0.8	%

¹N/M - not meaningful

The increase in non-interest income for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to a $2.1 million increase in other non-interest income and a $1.1 million increase in gain on sale and disposition of assets. Other non-interest income included a $1.6 million net increase in the value of the CRA Funds recorded during the nine months ended September 30, 2018, compared to an $84,000 net decrease in the CRA Funds for the nine months ended September 30, 2017. Additionally, other non-interest income for the nine months ended September 30, 2018 included a $402,000 yield maintenance fee on a bond pre-payment was received in the first quarter of 2018. Gain on sale and disposition of assets for the nine months ended September 30, 2018 included $2.3 million in proceeds resulting from an insurance settlement related to a misappropriation of approximately $2.5 million in vault cash from one of the former LegacyTexas Bank branches acquired in 2015, as well as $1.2 million in net gains recorded on the sale of foreclosed properties, which was partially offset by a $471,000 loss recorded on the anticipated disposition of a leased branch location, with the branch expected to close in the fourth quarter of 2018. Comparatively, gain on sale and disposition of assets for the nine months ended September 30, 2017 included $1.7 million in gains recorded on the sale of one branch location and one parcel of land.

Service charges and other fees decreased by $2.2 million compared to the nine months ended September 30, 2017, which included decreases in title premiums, commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), Warehouse Purchase Program fee income, and brokerage income after the Company discontinued its brokerage services in the third quarter of 2017. These decreases in service charges and other fees were partially offset by an

increase in debit card interchange and commercial account analysis fee income compared to the nine months ended September 30, 2017.

Net gains on the sale of mortgage loans held for sale during the nine months ended September 30, 2018 decreased by $692,000 compared to the nine months ended September 30, 2017, which included gains recognized on $148.4 million of one- to four-family mortgage loans that were sold or committed for sale and fair value changes on mortgage derivatives and mortgage fees collected during the 2017 period, compared to $138.6 million for the nine months ended September 30, 2018.

Non-interest Expense. Non-interest expense increased by $8.6 million, or 7.2%, to $128.3 million for the nine months ended September 30, 2018 from $119.6 million for the nine months ended September 30, 2017.



	Nine Months Ended September 30,				Dollar Change			Percent Change
	2018		2017		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	76,442	$	72,010	$	4,432		6.2	%
Advertising	3,070		2,976		94			3.2
Occupancy and equipment	11,800		10,609		1,191			11.2
Outside professional services	3,783		3,589		194			5.4
Regulatory assessments	2,635		3,267		(632		)	(19.3	)
Data processing	15,210		12,059		3,151			26.1
Office operations	6,756		7,058		(302		)	(4.3	)
Other	8,566		8,068		498			6.2
	$	128,262	$	119,636	$	8,626		7.2	%

The increase in non-interest expense from the nine months ended September 30, 2017 included a $4.4 million increase in salaries and employee benefits expense, which was driven by an increase in performance incentive accruals based on decreased non-performing assets, lower deferred salary costs related to loan originations that will be accounted for over the lives of the related loans, as well as increased severance costs, share-based compensation and ESOP expenses, and merit increases awarded in the 2018 period. These increases in salaries and employee benefits expense were partially offset by lower health care costs, staff reductions in the technology area, and decreased commissions related to lower mortgage loan production recorded during the nine months ended September 30, 2018. Also, in connection with the enactment of the Tax Cuts and Jobs Act ("TCJA"), in 2018, the Company awarded all full-time employees whose salary was under $100,000 a $1,000 bonus, which resulted in $679,000 of additional salary expense, and increased the Company's minimum wage to $15 from $11 per hour for all non-commission-based employees. Data processing expense increased by $3.2 million compared to the nine months ended September 30, 2017, as the Company has outsourced certain segments of its data processing operations and invested in system upgrades. Occupancy and equipment expense increased by $1.2 million during the nine months ended September 30, 2018 due to an early termination fee collected from a tenant in the third quarter of 2017, which in turn terminated future rental income from this tenant. Other non-interest expense increased by $498,000 due to higher debit card fraud and lending-related expenses during the 2018 period, partially offset by reduced brokerage expenses after the Company discontinued its brokerage services in the third quarter of 2017. These increased non-interest expenses compared to the nine months ended September 30, 2017 were partially offset by a $632,000 reduction in regulatory assessment expense and a $302,000 reduction in office operations expense.

Income Tax Expense. For the nine months ended September 30, 2018, we recognized income tax expense of $24.7 million on our pre-tax income, which was an effective tax rate of 20.4%, compared to income tax expense of $37.7 million for the nine months ended September 30, 2017, which was an effective tax rate of 33.5%. The decrease in the effective tax rate was primarily due to the enactment of the TCJA, which made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. Additionally, during the fourth quarter of 2017, the Company filed an advance consent application for change in accounting method with the Internal Revenue Service (the "IRS") to change the Company's tax method of accounting for its loan portfolio. The Company has received affirmative consent from the IRS, and this anticipated change will impact the Company's deferred tax asset and income tax expense in the fourth quarter of 2018.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Also presented are the weighted average yields on interest-earning assets, rates paid on interest-bearing liabilities and the resultant spread. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield. Yields earned and rates paid are calculated at the portfolio level using the actual number of days in each month over the actual number of days in the year, with the exception of the securities portfolios and the consumer real estate and loans held for sale loan portfolios, which are calculated using 30 days in a month over 360 days in a year.



		Three Months Ended September 30,
	(Dollars in thousands)	2018							2017
Interest-earning assets:		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
	Commercial real estate	$	3,016,889		$	39,127	5.15	%	$	2,854,343		$	36,392	5.06	%
	Warehouse Purchase Program	1,097,879			12,938		4.68		1,192,920			11,493		3.82
	Commercial and industrial	2,088,318			30,431		5.78		1,850,645			23,331		5.00
	Construction and land	271,829			3,707		5.41		279,189			3,628		5.16
	Consumer real estate	1,295,353			15,117		4.67		1,176,955			13,345		4.54
	Other consumer	44,508			652		5.81		47,169			670		5.64
	Loans held for sale	26,121			295		4.52		23,154			225		3.89
	Less: deferred fees and allowance for loan loss	(55,974		)	—		—		(70,048		)	—		—
	Loans receivable ¹	7,784,923			102,267		5.22		7,354,327			89,084		4.81
	Agency mortgage-backed securities	247,212			1,396		2.26		308,851			1,617		2.09
	Agency collateralized mortgage obligations	268,512			1,806		2.69		182,166			1,040		2.28
	Investment securities	95,793			666		2.77		109,395			750		2.74
	FHLB and FRB stock and other restricted securities	66,966			644		3.85		52,429			448		3.42
	Interest-earning deposit accounts	272,670			1,368		1.99		444,310			1,524		1.36
Total interest-earning assets		8,736,076			108,147		4.92		8,451,478			94,463		4.44
Non-interest-earning assets		431,531							438,436
Total assets		$	9,167,607						$	8,889,914
Interest-bearing liabilities:
	Interest-bearing demand	$	760,889		1,251		0.65		$	875,097		1,474		0.67
	Savings and money market	2,654,990			6,177		0.92		2,857,790			4,859		0.68
	Time	1,683,475			7,649		1.80		1,418,108			3,938		1.10
	Borrowings	1,154,079			7,403		2.55		1,178,031			5,228		1.76
Total interest-bearing liabilities		6,253,433			22,480		1.43		6,329,026			15,499		0.97
Non-interest-bearing demand		1,752,095							1,481,654
Non-interest-bearing liabilities		140,047							138,628
Total liabilities		8,145,575							7,949,308
Total shareholders’ equity		1,022,032							940,606
Total liabilities and shareholders’ equity		$	9,167,607						$	8,889,914
Net interest income and margin					$	85,667	3.90	%				$	78,964	3.71	%
Net interest income and margin (tax-equivalent basis) ²					$	85,796	3.90	%				$	79,214	3.72	%
Net interest rate spread							3.49	%						3.47	%
Net earning assets		$	2,482,643						$	2,122,452
Average interest-earning assets to average interest-bearing liabilities		139.70		%					133.54		%
¹	Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses.
²	In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment (a non-GAAP measure) has been computed using a federal income tax rate of 21% for 2018 and 35% for 2017. Tax-exempt investments and loans had an average balance of $86.1 million and $98.8 million for the three months ended September 30, 2018 and 2017, respectively.



		Nine Months Ended September 30,
	(Dollars in thousands)	2018							2017
Interest-earning assets:		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/Paid		Yield/ Rate
	Commercial real estate	$	3,021,772		$	115,425	5.11	%	$	2,787,137		$	105,539	5.06	%
	Warehouse Purchase Program	1,046,639			35,147		4.49		1,027,604			28,408		3.70
	Commercial and industrial	1,999,114			83,673		5.60		1,841,291			69,958		5.08
	Construction and land	267,766			10,641		5.31		282,968			10,902		5.15
	Consumer real estate	1,263,135			43,848		4.63		1,131,782			38,647		4.55
	Other consumer	44,391			1,899		5.72		49,828			2,077		5.57
	Loans held for sale	25,515			835		4.36		19,506			573		3.92
	Less: deferred fees and allowance for loan loss	(61,771		)	—		—		(68,259		)	—		—
	Loans receivable ¹	7,606,561			291,468		5.12		7,071,857			256,104		4.84
	Agency mortgage-backed securities	259,936			4,332		2.22		318,442			5,013		2.10
	Agency collateralized mortgage obligations	246,114			4,839		2.62		164,041			2,872		2.33
	Investment securities	97,948			2,056		2.80		110,890			2,303		2.77
	FHLB and FRB stock and other restricted securities	60,846			1,675		3.67		49,317			1,243		3.36
	Interest-earning deposit accounts	248,767			3,434		1.85		367,536			3,211		1.17
Total interest-earning assets		8,520,172			307,804		4.83		8,082,083			270,746		4.48
Non-interest-earning assets		430,306							438,441
Total assets		$	8,950,478						$	8,520,524
Interest-bearing liabilities:
	Interest-bearing demand	$	894,846		5,269		0.79		$	860,009		3,817		0.59
	Savings and money market	2,659,132			16,278		0.82		2,738,732			11,672		0.57
	Time	1,584,076			19,294		1.63		1,363,178			10,251		1.01
	Borrowings	1,017,855			18,754		2.46		1,121,124			13,774		1.64
Total interest-bearing liabilities		$	6,155,909		59,595		1.29		6,083,043			39,514		0.87
Non-interest-bearing demand		1,674,965							1,411,693
Non-interest-bearing liabilities		122,827							107,211
Total liabilities		7,953,701							7,601,947
Total shareholders’ equity		996,777							918,577
Total liabilities and shareholders’ equity		$	8,950,478						$	8,520,524
Net interest income and margin					$	248,209	3.89	%				$	231,232	3.82	%
Net interest income and margin (tax-equivalent basis) ²					$	248,614	3.90	%				$	232,004	3.84	%
Net interest rate spread							3.54	%						3.61	%
Net earning assets		$	2,364,263						$	1,999,040
Average interest-earning assets to average interest-bearing liabilities		138.41		%					132.86		%
¹	Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses.
²	In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment (a non-GAAP measure) has been computed using a federal income tax rate of 21% for 2018 and 35% for 2017. Tax-exempt investments and loans had an average balance of $89.8 million and $101.7 million for the nine months ended September 30, 2018 and 2017, respectively.

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and those due to changes in interest rates. The change in interest attributable to rate has been determined by applying the change in rate between periods to average balances outstanding in the earlier period. The change in interest due to volume has been determined by applying the rate from the earlier period to the change in average balances outstanding between periods. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.



	Three Months Ended September 30,									Nine Months Ended September 30,
	2018 versus 2017									2018 versus 2017
	Increase (Decrease) Due to						Total Increase (Decrease)			Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate			Total Increase (Decrease)			Volume			Rate			Total Increase (Decrease)
	(Dollars in thousands)
Interest-earning assets:
Commercial real estate	$	2,100		$	635		$	2,735		$	8,955		$	931		$	9,886
Warehouse Purchase Program	(969		)	2,414			1,445			535			6,204			6,739
Commercial and industrial	3,207			3,893			7,100			6,275			7,440			13,715
Construction and land	(97		)	176			79			(597		)	336			(261		)
Consumer real estate	1,373			399			1,772			4,550			651			5,201
Other consumer	(39		)	21			(18		)	(231		)	53			(178		)
Loans held for sale	31			39			70			191			71			262
Loans receivable	5,606			7,577			13,183			19,678			15,686			35,364
Agency mortgage-backed securities	(341		)	120			(221		)	(962		)	281			(681		)
Agency collateralized mortgage obligations	557			209			766			1,579			388			1,967
Investment securities	(94		)	10			(84		)	(271		)	24			(247		)
FHLB and FRB stock and other restricted securities	135			61			196			310			122			432
Interest-earning deposit accounts	(713		)	557			(156		)	(1,253		)	1,476			223
Total interest-earning assets	5,150			8,534			13,684			19,081			17,977			37,058
Interest-bearing liabilities:
Interest-bearing demand	(188		)	(35		)	(223		)	160			1,292			1,452
Savings and money market	(365		)	1,683			1,318			(348		)	4,954			4,606
Time	843			2,868			3,711			1,875			7,168			9,043
Borrowings	(108		)	2,283			2,175			(1,367		)	6,347			4,980
Total interest-bearing liabilities	182			6,799			6,981			320			19,761			20,081
Net interest income	$	4,968		$	1,735		$	6,703		$	18,761		$	(1,784	)	$	16,977

Liquidity

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run-off that may occur in the normal course of business. The Company relies on a number of different funding sources in order to meet its potential liquidity demands. The primary funding sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio.

Management also has several secondary sources of funds available to meet potential liquidity demands. At September 30, 2018, we had additional borrowing capacity of $2.09 billion with the FHLB and $250.0 million in federal funds lines of credit available with other financial institutions. We may also use the discount window at the Federal Reserve Bank as a source of short-term funding. Federal Reserve Bank borrowing capacity varies based upon securities pledged to the discount window line. At September 30, 2018, securities pledged had a collateral value of $81.1 million.

At September 30, 2018, we had classified 75.8% of our securities portfolio as available for sale (including pledged securities), providing an additional source of liquidity. Management believes that because active markets exist and our securities portfolio is of high quality, our available for sale securities are marketable. Selling participations in loans we originate, including portions of commercial real estate loans, creates another source of liquidity and allows us to manage borrower concentration risk as well as interest rate risk.

Liquidity management is both a daily and long-term function of business management. Short-term excess liquidity is generally placed in short-term investments, such as overnight deposits at the Federal Reserve Bank and correspondent banks. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities.

Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short-term basis through the cash management function. On a longer-term basis it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.

The Liquidity Committee monitors liquidity positions and projections. Liquidity contingency planning is added to the Committee's process by focusing on possible scenarios that would stress liquidity beyond the Bank's normal business liquidity needs. These scenarios may include macro-economic and bank specific situations focusing on high probability-high impact, high probability-low impact, low probability-high impact, and low probability-low impact stressors.

Management recognizes that the factors and conditions leading up to and occurring during a liquidity stress event cannot be precisely defined or listed. Nevertheless, management believes that liquidity stress events can be categorized into sources and uses of liquidity, and levels of severity, with responses that apply to various situations.

The Company, which is a separate legal entity from the Bank and must provide for its own liquidity, had liquid assets of $29.6 million on an unconsolidated basis at September 30, 2018. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, funds paid out for Company stock repurchases, and payments on trust-preferred securities and subordinated debt held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. See “How We Are Regulated - Limitations on Dividends and Other Capital Distributions” under Item 1 and Note 16 of the Notes to Consolidated Financial Statements contained in Item 8 of the Company's 2017 Form 10-K.

The Company uses its sources of funds primarily to meet its expenses, pay maturing deposits and fund withdrawals, and to fund loan commitments. Total approved loan commitments (including Warehouse Purchase Program commitments, unused lines of credit and letters of credit) amounted to $2.62 billion and $2.37 billion at September 30, 2018, and December 31, 2017, respectively. It is management's policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Company. Certificates of deposit scheduled to mature in one year or less at September 30, 2018 totaled $1.20 billion with a weighted average rate of 1.79%.

During the nine months ended September 30, 2018, cash and cash equivalents decreased by $39.1 million, or 13.3%, to $254.3 million at September 30, 2018 from $293.5 million at December 31, 2017. Operating activities provided cash of $188.3 million, which was more than offset by financing activities of $160.0 million and investing activities of $67.5 million. Primary sources of cash for the nine months ended September 30, 2018 included proceeds from pay-offs of Warehouse Purchase Program loans totaling $16.68 billion, proceeds from maturities, prepayments and calls on available-for-sale securities totaling $1.86 billion, proceeds from FHLB advances totaling $925.0 million, proceeds from the sale of loans held for sale

totaling $138.3 million, and a $12.1 million increase in deposits. Primary uses of cash for the nine months ended September 30, 2018 included originations of Warehouse Purchase Program loans totaling $16.42 billion, purchases of available-for-sale securities totaling $1.91 billion, repayments on FHLB advances totaling $1.04 billion and net fundings of loans held for investment totaling $320.5 million.

Please see Item 1A (Risk Factors) under Part 1 of the Company's 2017 Form 10-K for information regarding liquidity risk.

Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term contractual obligations and commitments to extend credit to our borrowers, in aggregate and by payment due dates (not including any interest amounts). In addition to the commitments below, the Company had overdraft protection available to its depositors in the amount of $85.6 million and credit card guarantees outstanding in the amount of $2.0 million at September 30, 2018.



	September 30, 2018
	Less than One Year		One through Three Years		Four through Five Years		After Five Years		Total
	(Dollars in thousands)
Contractual obligations:
Deposits without a stated maturity	$	5,140,982	$	—	$	—	$	—	$	5,140,982
Certificates of deposit	1,196,142		398,304		42,348		1,982		1,638,776
FHLB advances ¹	927,867		2,950		1,005		495		932,317
Repurchase agreements	40,408		—		—		—		40,408
Subordinated debt ¹	—		—		—		140,464		140,464
Private equity fund for Community Reinvestment Act purposes	830		—		—		—		830
Operating leases (premises)	6,186		11,369		9,807		15,941		43,303
Total contractual obligations	$	7,312,415	$	412,623	$	53,160	$	158,882	7,937,080
Off-balance sheet loan commitments: ²
Unused commitments to extend credit	$	851,055	$	503,840	$	268,070	$	77,506	1,700,471
Unused capacity on Warehouse Purchase Program loans³	881,495		—		—		—		881,495
Standby letters of credit	41,025		689		541		155		42,410
Total loan commitments	$	1,773,575	$	504,529	$	268,611	$	77,661	2,624,376
Total contractual obligations and loan commitments									$	10,561,456


¹	FHLB advances and subordinated debt are shown at their contractual amounts.


²	Loans having no stated maturity are reported in the “Less than One Year” category.


³	In regards to unused capacity on Warehouse Purchase Program loans, the Company has established a maximum purchase facility amount, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by its mortgage banking company customers for any reason in the Company's sole and absolute discretion.

Capital Resources

Consistent with our goal to operate a sound and profitable organization, our policy is for the Company and its subsidiary bank to maintain “well-capitalized” status under the FRB regulations. Based on capital levels at September 30, 2018 and December 31, 2017, the Bank and the Company were considered to be well-capitalized. At September 30, 2018, the Bank's equity totaled $1.12 billion. Our consolidated equity totaled $1.04 billion, or 11.4% of total assets, at September 30, 2018. Warehouse Purchase Program loan volumes can increase significantly on the last day of the month, potentially leading to a significant difference between the ending and average balance of Warehouse Purchase Program loans. At September 30, 2018, Warehouse Purchase Program loans totaled $1.05 billion, compared to an average balance of $1.10 billion for the three months ended September 30, 2018. Because the capital ratios below are calculated using ending risk-weighted assets and Warehouse Purchase Program loans are risk-weighted at 100%, an end of period increase in these balances can significantly impact the Company's reported capital ratios.



	Actual				Required for Capital Adequacy Purposes				To Be Well-Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2018	(Dollars in thousands)
Total risk-based capital
Company	$	1,074,883	12.88	%	$	667,830	8.00	%	$	834,787	10.00	%
Bank	1,019,546		12.21		667,790		8.00		834,738		10.00
Tier 1 risk-based capital
Company	884,915		10.60		500,872		6.00		500,872		6.00
Bank	952,401		11.41		500,843		6.00		667,790		8.00
Common equity tier 1 risk-based capital
Company	872,848		10.46		375,654		4.50		n/a ¹		n/a ¹
Bank	952,401		11.41		375,632		4.50		542,580		6.50
Tier 1 leverage
Company	884,915		9.83		360,126		4.00		n/a ¹		n/a ¹
Bank	952,401		10.58		360,171		4.00		450,214		5.00
December 31, 2017
Total risk-based capital
Company	$	991,713	11.87	%	$	668,142	8.00	%	$	835,178	10.00	%
Bank	939,655		11.25		668,096		8.00		835,120		10.00
Tier 1 risk-based capital
Company	796,887		9.54		501,107		6.00		501,107		6.00
Bank	867,424		10.39		501,072		6.00		668,096		8.00
Common equity tier 1 risk-based capital
Company	784,960		9.40		375,830		4.50		n/a ¹		n/a ¹
Bank	867,424		10.39		375,804		4.50		542,828		6.50
Tier 1 leverage
Company	796,887		9.17		347,731		4.00		n/a ¹		n/a ¹
Bank	867,424		9.98		347,808		4.00		434,759		5.00
¹ Not applicable

Pursuant to the capital regulations of the FRB and the other federal banking agencies, the Company and the Bank must maintain a capital conservation buffer consisting of additional common equity tier 1 capital greater than 2.5% of risk-weighted assets above the required minimum levels of risk-based common equity tier 1 capital, tier 1 capital and total capital in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. For our fiscal year ending December 31, 2018, the capital conservation buffer rule requires a buffer of greater than 1.875% of risk-weighted assets, which amount will increase by 0.625% yearly until the requirement is fully phased-in on January 1, 2019, when the buffer must exceed 2.5% of risk-weighted assets. At September 30, 2018, the Company's and the Bank's common equity tier 1 capital exceeded the required capital conservation buffer.



Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability Management

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. However, market rates change over time. Like other financial institutions, our results of operations are impacted by changes in market interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in market interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in market interest rates and comply with applicable regulations, we calculate and monitor our interest rate risk. In doing so, we analyze and manage assets and liabilities based on their interest rates and contractual cash flows, timing of maturities, prepayment potential, repricing opportunities, and sensitivity to actual or potential changes in market interest rates.

The Company is subject to interest rate risk to the extent that its interest-bearing liabilities, primarily deposits, FHLB advances and other borrowings, reprice more rapidly or slowly, or at different rates (basis risk) than its interest-earning assets, primarily loans and investment securities.

The Bank calculates interest rate risk by entering relevant contractual and projected information into its asset/liability management software simulation model. Data required by the model includes balance, rate, pay down schedule, and maturity. For items that contractually reprice, the repricing index, spread, and frequency are entered, including any initial, periodic, and lifetime interest rate caps and floors.

The Bank has adopted an asset and liability management policy. This policy sets the foundation for monitoring and managing the potential for adverse effects of material prolonged increases or decreases in interest rates on our results of operations. The Board of Directors sets the asset and liability policy for the Bank, which is implemented by the Asset/Liability Management Committee.

The purpose of the Asset/Liability Management Committee is to monitor, communicate, coordinate, and direct asset/liability management consistent with our business plan and board-approved policies. The Committee directs and monitors the volume and mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, interest rate risk, growth, and profitability goals.

The Committee meets on a quarterly basis to, among other things, protect capital through earnings stability over the interest rate cycle, maintain our well-capitalized status, and provide a reasonable return on investment. The Committee recommends appropriate strategy changes based on this review. The Committee is responsible for reviewing and reporting the effects of policy implementation and strategies to the Board of Directors at least quarterly. Senior managers oversee the process on a daily basis.

A key element of the Bank’s asset/liability management strategy is to protect earnings by managing the inherent maturity and repricing mismatches between its interest-earning assets and interest-bearing liabilities. The Bank generally manages such earnings exposure through the addition of loans, investment securities and deposits with risk mitigating characteristics and by entering into appropriate term FHLB advance agreements.

As part of its efforts to monitor and manage interest rate risk, the Bank uses the economic value of equity (“EVE”) methodology adopted by the Federal Financial Institutions Examination Council ("FFIEC") as part of its capital regulations. In essence, the EVE approach calculates the difference between the present value of expected cash flows from assets and liabilities. In addition to monitoring selected measures of EVE, management also calculates and monitors potential effects on net interest income resulting from increases or decreases in market interest rates. This approach uses the earnings at risk (“EAR”) methodology adopted by the Joint Agency Policy Statement on Interest Rate Risk as part of its capital regulations. EAR calculates estimated net interest income using a flat balance sheet approach over a twelve month time horizon. The EAR process is used in conjunction with EVE measures to identify interest rate risk on both a global and account level basis. Management and the Board of Directors review EVE and EAR measurements at least quarterly to review historical trends, projected measurements, and to determine whether the Bank's interest rate exposure is within the limits established by the Board of Directors.

The Bank's asset/liability management strategy sets acceptable limits for the percentage change in EVE and EAR given changes in interest rates. For instantaneous, parallel, and sustained interest rate increases or decreases of 100 basis points, the Bank's policy indicates that change in EVE should not decrease by more than 5%, and for increases of 200, 300, and 400 basis points, the change in EVE should not exceed a 10%, 12.5% and 15% decrease, respectively. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank's policy indicates that the change in EAR should not exceed a 7% decrease, and for increases of 200, 300, and 400 basis points, the change in EAR should not exceed decreases of 10%, 13% and 15%, respectively.

As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of September 30, 2018, and December 31, 2017, are internal analyses of our interest rate risk as measured by changes in EVE and EAR for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.

As illustrated in the tables below, our EVE would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact EVE as a result of the duration of assets, including loans and investments, being longer than the duration of liabilities, primarily deposit accounts and FHLB borrowings. In rising rate environments, deposits are more beneficial to the Bank’s EVE than comparable wholesale funding. As illustrated in the table below, at September 30, 2018, our EAR would be positively impacted by a parallel, instantaneous, and sustained increase in market rates. Our EVE and EAR would also be negatively impacted by a 100 basis point decline in market rates.



September 30, 2018
Change in Interest Rates in Basis Points		Economic Value of Equity						Earnings at Risk (12 months)
Change in Interest Rates in Basis Points		Estimated EVE	Estimated Increase / (Decrease) in EVE				EVE Ratio %	Estimated Net Interest Income	Increase / (Decrease) in Estimated Net Interest Income
		$ Amount	$ Change		% Change			$ Amount	$ Change		% Change
		(Dollars in thousands)
400		1,377,997	(134,679	)	(8.90	)	16.55	392,972	23,547		6.37
300		1,411,976	(100,700	)	(6.66	)	16.68	387,029	17,604		4.77
200		1,449,929	(62,747	)	(4.15	)	16.84	381,302	11,877		3.21
100		1,486,977	(25,699	)	(1.70	)	16.97	375,434	6,009		1.63
—		1,512,676	—		—		16.97	369,425	—		—
(100	)	1,464,761	(47,915	)	(3.17	)	16.19	356,678	(12,747	)	(3.45	)



December 31, 2017
Change in Interest Rates in Basis Points		Economic Value of Equity						Earnings at Risk (12 months)
Change in Interest Rates in Basis Points		Estimated EVE	Estimated Increase / (Decrease) in EVE				EVE Ratio %	Estimated Net Interest Income	Increase / (Decrease) in Estimated Net Interest Income
		$ Amount	$ Change		% Change			$ Amount	$ Change		% Change
		(Dollars in thousands)
400		1,250,757	(125,669	)	(9.13	)	14.89	358,384	15,210		4.43
300		1,289,760	(86,666	)	(6.30	)	15.09	355,186	12,012		3.50
200		1,322,187	(54,239	)	(3.94	)	15.21	351,794	8,620		2.51
100		1,348,578	(27,848	)	(2.02	)	15.26	348,173	4,999		1.46
—		1,376,426	—		—		15.34	343,174	—		—
(100	)	1,315,702	(60,724	)	(4.41	)	14.45	334,954	(8,220	)	(2.40	)

The Bank's EVE was $1.51 billion, or 16.97%, of the market value of portfolio assets as of September 30, 2018, a $136.3 million increase from $1.38 billion, or 15.34%, of the market value of portfolio assets as of December 31, 2017. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $62.7 million decrease in our EVE at September 30, 2018 compared to a $54.2 million decrease at December 31, 2017, and would result in a 13 basis point decrease in our EVE ratio to 16.84% at September 30, 2018 compared to a 13 basis point decrease to 15.21% at December 31, 2017. An immediate 100 basis point decrease in market interest rates would result in a $47.9 million decrease in our EVE at September 30, 2018 compared to a $60.7 million decrease at December 31, 2017, and would result in a 78 basis point decrease in our EVE ratio to 16.19% at September 30, 2018, as compared to an 89 basis point decrease in our EVE ratio to 14.45% at December 31, 2017.

The Bank's projected EAR for the twelve months ending September 30, 2019 is $369.4 million, compared to $343.2 million for the twelve months ending December 31, 2018. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in an $11.9 million, or 3.21%, increase in net interest income for the twelve months ending September 30, 2019 compared to an $8.6 million, or 2.51%, increase for the twelve months ending December 31, 2018. An immediate 100 basis point decrease in market rates would result in a $12.7 million, or 3.45%, decrease in net interest income for the twelve months ending September 30, 2019 compared to an $8.2 million, or 2.40%, decrease for the twelve months ending December 31, 2018.

We have implemented a strategic plan to mitigate interest rate risk. This plan includes the ongoing review of our current and projected mix of fixed rate versus variable rate loans, investments, deposits, and borrowings. When available and appropriate, high quality adjustable rate assets are purchased or originated. These assets generally may reduce our sensitivity to upward interest rate shocks. On the liability side of the balance sheet, borrowings are added as appropriate. These borrowings will be of a size and term so as to mitigate the impact of duration mismatches, reducing our sensitivity to upward interest rate shocks. These strategies are implemented as needed and as opportunities arise to mitigate interest rate risk without materially sacrificing earnings.

In managing our mix of assets and liabilities, while considering the relationship between long and short term interest rates, market conditions, and consumer preferences, we may place somewhat greater emphasis on maintaining or increasing the Bank’s net interest margin than on strictly matching the interest rate sensitivity of its assets and liabilities.

Management also believes that at times the increased net income which may result from a mismatch in the actual maturity, repricing, or duration of its asset and liability portfolios can provide sufficient returns to justify the increased exposure to sudden and unexpected increases or decreases in interest rates which may result from such a mismatch. Management believes that the Bank’s level of interest rate risk is acceptable under this approach.

In evaluating the Bank’s exposure to market interest rate movements, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or repricing characteristics, their interest rate drivers may react in different degrees to changes in market interest rates (basis risk). Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates over the life of the asset (time to initial interest rate reset; interest rate reset frequency; initial, periodic, and lifetime caps and floors). Further, in the event of a significant change in market interest rates, loan and securities prepayment and time deposit early withdrawal levels may deviate significantly from those assumed in the table above. Assets with prepayment options and liabilities with early withdrawal options are being monitored, with assumptions stress tested on a regular basis. Current market rates and customer behavior are being considered in the management of interest rate risk. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The Bank considers all of these factors in monitoring its exposure to interest rate risk. Of note, the current historically low interest rate environment has resulted in asymmetrical interest rate risk. The interest rates on certain repricing assets and liabilities cannot be fully shocked downward.

The Board of Directors and management believe that the Bank’s ability to successfully manage and mitigate its exposure to interest rate risk is strengthened by several key factors. For example, the Bank manages its balance sheet duration and overall interest rate risk by placing a preference on originating and retaining adjustable rate loans. In addition, the Bank borrows at various maturities from the FHLB to mitigate mismatches between the asset and liability portfolios. Furthermore, the investment securities portfolio is used as a primary interest rate risk management tool through the duration and repricing targeting of purchases and sales.



Item 4.	Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2018. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. There has been no change in the Company's internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goals, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual actions of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operations.



Item 1A.	Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company's 2017 Form 10-K.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

The Company did not repurchase any of its common stock during the quarter ended September 30, 2018.



Item 3.	Defaults upon Senior Securities

Not applicable.



Item 4.	Mine Safety Disclosures

Not applicable.



Item 5.	Other Information

Not applicable.



Item 6.		Exhibits



Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of November 25, 2013, by and between the Registrant and LegacyTexas Group, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on November 25, 2013 (File No. 001-34737))

2.2		Amendment No. One to the Agreement and Plan of Merger, dated as of February 19, 2014, by and between the Registrant and LegacyTexas Group, Inc. (incorporated herein by reference to Exhibit 2.3 of the Registrant’s Annual Report on Form 10-K filed with the SEC on February 26, 2014 (File No. 001-34737))

2.3		Amendment No. Two to the Agreement and Plan of Merger, dated as of August 29, 2014, by and between the Registrant and LegacyTexas Group, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2014 (File No. 001-34737))

3.1		Charter of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 25, 2017 (File No. 001-34737))

3.2		Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on July 25, 2017 (File No. 001-34737))

4.1		Certificate of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 6, 2015 (File No. 001-34737))

4.2		The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries.

10.1		ViewPoint Bank Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

10.2		Amended and Restated ViewPoint Bank Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1, as amended (File No. 0-24566-01))

10.3		2018 Executive Annual Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K filed with the SEC on February 8, 2018 (File No. 001-34737))

10.4		Change in Control and Severance Benefits Agreement entered into between the Registrant and Mays Davenport (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on November 25, 2013 (File No. 001-34737))

10.5		Form of Change In Control and Severance Benefits Agreement entered into between the Registrant and the following executive officers: Scott A. Almy, Charles D. Eikenberg, Thomas S. Swiley, and Mark L. Williamson (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on December 2, 2013 (File No. 001-34737))

10.6		Amended and Restated Executive Employment Agreement entered into between the Registrant and Kevin J. Hanigan (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on December 2, 2013 (File No. 001-34737))

10.7		Registrant's 2007 Equity Incentive Plan (incorporated herein by reference to Appendix A to the proxy statement filed with the SEC on March 30, 2007 (File No. 001-32992))

10.8		Registrant's 2012 Equity Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's proxy statement filed with the SEC on April 4, 2012 (File No. 001-34737))

10.9		Form of Incentive Stock Option Agreement under the 2012 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 14, 2012 (File No. 333-182122))



10.10		Form of Non-Qualified Stock Option Agreement under the 2012 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 14, 2012 (File No. 333-182122))

10.11		Form of Restricted Stock Agreement (Time-Based) under the 2012 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 14, 2012 (File No. 333-182122))

10.12		Form of Restricted Stock Agreement (Performance-Based) under the 2012 Equity Incentive Plan (incorporated herein by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-8 filed with the SEC on June 14, 2012 (File No. 333-182122))

10.13		Form of 2012 Equity Incentive Plan Restricted Stock Award and Non-Solicitation Agreement (incorporated herein by reference to Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on July 26, 2016 (File No. 001-34737))

10.14		Form of 2012 Equity Incentive Plan Non-Employee Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on July 26, 2016 (File No. 001-34737))

10.15		Registrant's 2017 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to the Registrant's proxy statement filed with the SEC on April 14, 2017 (File No. 001-34737))

10.16		Form of Incentive Stock Option Agreement under the 2017 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 7, 2017 (File No. 333-221398))

10.17		Form of Non-Qualified Stock Option Agreement under the 2017 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 7, 2017 (File No. 333-221398))

10.18		Form of Restricted Stock Agreement (Management) under the 2017 Omnibus Incentive Plan (Time-Based vesting) (incorporated herein by reference to Exhibit 99.4 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 7, 2017 (File No. 333-221398))

10.19		Form of Restricted Stock Agreement (Management) under the 2017 Omnibus Incentive Plan (Performance-Based vesting) (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 2, 2018 (File No. 001-34737))

10.20		Form of Restricted Stock Agreement (Non-Employee Director) under the 2017 Omnibus Incentive Plan (Time-Based vesting) (incorporated herein by reference to Exhibit 99.6 to the Registrant’s Registration Statement on Form S-8 filed with the SEC on November 7, 2017 (File No. 333-221398))

11		Statement regarding computation of per share earnings (See Note 3 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q)

31.1		Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)

31.2		Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)

32		Section 1350 Certifications

101		Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended September 30, 2018, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Condensed Notes to Unaudited Consolidated Interim Financial Statements. An instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LegacyTexas Financial Group, Inc.

(Registrant)



Date:	October 24, 2018	By:	/s/ Kevin J. Hanigan
			Kevin J. Hanigan,
			President and Chief Executive Officer
			(Duly Authorized Officer)

Date:	October 24, 2018	By:	/s/ J. Mays Davenport
			J. Mays Davenport
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)