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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-34737
LEGACYTEXAS FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
 
 
27-2176993
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
5851 Legacy Circle, Plano, Texas
 
 
 
75024
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 578-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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:
    
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class: Common Stock
 
Shares Outstanding as of April 22, 2019:
 
 
48,704,070



LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
March 31, 2019
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 
March 31,
2019
 
December 31,
2018
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
55,472

 
$
60,416

Short-term interest-bearing deposits in other financial institutions
219,051

 
208,777

Total cash and cash equivalents
274,523

 
269,193

Securities available for sale, at fair value
479,426

 
471,746

Securities held to maturity (fair value: March 31, 2019 — $135,460;
December 31, 2018— $144,791)
135,276

 
146,046

Loans held for sale, at fair value
11,380

 
23,193

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $77,530 at March 31, 2019 and $67,428 at December 31, 2018)
6,878,019

 
6,733,692

Loans held for investment - Warehouse Purchase Program
1,096,160

 
960,404

Total loans held for investment
7,974,179

 
7,694,096

Federal Home Loan Bank (“FHLB”) stock and other restricted securities, at cost
56,044

 
56,226

Bank-owned life insurance
59,377

 
59,036

Premises and equipment, net
107,684

 
73,073

Goodwill
178,559

 
178,559

Other assets
69,624

 
79,974

Total assets
$
9,346,072

 
$
9,051,142

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,752,694

 
$
1,773,762

Interest-bearing demand
884,494

 
826,755

Savings and money market
2,492,226

 
2,455,787

Time
1,948,011

 
1,785,411

Total deposits
7,077,425

 
6,841,715

FHLB advances
820,084

 
825,409

Repurchase agreements
37,277

 
50,340

Subordinated debt
135,135

 
135,012

Accrued expenses and other liabilities
155,064

 
104,299

Total liabilities
8,224,985

 
7,956,775

Commitments and contingent liabilities (See Note 11)


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — March 31, 2019 and December 31, 2018
—

 
—

Common stock, $.01 par value; 90,000,000 shares authorized; 48,704,070 shares issued —
March 31, 2019 and 48,505,261 shares issued — December 31, 2018
487

 
485

Additional paid-in capital
625,405

 
619,983

Retained earnings
508,887

 
491,948

Accumulated other comprehensive income (loss), net
(2,433
)
 
(6,658
)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,125,902 shares at March 31, 2019 and 1,139,140 shares at December 31, 2018
(11,259
)
 
(11,391
)
Total shareholders’ equity
1,121,087

 
1,094,367

Total liabilities and shareholders’ equity
$
9,346,072

 
$
9,051,142

See accompanying notes to consolidated financial statements.

3

LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Interest and dividend income
 
 
 
Loans, including fees
$
100,301

 
$
90,631

Taxable securities
3,602

 
2,911

Nontaxable securities
343

 
675

Interest-bearing deposits in other financial institutions
1,277

 
969

FHLB and FRB stock and other
581

 
480

 
106,104

 
95,666

Interest expense
 
 
 
Deposits
18,215

 
12,032

FHLB advances
4,456

 
2,680

Repurchase agreements and other borrowings
2,269

 
2,341

 
24,940

 
17,053

Net interest income
81,164

 
78,613

Provision for credit losses
9,800

 
15,663

Net interest income after provision for credit losses
71,364

 
62,950

Non-interest income
 
 
 
Service charges and other fees
7,255

 
7,927

Net gain on sale of mortgage loans held for sale
1,525

 
1,809

Bank-owned life insurance income
482

 
447

Net gain (loss) on securities transactions
6

 
(128
)
Gain (loss) on sale and disposition of assets
(14
)
 
2,213

Other
640

 
630

 
9,894

 
12,898

Non-interest expense
 
 
 
Salaries and employee benefits
26,871

 
27,076

Advertising
903

 
888

Occupancy and equipment
3,899

 
3,860

Outside professional services
1,285

 
1,250

Regulatory assessments
618

 
1,154

Data processing
5,933

 
4,703

Office operations
2,335

 
2,300

Other
2,463

 
2,648

 
44,307

 
43,879

Income before income tax expense
36,951

 
31,969

Income tax expense
7,871

 
6,207

Net income
$
29,080

 
$
25,762

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.61

 
$
0.55

Diluted
$
0.61

 
$
0.54

Dividends declared per share
$
0.25

 
$
0.16

 
 
 
 
See accompanying notes to consolidated financial statements.



4

LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income
$
29,080

 
$
25,762

Change in unrealized gains (losses) on securities available for sale
5,353

 
(4,845
)
Reclassification of amount realized through securities transactions
(6
)
 
128

Tax effect
(1,122
)
 
988

Reclassification of income tax effects of the Tax Cuts and Jobs Act
(see Note 10 for more information)
—

 
(741
)
Other comprehensive income (loss), net of tax
4,225

 
(4,470
)
Comprehensive income
$
33,305

 
$
21,292

 
 
 
 
See accompanying notes to consolidated financial statements.


5


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except share and per share data)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss), Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
For the three months ended March 31, 2019
 
 
 
 
 
 
 
 
Balance at January 1, 2019
$
485

 
$
619,983

 
$
491,948

 
$
(6,658
)
 
$
(11,391
)
 
$
1,094,367

Net income
—

 
—

 
29,080

 
—

 
—

 
29,080

Other comprehensive income, net of tax
—

 
—

 
—

 
4,225

 
—

 
4,225

Dividends declared ($0.25 per share)
—

 
—

 
(12,141
)
 
—

 
—

 
(12,141
)
ESOP shares earned (13,238 shares)
—

 
385

 
—

 
—

 
132

 
517

Share-based compensation expense
—

 
2,550

 
—

 
—

 
—

 
2,550

Activity in employee stock plans (198,809 shares)
2

 
2,487

 
—

 
—

 
—

 
2,489

Balance at March 31, 2019
$
487

 
$
625,405

 
$
508,887

 
$
(2,433
)
 
$
(11,259
)
 
$
1,121,087

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

 
$
603,884

 
$
370,858

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

Net income
—

 
—

 
25,762

 
—

 
—

 
25,762

Other comprehensive (loss), net of tax
—

 
—

 
—

 
(4,470
)
 
—

 
(4,470
)
Reclassification of income tax effects of the Tax Cuts and Jobs Act (see Note 10 for more information)
—

 
—

 
741

 
—

 
—

 
741

Dividends declared ($0.16 per share)
—

 
—

 
(7,708
)
 
—

 
—

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

 
447

 
—

 
—

 
131

 
578

Share-based compensation expense
—

 
2,055

 
—

 
—

 
—

 
2,055

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

 
2,660

 
—

 
—

 
—

 
2,662

Balance at March 31, 2018
$
483

 
$
609,046

 
$
389,653

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


See accompanying notes to consolidated financial statements.

6

LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)

 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income
$
29,080

 
$
25,762

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
9,800

 
15,663

Depreciation and amortization
2,760

 
1,738

Deferred tax benefit
(4,614
)
 
(460
)
Premium amortization and accretion of securities, net
980

 
1,031

Accretion related to acquired loans
(255
)
 
(513
)
Net (gain) loss on securities transactions
(6
)
 
128

ESOP compensation expense
517

 
578

Share-based compensation expense
2,550

 
2,055

Excess tax benefit on vesting of stock awards
74

 
528

Net gain on loans held for sale
(1,525
)
 
(1,809
)
Loans originated or purchased for sale
(32,172
)
 
(49,428
)
Proceeds from sale of loans held for sale
45,510

 
36,821

FHLB stock dividends
(287
)
 
(171
)
Bank-owned life insurance income
(482
)
 
(447
)
(Gain) loss on sale and disposition of repossessed assets, premises and equipment
14

 
64

Net change in deferred loan fees/costs
(421
)
 
(1,250
)
Net change in accrued interest receivable
(4,403
)
 
274

Net change in other assets
12,406

 
(2,338
)
Net change in other liabilities
19,628

 
19,979

Net cash provided by operating activities
79,154

 
48,205

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
320,617

 
118,661

Purchases
(347,545
)
 
(136,007
)
Proceeds from sale of AFS securities
23,886

 
—

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
10,507

 
16,385

Originations of Warehouse Purchase Program loans
(3,874,762
)
 
(4,972,238
)
Proceeds from pay-offs of Warehouse Purchase Program loans
3,739,006

 
5,273,244

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(153,830
)
 
(97,968
)
Redemption of FHLB and Federal Reserve Bank stock and other
469

 
18,119

Purchases of premises and equipment
(728
)
 
(2,320
)
Proceeds from sale of assets
886

 
356

Net cash provided by (used in) investing activities
(281,494
)
 
218,232


7

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

 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from financing activities
 
 
 
Net change in deposits
235,710

 
186,724

Proceeds from FHLB advances
815,000

 
390,000

Repayments on FHLB advances
(820,325
)
 
(828,601
)
Repayments of borrowings
(13,063
)
 
(8,066
)
Payment of dividends
(12,141
)
 
(7,708
)
Activity in employee stock plans
2,489

 
2,662

Net cash provided by (used in) financing activities
207,670

 
(264,989
)
Net change in cash and cash equivalents
5,330

 
1,448

Beginning cash and cash equivalents
269,193

 
293,456

Ending cash and cash equivalents
$
274,523

 
$
294,904

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
286

 
$
122

Leased assets obtained in exchange for new operating lease liabilities
$
36,503

 
$
—

See accompanying notes to consolidated financial statements.

8
Table of Contents
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, 2018 (“2018 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 2018 Form 10-K.
The accompanying Unaudited Consolidated Interim Financial Statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, LegacyTexas Bank (the “Bank”). All significant intercompany transactions and balances are eliminated in consolidation.

9
Table of Contents
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 months ended March 31, 2019 and 2018, are below:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Card services income
(a)
$
3,012

 
$
3,058

Service charges on deposits
(b)
1,972

 
1,773

Title income
(c)
786

 
1,057

Losses on the sale of other real estate owned
(d)
(5
)
 
(40
)

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

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

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

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

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

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

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


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

The Company has applied ASC 606 using the modified retrospective approach effective on January 1, 2018 to all existing contracts with customers covered under the scope of the standard. The Company did not have an aggregate effect of modification resulting from adoption of ASC 606, and no financial statement line items were affected by this change in accounting standard.



11
Table of Contents
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 months ended March 31, 2019 and 2018 is as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Basic earnings per share:
 
 
 
Numerator:
 
 
 
Net income
$
29,080

 
$
25,762

Distributed and undistributed earnings to participating securities
(125
)
 
(75
)
Income available to common shareholders
$
28,955

 
$
25,687

Denominator:
 
 
 
Weighted average common shares outstanding
48,585,553

 
48,197,596

Less: Average unallocated ESOP shares
(1,134,580
)
 
(1,187,533
)
  Average unvested restricted stock awards
(204,691
)
 
(137,730
)
Average shares for basic earnings per share
47,246,282

 
46,872,333

Basic earnings per common share
$
0.61

 
$
0.55

Diluted earnings per share:
 
 
 
Numerator:
 
 
 
Income available to common shareholders
$
28,955

 
$
25,687

Denominator:
 
 
 
Average shares for basic earnings per share
47,246,282

 
46,872,333

Dilutive effect of share-based compensation plan
589,411

 
692,254

Average shares for diluted earnings per share
47,835,693

 
47,564,587

Diluted earnings per common share
$
0.61

 
$
0.54

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
469,208

 
184,000




12
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 4 - Securities
The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the fair value of securities available for sale (“AFS”) were as follows:
March 31, 2019
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
143,072

 
$
244

 
$
2,134

 
$
141,182

Agency commercial mortgage-backed securities 1
8,436

 
—

 
88

 
8,348

Agency residential collateralized mortgage obligations 1
308,655

 
1,435

 
2,649

 
307,441

Municipal bonds
22,343

 
166

 
54

 
22,455

Total securities
$
482,506

 
$
1,845

 
$
4,925

 
$
479,426

December 31, 2018
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
153,671

 
$
283

 
$
4,083

 
$
149,871

Agency commercial mortgage-backed securities 1
9,063

 
—

 
143

 
8,920

Agency residential collateralized mortgage obligations 1
284,886

 
603

 
4,850

 
280,639

US government and agency securities
1,500

 
43

 
—

 
1,543

Municipal bonds
31,053

 
87

 
367

 
30,773

Total securities
$
480,173

 
$
1,016

 
$
9,443

 
$
471,746

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:
March 31, 2019
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
50,791

 
$
489

 
$
595

 
$
50,685

Agency commercial mortgage-backed securities 1
21,740

 
177

 
15

 
21,902

Agency residential collateralized mortgage obligations 1
15,813

 
49

 
76

 
15,786

Municipal bonds
46,932

 
305

 
150

 
47,087

Total securities
$
135,276

 
$
1,020

 
$
836

 
$
135,460

December 31, 2018
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
53,377

 
$
266

 
$
1,151

 
$
52,492

Agency commercial mortgage-backed securities 1
21,872

 
60

 
167

 
21,765

Agency residential collateralized mortgage obligations 1
17,645

 
25

 
124

 
17,546

Municipal bonds
53,152

 
305

 
469

 
52,988

Total securities
$
146,046

 
$
656

 
$
1,911

 
$
144,791

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


13
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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 March 31, 2019 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. During the quarter ended March 31, 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-08, Premium Amortization on Purchased Callable Debt, which required certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount was not impacted by this ASU. The adoption of this ASU did not have a significant impact on the Company’s financial statements and disclosures.
 
HTM
 
AFS
 
Amortized Cost
 
Fair Value
 
Fair Value
Due in one year or less
$
966

 
$
973

 
$
1,802

Due after one to five years
17,904

 
18,046

 
7,093

Due after five to ten years
27,168

 
27,166

 
11,360

Due after ten years
894

 
902

 
2,200

Agency residential mortgage-backed securities
50,791

 
50,685

 
141,182

Agency commercial mortgage-backed securities
21,740

 
21,902

 
8,348

Agency residential collateralized mortgage obligations
15,813

 
15,786

 
307,441

Total
$
135,276

 
$
135,460

 
$
479,426


Securities with a carrying value of $217,063 and $211,198 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At March 31, 2019 and December 31, 2018, 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.
Securities sales activity during the three months ended March 31, 2019 or 2018 is shown below. All securities sold were classified as available for sale, and gains and losses are recorded using the specific-identification method.
 
Three Months Ended March 31,
 
2019
 
2018
Proceeds
$
23,886

 
$
—

Gross gains
161

 
—

Gross losses
155

 
—

Tax expense of securities gains/losses
1

 
—





14
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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 March 31, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AFS
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2019
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
1,112

 
$
6

 
$
121,158

 
$
2,128

 
$
122,270

 
$
2,134

Agency commercial mortgage-backed securities 1
—

 
—

 
8,348

 
88

 
8,348

 
88

Agency residential collateralized mortgage obligations 1
5,456

 
6

 
165,800

 
2,643

 
171,256

 
2,649

Municipal bonds
988

 
7

 
8,734

 
47

 
9,722

 
54

Total temporarily impaired
$
7,556

 
$
19

 
$
304,040

 
$
4,906

 
$
311,596

 
$
4,925

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
4,770

 
$
27

 
$
123,413

 
$
4,056

 
$
128,183

 
$
4,083

Agency commercial mortgage-backed securities 1
—

 
—

 
8,921

 
143

 
8,921

 
143

Agency residential collateralized mortgage obligations 1
32,668

 
195

 
153,131

 
4,655

 
185,799

 
4,850

Municipal bonds
6,326

 
59

 
16,260

 
308

 
22,586

 
367

Total temporarily impaired
$
43,764

 
$
281

 
$
301,725

 
$
9,162

 
$
345,489

 
$
9,443



HTM
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2019
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
—

 
$
—

 
$
29,206

 
$
595

 
$
29,206

 
$
595

Agency commercial mortgage-backed securities 1
—

 
—

 
11,960

 
15

 
11,960

 
15

Agency residential collateralized mortgage obligations 1
—

 
—

 
7,088

 
76

 
7,088

 
76

Municipal bonds
—

 
—

 
15,581

 
150

 
15,581

 
150

Total temporarily impaired
$
—

 
$
—

 
$
63,835

 
$
836

 
$
63,835


$
836

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
5,002

 
$
15

 
$
30,180

 
$
1,136

 
$
35,182

 
$
1,151

Agency commercial mortgage-backed securities 1
6,465

 
41

 
6,964

 
126

 
13,429

 
167

Agency residential collateralized mortgage obligations 1
3,994

 
11

 
6,213

 
113

 
10,207

 
124

Municipal bonds
7,131

 
17

 
20,244

 
452

 
27,375

 
469

Total temporarily impaired
$
22,592

 
$
84

 
$
63,601

 
$
1,827

 
$
86,193

 
$
1,911

1 
Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of March 31, 2019, 243 securities had unrealized losses, 238 of which had been in an unrealized loss position for over 12 months at March 31, 2019. The Company does not believe these unrealized losses are other-than-temporary and expects full collection of the carrying amount of these securities. At March 31, 2019, the Company does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost. All principal and interest payments are being received on time and in full.


15
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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.
 
March 31,
2019
 
December 31,
2018
Loans held for sale, at fair value
$
11,380

 
$
23,193

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
3,122,726

 
$
3,026,754

Commercial and industrial
2,070,715

 
2,057,791

Construction and land
282,463

 
270,629

Consumer real estate
1,423,095

 
1,390,378

Other consumer
45,732

 
45,171

Gross loans held for investment, excluding Warehouse Purchase Program
6,944,731

 
6,790,723

Net of:
 
 
 
Deferred costs (fees) and discounts, net
10,818

 
10,397

Allowance for loan losses
(77,530
)
 
(67,428
)
Net loans held for investment, excluding Warehouse Purchase Program
6,878,019

 
6,733,692

Warehouse Purchase Program
1,096,160

 
960,404

Total loans held for investment
$
7,974,179

 
$
7,694,096



Activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018, segregated by portfolio segment and evaluation for impairment, is set forth below. The below activity does not include Warehouse Purchase Program loans, which are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. To date, the Company has not experienced a loss on its Warehouse Purchase Program loans and no allowance for loan losses has been allocated to them. At March 31, 2019 and 2018, the allowance for loan impairment related to purchased credit impaired (“PCI”) loans totaled $252 and $314, respectively.
For the three months ended March 31, 2019
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
20,045

 
$
36,398

 
$
3,910

 
$
5,843

 
$
1,232

 
$
67,428

Charge-offs
—

 
(92
)
 
—

 
(23
)
 
(244
)
 
(359
)
Recoveries
—

 
555

 
—

 
20

 
47

 
622

Provision expense (benefit)
1,480

 
7,860

 
(73
)
 
232

 
340

 
9,839

Ending balance
$
21,525

 
$
44,721

 
$
3,837

 
$
6,072

 
$
1,375

 
$
77,530

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
10

 
$
19,141

 
$
—

 
$
224

 
$
26

 
$
19,401

Collectively evaluated for impairment
21,515

 
25,580

 
3,837

 
5,848

 
1,349

 
58,129

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
6,623

 
49,259

 
—

 
2,660

 
5

 
58,547

Collectively evaluated for impairment
3,115,879

 
2,021,358

 
282,463

 
1,419,744

 
45,553

 
6,884,997

PCI loans
224

 
98

 
—

 
691

 
174

 
1,187

Ending balance
$
3,122,726

 
$
2,070,715

 
$
282,463

 
$
1,423,095

 
$
45,732

 
$
6,944,731


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

For the three months ended March 31, 2018
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,587

 
$
39,005

 
$
4,644

 
$
4,838

 
$
1,227

 
$
71,301

Charge-offs
(3
)
 
(12,236
)
 
—

 
—

 
(288
)
 
(12,527
)
Recoveries
—

 
22

 
—

 
11

 
66

 
99

Provision expense (benefit)
(46
)
 
15,973

 
(706
)
 
180

 
234

 
15,635

Ending balance
$
21,538

 
$
42,764

 
$
3,938

 
$
5,029

 
$
1,239

 
$
74,508

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
56

 
$
11,250

 
$
—

 
$
226

 
$
30

 
$
11,562

Collectively evaluated for impairment
21,482

 
31,514

 
3,938

 
4,803

 
1,209

 
62,946

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
3,748

 
40,453

 
—

 
2,911

 
23

 
47,135

Collectively evaluated for impairment
3,047,695

 
1,926,847

 
252,213

 
1,248,769

 
43,080

 
6,518,604

PCI loans
2,307

 
143

 
—

 
753

 
181

 
3,384

Ending balance
$
3,053,750

 
$
1,967,443

 
$
252,213

 
$
1,252,433

 
$
43,284

 
$
6,569,123

The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.
The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations, inclusive of estimated loss emergence periods. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which are not yet reflected in the historical loss ratios, and that could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and adversely rated loans within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy and capitalization rates and other pertinent economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower’s ability to repay and on individually analyzed loans found to be impaired. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, estimated discounted cash flows are used to determine the amount of impairment, if any. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does

17
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
Changes in the allowance for off-balance sheet credit losses on lending-related commitments and guarantees on credit card debt, included in “accrued expenses and other liabilities” on the consolidated balance sheets, are summarized in the following table. Please see Note 11 - Commitments and Contingent Liabilities for more information.
 
Three Months Ended March 31,
 
2019
 
2018
Beginning balance
$
729

 
$
929

Charge-offs on lending-related commitments
—

 
—

Provision (benefit) for credit losses on lending-related commitments
(39
)
 
28

Ending balance
$
690

 
$
957


Impaired loans at March 31, 2019 and December 31, 2018, were as follows1:
March 31, 2019
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
6,641

 
$
6,623

 
$
—

 
$
6,623

 
$
—

Commercial and industrial
 
49,779

 
1,569

 
47,690

 
49,259

 
19,141

Consumer real estate
 
3,155

 
2,656

 
4

 
2,660

 
4

Other consumer
 
20

 
—

 
5

 
5

 
4

Total
 
$
59,595

 
$
10,848

 
$
47,699

 
$
58,547

 
$
19,149

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
177

 
$
159

 
$
—

 
$
159

 
$
—

Commercial and industrial
 
17,124

 
1,844

 
14,864

 
16,708

 
4,109

Consumer real estate
 
2,865

 
2,370

 
5

 
2,375

 
4

Other consumer
 
35

 
—

 
3

 
3

 
3

Total
 
$
20,201

 
$
4,373

 
$
14,872

 
$
19,245

 
$
4,116

1 
No Warehouse Purchase Program loans were impaired at March 31, 2019 or December 31, 2018. Loans reported do not include PCI loans.
Income on impaired loans for the three months ended March 31, 2019 and 2018, was as follows1:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Commercial real estate
 
$
1,774

 
$
2

 
$
3,879

 
$
2

Commercial and industrial
 
24,552

 
—

 
63,294

 
—

Consumer real estate
 
2,515

 
10

 
2,952

 
8

Other consumer
 
4

 
—

 
29

 
1

Total
 
$
28,845

 
$
12

 
$
70,154

 
$
11

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

18
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
No loans past due over 90 days were still accruing interest at March 31, 2019. Loans past due over 90 days that were still accruing interest at December 31, 2018 totaled $58, which consisted entirely of PCI loans. At March 31, 2019, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at March 31, 2019 or December 31, 2018. Non-performing (nonaccrual) loans were as follows:
 
March 31, 2019
 
December 31, 2018
Commercial real estate
$
6,623

 
$
159

Commercial and industrial
49,261

 
16,710

Consumer real estate
5,123

 
5,506

Other consumer
21

 
46

Total
$
61,028

 
$
22,421


A loan that has been modified is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans.
The outstanding balances of TDRs are shown below:
 
March 31, 2019
 
December 31, 2018
Nonaccrual TDRs(1)
$
8,479

 
$
1,160

Performing TDRs (2)
857

 
926

Total
$
9,336

 
$
2,086

Outstanding commitments to lend additional funds to borrowers with TDR loans
—

 
—

1 
Nonaccrual TDR loans are included in the nonaccrual loan totals.
2 
Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans.

19
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

The following tables provide the recorded balances of loans modified as a TDR during the three months ended March 31, 2019 and 2018.
Three Months Ended March 31, 2019
 
Principal Deferrals
 
Commercial and industrial
 
$
7,401

 
Other consumer
 
3

 
Total
 
$
7,404

 
Three Months Ended March 31, 2018
 
 
Commercial and industrial
 
$
83

 
Total
 
$
83

 

No loans modified as a TDR during the three months ended March 31, 2019 or 2018, experienced a subsequent payment default in the preceding twelve months. A payment default is defined as a loan that was 90 days or more past due.
Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company would not be able to collect all contractual amounts due, were accounted for as PCI loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related outstanding balances at March 31, 2019 and December 31, 2018 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
 
March 31, 2019
 
December 31, 2018
Carrying amount 1
$
935

 
$
939

Outstanding balance
1,129

 
1,170

1 
The carrying amounts are reported net of allowance for loan losses of $252 and $250 as of March 31, 2019 and December 31, 2018.
Changes in the accretable yield for PCI loans for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Beginning balance
$
624

 
$
2,279

Reclassifications from nonaccretable
35

 
51

Disposals
—

 
(64
)
Accretion
(50
)
 
(99
)
Balance at end of period
$
609

 
$
2,167



20
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Below is an analysis of the age of recorded investment in loans that were past due at March 31, 2019 and December 31, 2018. No Warehouse Purchase Program loans were delinquent at March 31, 2019 or December 31, 2018 and therefore are not included in the following tables.
March 31, 2019
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
$
11,667

 
$
484

 
$
—

 
$
12,151

 
$
3,110,575

 
$
3,122,726

Commercial and industrial
10,344

 
86

 
37

 
10,467

 
2,060,248

 
2,070,715

Construction and land
558

 
—

 
—

 
558

 
281,905

 
282,463

Consumer real estate
25,784

 
724

 
802

 
27,310

 
1,395,785

 
1,423,095

Other consumer
295

 
138

 
—

 
433

 
45,299

 
45,732

Total
$
48,648

 
$
1,432

 
$
839

 
$
50,919

 
$
6,893,812

 
$
6,944,731

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
6

 
$
—

 
$
—

 
$
6

 
$
3,026,748

 
$
3,026,754

Commercial and industrial
289

 
—

 
217

 
506

 
2,057,285

 
2,057,791

Construction and land
557

 
—

 
—

 
557

 
270,072

 
270,629

Consumer real estate
18,885

 
4,241

 
1,632

 
24,758

 
1,365,620

 
1,390,378

Other consumer
271

 
15

 
29

 
315

 
44,856

 
45,171

Total
$
20,008

 
$
4,256

 
$
1,878

 
$
26,142

 
$
6,764,581

 
$
6,790,723

1 
Includes acquired PCI loans with a total carrying value of $1,130 and $1,120 at March 31, 2019 and December 31, 2018, 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 March 31, 2019 and December 31, 2018, was as follows:
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
March 31, 2019
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
3,094,100

 
$
1,917,294

 
$
282,463

 
$
1,414,122

Special Mention
 
20,561

 
57,065

 
—

 
2,714

Substandard
 
8,065

 
96,354

 
—

 
5,927

Doubtful
 
—

 
2

 
—

 
332

Total
 
$
3,122,726

 
$
2,070,715

 
$
282,463

 
$
1,423,095

December 31, 2018
 
 
 
 
 
 
 
 
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
3,007,810

 
$
1,935,786

 
$
270,629

 
$
1,382,388

Special Mention
 
17,322

 
56,016

 
—

 
1,218

Substandard
 
1,622

 
65,987

 
—

 
6,429

Doubtful
 
—

 
2

 
—

 
343

Total
 
$
3,026,754

 
$
2,057,791

 
$
270,629

 
$
1,390,378

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 March 31, 2019 and December 31, 2018.
Other Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
 
March 31, 2019
 
December 31, 2018
Performing
$
45,711

 
$
45,125

Non-performing
21

 
46

Total
$
45,732

 
$
45,171




22
Table of Contents
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
 
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
 
Agency residential mortgage-backed securities
 
$
141,182

 
$
149,871

Agency commercial mortgage-backed securities
 
8,348

 
8,920

Agency residential collateralized mortgage obligations
 
307,441

 
280,639

US government and agency securities
 
—

 
1,543

Municipal bonds
 
22,455

 
30,773

Total securities available for sale
 
$
479,426

 
$
471,746

 
 
 
 
 
Loans held for sale 1
 
$
11,380

 
$
23,193

Derivative financial instruments:
 
 
 
 
Interest rate lock commitments
 
699

 
459

Forward mortgage-backed securities trades
 
5

 
—

Loan customer counterparty
 
1,704

 
578

Financial institution counterparty
 
536

 
1,118

Liabilities:
 
 
 
 
Derivative financial instruments:
 
 
 
 
Interest rate lock commitments
 
—

 
—

Forward mortgage-backed securities trades
 
231

 
163

Loan customer counterparty
 
536

 
1,118

Financial institution counterparty
 
1,704

 
578

1 
At March 31, 2019 and December 31, 2018, loans held for sale had an aggregate outstanding principal balance of $10,975 and $22,402, respectively. There were no mortgage loans held for sale that were 90 days or greater past due or on non-accrual at March 31, 2019 or December 31, 2018.
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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Table of Contents
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. The fair value of IRLCs is subject to change primarily due to changes in interest rates. 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 March 31, 2019 or December 31, 2018.
 
 
Fair Value Measurements Using Level 3
 
 
March 31, 2019
 
December 31, 2018
Assets:
 
 
 
 
Impaired loans
 
$
28,550

 
$
10,756

Foreclosed assets:
 
 
 
 
Consumer real estate
 
176

 
720

Other
 
606

 
613


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 March 31, 2019, the Company had $852 in residential mortgage loans in the process of 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

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

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 March 31, 2019 and at December 31, 2018, were as follows:
 
 
 
 
Fair Value Measurement Using
March 31, 2019
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
274,523

 
$
274,523

 
$
—

 
$
—

Securities held to maturity
 
135,276

 
—

 
135,460

 
—

Loans held for investment, net
 
6,878,019

 
—

 
—

 
6,807,813

Loans held for investment - Warehouse Purchase Program
 
1,096,160

 
—

 
—

 
1,096,160

FHLB and other restricted securities, at cost
 
56,044

 
—

 
56,044

 
—

Accrued interest receivable
 
31,507

 
31,507

 
—

 
—

Financial liabilities
 
 
 
 
 
 
 
 
Deposits
 
$
7,077,425

 
$
—

 
$
—

 
$
7,074,649

FHLB advances
 
820,084

 
—

 
—

 
820,161

Repurchase agreements
 
37,277

 
—

 
—

 
33,008

Subordinated debt
 
135,135

 
—

 
—

 
137,360

Accrued interest payable
 
6,235

 
6,235

 
—

 
—

December 31, 2018
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
269,193

 
$
269,193

 
$
—

 
$
—

Securities held to maturity
 
146,046

 
—

 
144,791

 
—

Loans held for investment, net
 
6,733,692

 
—

 
—

 
6,664,703

Loans held for investment - Warehouse Purchase Program
 
960,404

 
—

 
—

 
960,404

FHLB and other restricted securities, at cost
 
56,226

 
—

 
56,226

 
—

Accrued interest receivable
 
27,104

 
27,104

 
—

 
—

Financial liabilities
 
 
 
 
 
 
 
 
Deposits 1
 
$
6,841,715

 
$
—

 
$
—

 
$
6,834,351

FHLB advances
 
825,409

 
—

 
—

 
825,496

Repurchase agreement
 
50,340

 
—

 
—

 
44,214

Subordinated debt
 
135,012

 
—

 
—

 
138,524

Accrued interest payable
 
4,428

 
4,428

 
—

 
—


1 The fair value of non-maturity deposits at December 31, 2018 was adjusted to report these deposits at their carrying value.


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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 March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
 
Outstanding Notional Balance
 
Asset Derivative Fair Value
 
Liability Derivative Fair Value
 
Outstanding Notional Balance
 
Asset Derivative Fair Value
 
Liability Derivative Fair Value
IRLCs
$
19,674

 
$
699

 
$
—

 
$
12,287

 
$
459

 
$
—

Forward mortgage-backed securities trades
28,633

 
5

 
231

 
24,133

 
—

 
163

Commercial loan interest rate swaps and caps:
 
 
 
 
 
 
 
 
 
Loan customer counterparty
$
112,004

 
$
1,704

 
$
536

 
$
64,130

 
$
578

 
$
1,118

Financial institution counterparty
112,004

 
536

 
1,704

 
64,130

 
1,118

 
578

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 March 31, 2019 and December 31, 2018 are presented in the following table.

 
 
Weighted-Average Interest Rate
March 31, 2019
 
December 31, 2018
Received
 
Paid
 
Received
 
Paid
Loan customer counterparty
 
4.09
%
 
4.34
%
 
4.21
%
 
4.29
%


Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $1,704 at March 31, 2019 and $578 at December 31, 2018. 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 $546 at March 31, 2019.  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 $3,880 at March 31, 2019 and $2,480 at December 31, 2018, is in excess of our credit exposure.

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Table of Contents
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 months ended March 31, 2019 and 2018 was as follows:

Derivatives not designated as hedging instruments
Three Months Ended March 31,
2019
 
2018
IRLCs
$
240

 
$
87

Forward mortgage-backed securities trades
(337
)
 
399




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Table of Contents
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, which is reported in non-interest expense as salaries and employee benefits, is presented below.
 
Three Months Ended March 31,
 
2019
 
2018
Restricted stock
$
1,879

 
$
1,064

Stock options
671

 
991

Income tax benefit
536

 
432



A summary of activity in the Company’s active share-based compensation plans (“Plans”) for the three months ended March 31, 2019 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
191,803

 
$
38.90

 
78,958

 
$
32.09

 
1,832,887

 
$
26.97

Granted
43,900

 
42.39

 
28,600

3 
37.39

 
—

 
—

Additional performance-based shares issued at vesting
—

 
—

 
20,100

4 
35.13

 
—

 
—

Vested/exercised
(17,949
)
 
42.40

 
(60,300
)
 
35.13

 
(95,619
)
 
26.03

Forfeited/expired
(1,010
)
 
43.89

 
—

 
—

 
(30,917
)
 
31.84

Ending balance
216,744

 
$
39.30

 
67,358

 
$
37.39

 
1,706,351

 
$
26.93


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.
2 
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 28,600 performance-based shares granted are represented 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.
4 
Performance-based restricted stock awards that achieved the maximum performance goals and vested at 150% based on Company return on average assets and return on average equity relative to a specified peer group of financial institutions over a three-year performance period that commenced in January 2016 and ended in December 2018. The 20,100 shares represents the additional shares issued to bring the vesting share amount from target (100%) to maximum (150%.)
The total unrecognized compensation expense as of March 31, 2019, related to the Plans is presented below.
 
Unrecognized Compensation Expense
 
Weighted-Average Period of Expense
Non-vested restricted shares
$
7,564

 
1.8
Non-vested stock options
$
2,624

 
1.0



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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 - Leases

The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the alternative transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the Company to carry forward the historical lease classifications. Additionally, the Company elected the hindsight practical expedient to determine the lease term for existing leases. In the application of hindsight, the Company evaluated the performance of the leased branches and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.

The Company leases certain branch locations, office space and equipment. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term. Two leases include rental payments that are adjusted periodically for inflation.

Adoption of this standard resulted in the Company recognizing a right of use asset of $36,140 and a corresponding lease liability of $39,843 on January 1, 2019.

Supplemental lease information at or for the three months ended March 31, 2019 is as follows:
Balance sheet:
 
 
Operating lease asset classified as premises and equipment
 
$
35,480

Operating lease liability classified as other liabilities
 
39,170

Income statement:
 
 
Operating lease cost classified as occupancy and equipment expense
 
$
1,488

Weighted average lease term, in years
 
9.52

Weighted average discount rate1
 
4.87
%
Operating cash flows
 
$
1,500

1. 
The discount rate was developed by using the US Financials A+, A, A- BVAL curve (base curve), which represents the unsecured borrowing cost of banks with similar credit ratings as the Company.  A liquidity premium was derived from recent market transactions and applied to the base curve to determine final discount rates.

A maturity analysis of the Company’s lease liabilities at March 31, 2019 was as follows:
 
Balance
April 1, 2019 to March 31, 2020
$
6,113

April 1, 2020 to March 31, 2021
5,752

April 1, 2021 to March 31, 2022
5,561

April 1, 2022 to March 31, 2023
4,989

April 1, 2023 to March 31, 2024
4,832

Thereafter
22,197

Total lease payments
49,444

Less: Interest
(10,274
)
Present value of lease liabilities
$
39,170





29
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 10 - Income Taxes
A summary of the net deferred tax liabilities as of March 31, 2019 and December 31, 2018, is presented below:
 
March 31, 2019
 
December 31, 2018
Net deferred tax liabilities
$
6,278

 
$
9,769

Estimated annual effective tax rate
21
%
 
 


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%. During the three months ended March 31, 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.


30
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 11 - 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 March 31, 2019 and December 31, 2018, 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.
 
March 31, 2019
 
December 31, 2018
Unused commitments to extend credit
$
1,797,838

 
$
1,850,351

Unused capacity on Warehouse Purchase Program loans
741,340

 
967,096

Standby letters of credit
80,906

 
46,383

Total unused commitments/capacity
$
2,620,084

 
$
2,863,830


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 March 31, 2019 and December 31, 2018, these credit card guarantees totaled $2,073 and $1,973, 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 March 31, 2019 and December 31, 2018, 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 $690 and $729, respectively.
In addition to the commitments above, the Company had overdraft protection available in the amounts of $83,947 and $84,504 at March 31, 2019 and December 31, 2018, respectively.
The Company, at March 31, 2019 and December 31, 2018, had FHLB letters of credit of $941,860 and $932,200, respectively, pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At March 31, 2019 and December 31, 2018, the Company had $830 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.


31
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 12 - Recent Accounting Developments    
Effect of Newly Issued But Not Yet Effective Accounting Standards
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 is currently running its financial models to calculate lifetime expected credit losses in parallel with its current incurred loss methodology and is continuing to document the allowance for loan loss policy and procedures under the revised accounting method, validate and refine key model assumptions, and analyze new disclosure requirements.




32
Table of Contents
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

Note 13 — Subsequent Events
The Company evaluated events from the date of the consolidated financial statements on March 31, 2019 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated April 23, 2019. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.

33

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 LegacyTexas Financial Group, Inc. (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, 2018 (“2018 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
The Company 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.

34

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 their 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 Summary

•
Net income for the three months ended March 31, 2019 was $29.1 million, an increase of $3.3 million, or 12.9%, from net income of $25.8 million for the three months ended March 31, 2018. The increase in net income was driven by higher interest income on loans and a lower provision for credit losses, which was partially offset by higher interest and non-interest expense, as well as lower non-interest income.

•
The net interest margin for the three months ended March 31, 2019 was 3.89%, a four basis point increase from the three months ended March 31, 2018.

•
Assets totaled $9.35 billion at March 31, 2019, which generated basic earnings per share for the three months ended March 31, 2019 of $0.61.
 
•
Gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $154.0 million from December 31, 2018, while Warehouse Purchase Program loans, which totaled $1.10 billion at March 31, 2019, increased by $135.8 million from December 31, 2018.

•
Total deposits at March 31, 2019 grew $235.7 million from December 31, 2018, which included increases in interest-bearing demand, time, and savings and money market deposits, while non-interest-bearing demand deposits decreased by $21.1 million for the same period.

•
Non-performing loans increased by $38.6 million from December 31, 2018, totaling $61.0 million at March 31, 2019.
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 2018 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

35

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 March 31, 2019.
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.

36

Comparison of Financial Condition at March 31, 2019 and December 31, 2018
General. Total assets increased by $294.9 million to $9.35 billion at March 31, 2019 from $9.05 billion at December 31, 2018, primarily due to a $154.0 million, or 2.3%, increase in gross loans held for investment, excluding Warehouse Purchase Program loan, as well as a $135.8 million, or 14.1%, increase in Warehouse Purchase Program loans.
Loans. Gross loans held for investment increased by $289.8 million, or 3.7%, to $8.04 billion at March 31, 2019 from $7.75 billion at December 31, 2018, while loans held for sale decreased by $11.8 million, or 50.9%, for the same period.
    
 
March 31,
2019
 
December 31,
2018
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Commercial real estate
$
3,122,726

 
$
3,026,754

 
$
95,972

 
3.2
 %
Commercial and industrial
2,070,715

 
2,057,791

 
12,924

 
0.6

Construction and land
282,463

 
270,629

 
11,834

 
4.4

Consumer real estate
1,423,095

 
1,390,378

 
32,717

 
2.4

Other consumer
45,732

 
45,171

 
561

 
1.2

Gross loans held for investment, excluding Warehouse Purchase Program loans
6,944,731

 
6,790,723

 
154,008

 
2.3

Warehouse Purchase Program
1,096,160

 
960,404

 
135,756

 
14.1

Gross loans held for investment
8,040,891

 
7,751,127

 
289,764

 
3.7

Loans held for sale
11,380

 
23,193

 
(11,813
)
 
(50.9
)
Gross loans
$
8,052,271

 
$
7,774,320

 
$
277,951

 
3.6
 %

Gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $154.0 million, or 2.3%, from December 31, 2018, which included growth in all loan portfolios. Commercial real estate and consumer real estate loans at March 31, 2019 increased by $96.0 million and $32.7 million, respectively, from December 31, 2018, while commercial and industrial and construction and land loans increased by $12.9 million and $11.8 million, respectively, for the same period.
Reserve-based energy loans, which are reported as commercial and industrial loans, totaled $499.8 million at March 31, 2019, down $20.6 million from $520.4 million at December 31, 2018. Substantially all of the reserve-based energy loans are secured by deeds of trust on properties containing proven oil and natural gas reserves.
  
At March 31, 2019, our reserve-based energy portfolio (reported above at $499.8 million) was secured by collateral that consisted of 59% crude oil reserves and 41% 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 March 31, 2019, “Midstream and Other” loans had a total outstanding balance of $22.1 million, down $16.0 million from $38.1 million at December 31, 2018.

Warehouse Purchase Program loans increased by $135.8 million, or 14.1%, to $1.10 billion at March 31, 2019 from $960.4 million at December 31, 2018. 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 first quarter of 2019 consisted of 44% conforming, 43% government loans and 13% of other loan types, including Jumbo loans.

37

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 0.88% at March 31, 2019 compared to 0.33% at December 31, 2018. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was 0.76% at March 31, 2019 compared to 0.29% at December 31, 2018. Non-performing loans increased by $38.6 million to $61.0 million at March 31, 2019 from $22.4 million at December 31, 2018. This increase in non-performing loans was primarily due to a $6.1 million increase in non-performing energy loans and the placement of the Company’s only remaining corporate healthcare finance relationship totaling $19.3 million on non-accrual status during the first quarter of 2019. The increase in non-performing loans from December 31, 2018 also included a $7.4 million personal loan to the owner of an energy company that was used to recapitalize the company. This loan is collateralized by the borrower’s stock in the energy company, as well as other personal assets, and was reported at March 31, 2019 as a non-performing loan in the commercial and industrial, excluding energy category. 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 $77.5 million at March 31, 2019 compared to $67.4 million at December 31, 2018, or 0.96% of total loans held for investment (including Warehouse Purchase Program loans) at March 31, 2019 compared to 0.87% at December 31, 2018. Our allowance for loan losses to non-performing loans was 127.04% at March 31, 2019 compared to 300.74% at December 31, 2018.
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 10.0% of our total equity and 1.2% of our total assets at March 31, 2019 compared to 6.9% of our

38

total equity and 0.8% of our total assets at December 31, 2018. The aggregate amount of classified assets at the dates indicated was as follows:
 
March 31,
2019
 
December 31,
2018
 
(Dollars in thousands)
Doubtful
$
335

 
$
345

Substandard
110,546

 
74,263

Total classified loans
110,881

 
74,608

Foreclosed assets
782

 
1,333

Total classified assets
$
111,663

 
$
75,941

Substandard loans at March 31, 2019 increased by $36.3 million from December 31, 2018, with substandard non-performing energy loans totaling $21.9 million at March 31, 2019, up $6.1 million from December 31, 2018. 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. Additionally, substandard loans at March 31, 2019 included the previously mentioned $19.3 million corporate healthcare finance loan that was placed on nonaccrual status during the first quarter of 2019, which also contributed to the increase from December 31, 2018.
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 $48.6 million in loans that were classified as “substandard,” but were still accruing interest and were not considered impaired at March 31, 2019 (excluding PCI loans), compared to $50.9 million at December 31, 2018. Other loans of concern have been considered in management’s analysis of potential loan losses.
Securities. Our securities portfolio decreased by $3.1 million, or 0.5%, to $614.7 million at March 31, 2019 from $617.8 million at December 31, 2018. During the three months ended March 31, 2019, purchases totaling $347.5 million offset paydowns and maturities of securities totaling $331.1 million.
Other Assets. Premises and equipment increased by $34.6 million, or 47.4%, to $107.7 million at March 31, 2019 from $73.1 million at December 31, 2018, primarily due to the adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, which resulted in the Company recognizing a right of use asset of $36.1 million.
Deposits. Total deposits increased by $235.7 million, or 3.4%, to $7.08 billion at March 31, 2019 from $6.84 billion at December 31, 2018, due to growth in time, interest-bearing demand and savings and money market deposits.
 
March 31,
2019
 
December 31, 2018
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Non-interest-bearing demand
$
1,752,694

 
$
1,773,762

 
$
(21,068
)
 
(1.2
)%
Interest-bearing demand
884,494

 
826,755

 
57,739

 
7.0

Savings and money market
2,492,226

 
2,455,787

 
36,439

 
1.5

Time
1,948,011

 
1,785,411

 
162,600

 
9.1

Total deposits
$
7,077,425

 
$
6,841,715

 
$
235,710

 
3.4
 %

Time and interest-bearing demand deposits increased by $162.6 million and $57.7 million, respectively, compared to December 31, 2018, while savings and money market deposits increased by $36.4 million for the same period. These increases were partially offset by a $21.1 million decline in non-interest-bearing demand deposits compared to December 31, 2018.
Borrowings. FHLB advances decreased by $5.3 million, or 0.6%, to $820.1 million at March 31, 2019 from $825.4 million at December 31, 2018, while overnight repurchase agreements decreased by $13.1 million, or 25.9%, to $37.3 million at

39

March 31, 2019 from $50.3 million at December 31, 2018. At March 31, 2019, the Company was eligible to borrow an additional $2.14 billion from the FHLB.
The table below shows FHLB advances by maturity and weighted average rate at March 31, 2019:
 
Balance
 
Weighted Average Rate
 
(Dollars in thousands)
Less than 90 days
$
765,319

 
2.55
%
90 days to less than one year
51,907

 
2.61

One to three years
2,065

 
5.50

After three to five years
372

 
5.52

After five years
421

 
5.44

Total
$
820,084

 
2.57
%
Additionally, we have 20 available federal funds lines of credit with financial institutions and other sources totaling $554.0 million and were eligible to borrow $74.9 million from the Federal Reserve Bank discount window.
At March 31, 2019, subordinated debt totaled $135.1 million, which included $123.0 million of fixed-to-floating rate subordinated notes (reported net of $2.0 million in debt issuance costs.) The $135.1 million of subordinated debt also included $12.2 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 $50.8 million, or 48.7%, to $155.1 million at March 31, 2019 from $104.3 million at December 31, 2018. This increase was primarily due to the adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, which created an operating lease liability totaling $39.2 million at March 31, 2019. Additionally, other liabilities were higher at March 31, 2019 due to timing of escrow payments.
Shareholders’ Equity. Total shareholders’ equity increased by $26.7 million, or 2.4%, to $1.12 billion at March 31, 2019 from $1.09 billion at December 31, 2018.
 
March 31,
2019
 
December 31, 2018
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Common stock
$
487

 
$
485

 
$
2

 
0.4
 %
Additional paid-in capital
625,405

 
619,983

 
5,422

 
0.9

Retained earnings
508,887

 
491,948

 
16,939

 
3.4

Accumulated other comprehensive loss, net
(2,433
)
 
(6,658
)
 
4,225

 
(63.5
)
Unearned ESOP shares
(11,259
)
 
(11,391
)
 
132

 
(1.2
)
Total shareholders’ equity
$
1,121,087

 
$
1,094,367

 
$
26,720

 
2.4
 %
The increase in shareholders’ equity at March 31, 2019, compared to December 31, 2018, was primarily due to net income of $29.1 million recognized during the three months ended March 31, 2019, which was partially offset by the payment of quarterly dividends totaling $0.25 per common share, or $12.1 million, during the three months ended March 31, 2019.

40

Comparison of Results of Operations for the Three Months Ended March 31, 2019 and 2018
General. Net income for the three months ended March 31, 2019 was $29.1 million, an increase of $3.3 million, or 12.9%, from net income of $25.8 million for the three months ended March 31, 2018. The increase in net income was driven by a $9.7 million increase in interest income on loans and a $5.9 million decrease in the provision for credit losses, which was partially offset by a $7.9 million increase in interest expense, a $3.0 million decrease in non-interest income and a $428,000 increase in non-interest expense. Basic earnings per share for the three months ended March 31, 2019 was $0.61, a $0.06 increase from $0.55 for the three months ended March 31, 2018. Diluted earnings per share for the three months ended March 31, 2019 was $0.61, a $0.07 increase from $0.54 for the three months ended March 31, 2018.
Interest Income. Interest income increased by $10.4 million, or 10.9%, to $106.1 million for the three months ended March 31, 2019 from $95.7 million for the three months ended March 31, 2018.
 
Three Months Ended March 31,
 
Dollar Change
 
Percent Change
 
2019
 
2018
 
 
 
(Dollars in thousands)
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
100,301

 
$
90,631

 
$
9,670

 
10.7
%
Securities
3,945

 
3,586

 
359

 
10.0

Interest-bearing deposits in other financial institutions
1,277

 
969

 
308

 
31.8

FHLB and Federal Reserve Bank stock and other
581

 
480

 
101

 
21.0

 
$
106,104

 
$
95,666

 
$
10,438

 
10.9
%
The $10.4 million increase in interest income for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a $9.7 million increase in interest income on loans, which was driven by higher yields earned on all loan portfolios, as well as increased volume in all loan portfolios with the exception of Warehouse Purchase Program loans and loans held for sale. The average balance of commercial and industrial loans increased by $183.5 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 71 basis points for the same period, resulting in a $6.0 million increase in interest income. The average yield earned on the commercial and industrial portfolio for the quarter ended March 31, 2019 was positively impacted by three increases in the Fed Funds rate totaling 75 basis points since March 31, 2018. The average balance of consumer real estate loans increased by $176.7 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 25 basis points, which led to a $2.9 million increase in interest income. A $55.1 million increase in the average balance of commercial real estate loans compared to the first quarter of 2018, as well as a nine basis point increase in the average yield, resulted in a $1.4 million increase in interest income. The average balance of Warehouse Purchase Program loans decreased by $241.3 million from the first quarter of 2018, while the average yield earned on this portfolio increased by 68 basis points, resulting in a $1.3 million decrease in interest income compared to the first quarter of 2018.
 
Interest income on loans for the first quarter of 2019 included $255,000 in accretion of purchase accounting fair value adjustments on acquired loans, which primarily consisted of $73,000 on acquired commercial real estate loans, $46,000 on acquired commercial and industrial loans and $135,000 on acquired consumer loans.
Interest Expense. Interest expense increased by $7.9 million, or 46.2%, to $24.9 million for the three months ended March 31, 2019 from $17.1 million for the three months ended March 31, 2018.

 
Three Months Ended March 31,
 
Dollar Change
 
Percent Change
 
2019
 
2018
 
 
 
(Dollars in thousands)
Interest expense
 
 
 
 
 
 
 
Deposits
$
18,215

 
$
12,032

 
$
6,183

 
51.4
 %
FHLB advances
4,456

 
2,680

 
1,776

 
66.3

Repurchase agreements and other borrowings
2,269

 
2,341

 
(72
)
 
(3.1
)
 
$
24,940

 
$
17,053

 
$
7,887

 
46.2
 %
The increase in interest expense for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to higher average savings, money market and time deposit and borrowing rates, as well as a $343.5 million

41

increase in the average balance of time deposits. A 38 basis point increase in the average rate paid on savings and money market deposits compared to the first quarter of 2018 offset a $257.4 million decrease in the average balance of these deposits. A 77 basis point increase in the average rate paid on borrowings compared to the first quarter of 2018, as well as a $4.6 million increase in the average balance, resulted in a $1.7 million year-over-year increase in interest expense on borrowed funds.
Net Interest Income. Net interest income increased by $2.6 million, or 3.2%, to $81.2 million for the three months ended March 31, 2019 from $78.6 million for the three months ended March 31, 2018. The net interest margin for the first quarter of 2019 was 3.89%, a four basis point increase from the first quarter of 2018. The average yield on earning assets for the first quarter of 2019 was 5.09%, a 40 basis point increase from the first quarter of 2018. The average cost of interest-bearing liabilities for the first quarter of 2019 was 1.70%, up 55 basis points from the first quarter of 2018.
Provision for Credit Losses. The Company recorded a provision for credit losses of $9.8 million for the quarter ended March 31, 2019, down $5.9 million from $15.7 million for the quarter ended March 31, 2018. The decrease in provision expense from the three months ended March 31, 2018 was primarily due to decreased net charge-offs during the quarter ended March 31, 2019. Net recoveries totaled $263,000 for the three months ended March 31, 2019, compared to net charge-offs totaling $12.4 million for the three months ended March 31, 2018, due to energy-related charge-offs recorded in the 2018 period. For more information about the Company’s allowance for loan losses, please see “Management’s Discussion and Analysis - Comparison of Financial Condition at March 31, 2019 and December 31, 2018 - Allowance for Loan Losses” contained in Item 2 of this report.
Non-interest Income. Non-interest income decreased by $3.0 million, or 23.3%, to $9.9 million for the three months ended March 31, 2019 from $12.9 million for the three months ended March 31, 2018.
 
Three Months Ended March 31,
 
Dollar Change
 
Percent Change
 
2019
 
2018
 
 
 
(Dollars in thousands)
Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
$
7,255

 
$
7,927

 
$
(672
)
 
(8.5
)%
Net gain on sale of mortgage loans held for sale
1,525

 
1,809

 
(284
)
 
(15.7
)
Bank-owned life insurance income
482

 
447

 
35

 
7.8

Net gain (loss) on securities transactions
6

 
(128
)
 
134

 
N/M1

Gain (loss) on sale and disposition of assets
(14
)
 
2,213

 
(2,227
)
 
N/M1

Other
640

 
630

 
10

 
1.6

 
$
9,894

 
$
12,898

 
$
(3,004
)
 
(23.3
)%
1N/M - not meaningful
The $3.0 million decrease in non-interest income from the first quarter of 2018 was primarily due to a $2.2 million decrease in gain (loss) on sale and disposition of assets, primarily due to a $2.3 million insurance settlement received in the first quarter of 2018 related to a misappropriation of approximately $2.5 million in vault cash from one of the former LegacyTexas Bank branches it acquired in 2015. Service charges and other fees decreased by $672,000 from the first quarter of 2018, which was driven by lower commercial loan fee income, as well as decreased title premium income and Warehouse Purchase Program income. Net gains on the sale of mortgage loans held for sale during the first quarter of 2019 decreased by $284,000 compared to the same period in 2018, which included gains recognized on $49.1 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 2018 period, compared to $32.6 million for the 2019 period.

42

Non-interest Expense. Non-interest expense increased by $428,000, or 1.0%, to $44.3 million for the three months ended March 31, 2019, from $43.9 million for the three months ended March 31, 2018.
 
Three Months Ended March 31,
 
Dollar Change
 
Percent Change
 
2019
 
2018
 
 
 
(Dollars in thousands)
Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
26,871

 
$
27,076

 
$
(205
)
 
(0.8
)%
Advertising
903

 
888

 
15

 
1.7

Occupancy and equipment
3,899

 
3,860

 
39

 
1.0

Outside professional services
1,285

 
1,250

 
35

 
2.8

Regulatory assessments
618

 
1,154

 
(536
)
 
(46.4
)
Data processing
5,933

 
4,703

 
1,230

 
26.2

Office operations
2,335

 
2,300

 
35

 
1.5

Other
2,463

 
2,648

 
(185
)
 
(7.0
)
 
$
44,307

 
$
43,879

 
$
428

 
1.0
 %

The $428,000 increase in non-interest expense from the first quarter of 2018 was primarily due to a $1.2 million increase in data processing expense due to system upgrades, technology refreshments and outsourcing certain segments of its data processing. The year-over-year increase in data processing expense was partially offset by a $536,000 decline in regulatory assessments expense from the first quarter of 2018, due to a notice of preliminary assessment credit received from the FDIC in the first quarter of 2019, which may reduce future FDIC assessment payments, as well as a lower assessment rate in the 2019 period. Additionally, salaries and employee benefits expense decreased by $205,000 from the first quarter of 2018, as the 2018 period included a $1,000 bonus paid to all full-time employees whose salary was under $100,000 (awarded in connection with the enactment of the Tax Cuts and Jobs Act), which resulted in $679,000 of additional salary expense recorded in the first quarter of 2018. This year-over-year decrease in salaries and employee benefits expense was partially offset by higher salary costs attributable to merit increases granted in the first quarter of 2019, as well as higher share-based compensation expense in the 2019 period related to fluctuations in the Company’s share price.
Income Tax Expense. For the three months ended March 31, 2019, we recognized income tax expense of $7.9 million on our pre-tax income, which was an effective tax rate of 21.3%, compared to income tax expense of $6.2 million for the three months ended March 31, 2018, which was an effective tax rate of 19.4%. The increase in the effective tax rate in the 2019 period primarily resulted from permanent differences related to share-based compensation cost.


43

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 March 31,
 
(Dollars in thousands)
2019
 
2018
Interest-earning assets:
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
Commercial real estate
$
3,048,087

 
$
38,920

 
5.18
%
 
$
2,993,024

 
$
37,537

 
5.09
%
 
Warehouse Purchase Program
724,070

 
8,771

 
4.91

 
965,320

 
10,071

 
4.23

 
Commercial and industrial
2,088,056

 
30,791

 
5.98

 
1,904,515

 
24,753

 
5.27

 
Construction and land
276,642

 
4,116

 
6.03

 
270,899

 
3,456

 
5.17

 
Consumer real estate
1,404,292

 
16,876

 
4.81

 
1,227,556

 
13,980

 
4.56

 
Other consumer
45,339

 
657

 
5.88

 
44,891

 
622

 
5.62

 
Loans held for sale
15,347

 
170

 
4.43

 
20,988

 
212

 
4.04

 
Less: deferred fees and allowance for loan loss
(57,955
)
 
—

 
—

 
(62,666
)
 
—

 
—

 
Loans receivable 1
7,543,878

 
100,301

 
5.38

 
7,364,527

 
90,631

 
4.98

 
Agency mortgage-backed securities
229,227

 
1,400

 
2.44

 
274,471

 
1,502

 
2.19

 
Agency collateralized mortgage obligations
303,281

 
2,175

 
2.87

 
221,157

 
1,392

 
2.52

 
Investment securities
81,946

 
370

 
1.80

 
96,423

 
692

 
2.87

 
FHLB and FRB stock and other restricted securities
56,145

 
581

 
4.14

 
56,483

 
480

 
3.40

 
Interest-earning deposit accounts
218,608

 
1,277

 
2.37

 
239,936

 
969

 
1.64

Total interest-earning assets
8,433,085

 
106,104

 
5.09

 
8,252,997

 
95,666

 
4.69

Non-interest-earning assets
457,974

 
 
 
 
 
429,464

 
 
 
 
Total assets
$
8,891,059

 
 
 
 
 
$
8,682,461

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
800,557

 
1,504

 
0.76

 
$
970,998

 
1,933

 
0.81

 
Savings and money market
2,487,833

 
6,928

 
1.13

 
2,745,192

 
5,044

 
0.75

 
Time
1,776,829

 
9,783

 
2.23

 
1,433,307

 
5,055

 
1.43

 
Borrowings
882,061

 
6,725

 
3.09

 
877,502

 
5,021

 
2.32

Total interest-bearing liabilities
5,947,280

 
24,940

 
1.70

 
6,026,999

 
17,053

 
1.15

Non-interest-bearing demand
1,688,937

 
 
 
 
 
1,576,792

 
 
 
 
Non-interest-bearing liabilities
147,123

 
 
 
 
 
105,483

 
 
 
 
Total liabilities
7,783,340

 
 
 
 
 
7,709,274

 
 
 
 
Total shareholders’ equity
1,107,719

 
 
 
 
 
973,187

 
 
 
 
Total liabilities and shareholders’ equity
$
8,891,059

 
 
 
 
 
$
8,682,461

 
 
 
 
Net interest income and margin
 
 
$
81,164

 
3.89
%
 
 
 
$
78,613

 
3.85
%
Net interest income and margin (tax-equivalent basis) 2
 
 
$
81,236

 
3.91
%
 
 
 
$
78,755

 
3.86
%
Net interest rate spread
 
 
 
 
3.39
%
 
 
 
 
 
3.54
%
Net earning assets
$
2,485,805

 
 
 
 
 
$
2,225,998

 
 
 
 
Average interest-earning assets to average interest-bearing liabilities
141.80
%
 
 
 
 
 
136.93
%
 
 
 
 
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 2019 and 2018. Tax-exempt investments and loans had an average balance of $77.7 million and $93.7 million for the three months ended March 31, 2019 and 2018, respectively.



44

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 March 31,
 
2019 versus 2018
 
Increase (Decrease) Due to
 
Total Increase (Decrease)
 
Volume
 
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Commercial real estate
$
697

 
$
686

 
$
1,383

Warehouse Purchase Program
(2,763
)
 
1,463

 
(1,300
)
Commercial and industrial
2,519

 
3,519

 
6,038

Construction and land
75

 
585

 
660

Consumer real estate
2,093

 
803

 
2,896

Other consumer
6

 
29

 
35

Loans held for sale
(61
)
 
19

 
(42
)
Loans receivable
2,566

 
7,104

 
9,670

Agency mortgage-backed securities
(264
)
 
162

 
(102
)
Agency collateralized mortgage obligations
569

 
214

 
783

Investment securities
(93
)
 
(229
)
 
(322
)
FHLB and FRB stock and other restricted securities
(3
)
 
104

 
101

Interest-earning deposit accounts
(93
)
 
401

 
308

Total interest-earning assets
2,682

 
7,756

 
10,438

Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
(325
)
 
(104
)
 
(429
)
Savings and money market
(510
)
 
2,394

 
1,884

Time
1,415

 
3,313

 
4,728

Borrowings
26

 
1,678

 
1,704

Total interest-bearing liabilities
606

 
7,281

 
7,887

Net interest income
$
2,076

 
$
475

 
$
2,551




45

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 March 31, 2019, we had additional borrowing capacity of $2.14 billion with the FHLB and $554.0 million in federal funds lines of credit available with financial institutions and other sources. 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 March 31, 2019, securities pledged had a collateral value of $74.9 million.
At March 31, 2019, we had classified 78.0% 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 $33.0 million on an unconsolidated basis at March 31, 2019. 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 17 of the Notes to Consolidated Financial Statements contained in Item 8 of the Company’s 2018 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 $2.86 billion at March 31, 2019, and December 31, 2018, 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 March 31, 2019 totaled $1.19 billion with a weighted average rate of 2.18%.
During the three months ended March 31, 2019, cash and cash equivalents increased by $5.3 million, or 2.0%, to $274.5 million at March 31, 2019 from $269.2 million at December 31, 2018. Operating activities provided cash of $79.2 million and financing activities provided cash of $207.7 million, which was partially offset by cash used in investing activities of $281.5 million. Primary sources of cash for the three months ended March 31, 2019 included proceeds from pay-offs of Warehouse Purchase Program loans totaling $3.74 billion, proceeds from maturities, prepayments and calls on available-for-sale securities totaling $320.6 million, proceeds from FHLB advances totaling $815.0 million, proceeds from the sale of loans

46

held for sale totaling $45.5 million, and a $235.7 million increase in deposits. Primary uses of cash for the three months ended March 31, 2019 included originations of Warehouse Purchase Program loans totaling $3.87 billion, purchases of available-for-sale securities totaling $347.5 million, repayments on FHLB advances totaling $820.3 million and net fundings of loans held for investment totaling $153.8 million.
Please see Item 1A (Risk Factors) under Part 1 of the Company’s 2018 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 $83.9 million and credit card guarantees outstanding in the amount of $2.1 million at March 31, 2019.
 
March 31, 2019
 
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
$
5,129,414

 
$
—

 
$
—

 
$
—

 
$
5,129,414

Certificates of deposit
1,193,075

 
727,666

 
26,879

 
391

 
1,948,011

FHLB advances 1
817,226

 
2,065

 
372

 
421

 
820,084

Repurchase agreements
37,277

 
—

 
—

 
—

 
37,277

Subordinated debt 1
—

 
—

 
—

 
140,464

 
140,464

Private equity fund for Community Reinvestment Act purposes
830

 
—

 
—

 
—

 
830

Operating leases (premises)
4,365

 
8,400

 
7,650

 
18,755

 
39,170

Total contractual obligations
$
7,182,187

 
$
738,131

 
$
34,901

 
$
160,031

 
8,115,250

Off-balance sheet loan commitments: 2
 
 
 
 
 
 
 
 
 
Unused commitments to extend credit
$
888,646

 
$
660,082

 
$
185,975

 
$
63,135

 
1,797,838

Unused capacity on Warehouse Purchase Program loans 3
741,340

 
—

 
—

 
—

 
741,340

Standby letters of credit
35,277

 
44,989

 
640

 
—

 
80,906

Total loan commitments
$
1,665,263

 
$
705,071

 
$
186,615

 
$
63,135

 
2,620,084

Total contractual obligations and loan commitments
 
 
 
 
 
 
 
 
$
10,735,334

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.



47

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 March 31, 2019 and December 31, 2018, the Bank and the Company were considered to be well-capitalized. At March 31, 2019, the Bank’s equity totaled $1.20 billion. Our consolidated equity totaled $1.12 billion, or 12.0% of total assets, at March 31, 2019. 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 March 31, 2019, Warehouse Purchase Program loans totaled $1.10 billion, compared to an average balance of $724.1 million for the three months ended March 31, 2019. 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
March 31, 2019
(Dollars in thousands)
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,158,751

 
13.39
%
 
$
692,395

 
8.00
%
 
$
865,494

 
10.00
%
Bank
1,097,654

 
12.68

 
692,296

 
8.00

 
865,370

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
957,557

 
11.06

 
519,296

 
6.00

 
519,296

 
6.00

Bank
1,019,435

 
11.78

 
519,222

 
6.00

 
692,296

 
8.00

Common equity tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
Company
945,397

 
10.92

 
389,472

 
4.50

 
n/a 1

 
n/a 1

Bank
1,019,435

 
11.78

 
389,417

 
4.50

 
562,491

 
6.50

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Company
957,557

 
10.98

 
348,941

 
4.00

 
n/a 1

 
n/a 1

Bank
1,019,435

 
11.68

 
348,980

 
4.00

 
436,226

 
5.00

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
$
1,126,019

 
13.48
%
 
$
668,267

 
8.00
%
 
$
835,334

 
10.00
%
Bank
1,073,807

 
12.85

 
668,282

 
8.00

 
835,352

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
934,964

 
11.19

 
501,200

 
6.00

 
501,200

 
6.00

Bank
1,005,651

 
12.04

 
501,211

 
6.00

 
668,282

 
8.00

Common equity tier 1 risk-based capital
 
 

 
 
 
 
 
 
 
 
Company
922,850

 
11.05

 
375,900

 
4.50

 
n/a 1

 
n/a 1

Bank
1,005,651

 
12.04

 
375,908

 
4.50

 
542,979

 
6.50

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Company
934,964

 
10.76

 
347,525

 
4.00

 
n/a 1

 
n/a 1

Bank
1,005,651

 
11.57

 
347,644

 
4.00

 
434,555

 
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. At March 31, 2019, the Company’s and the Bank’s common equity tier 1 capital exceeded the required capital conservation buffer.

48

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.

49

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 and 200 basis points, the Bank’s policy indicates that the change in EVE should not decrease by more than 5% and 10%, respectively. For increases of 300 and 400 basis points, the change in EVE should not exceed a 12.5% and 15% decrease, respectively. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 and 200 basis points, the Bank’s policy indicates that the change in EAR should not decrease by more than 7% and 10%, respectively. For increases of 300 and 400 basis points, EAR should not decrease by more than 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 March 31, 2019, and December 31, 2018, 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 200 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 March 31, 2019, 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 decline in market rates.
March 31, 2019
Change in Interest Rates in Basis Points
 
Economic Value of Equity
 
Earnings at Risk (12 months)
 
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

 
1,340,669

 
(120,819
)
 
(8.27
)
 
15.64
 
383,776

 
23,379

 
6.49

300

 
1,376,506

 
(84,982
)
 
(5.81
)
 
15.78
 
377,814

 
17,417

 
4.83

200

 
1,414,119

 
(47,369
)
 
(3.24
)
 
15.93
 
372,043

 
11,646

 
3.23

100

 
1,445,859

 
(15,629
)
 
(1.07
)
 
16.01
 
365,964

 
5,567

 
1.54

—

 
1,461,488

 
—

 
—

 
15.92
 
360,397

 
—

 
—

(100
)
 
1,401,856

 
(59,632
)
 
(4.08
)
 
15.05
 
348,445

 
(11,952
)
 
(3.32
)
(200
)
 
1,331,717

 
(129,771
)
 
(8.88
)
 
14.09
 
331,555

 
(28,842
)
 
(8.00
)
December 31, 2018
Change in Interest Rates in Basis Points
 
Economic Value of Equity
 
Earnings at Risk (12 months)
 
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

 
1,380,258

 
(126,105
)
 
(8.37
)
 
16.69
 
383,142

 
22,618

 
6.27

300

 
1,413,122

 
(93,241
)
 
(6.19
)
 
16.80
 
377,525

 
17,001

 
4.72

200

 
1,450,175

 
(56,188
)
 
(3.73
)
 
16.94
 
372,140

 
11,616

 
3.22

100

 
1,483,983

 
(22,380
)
 
(1.49
)
 
17.03
 
366,596

 
6,072

 
1.68

—

 
1,506,363

 
—

 
—

 
17.00
 
360,524

 
—

 
—

(100
)
 
1,450,810

 
(55,553
)
 
(3.69
)
 
16.13
 
347,307

 
(13,217
)
 
(3.67
)
(200
)
 
1,380,606

 
(125,757
)
 
(8.35
)
 
15.13
 
329,235

 
(31,289
)
 
(8.68
)


50


The Bank's EVE was $1.46 billion, or 15.92%, of the market value of portfolio assets as of March 31, 2019, a $44.9 million decrease from $1.51 billion, or 17.00%, of the market value of portfolio assets as of December 31, 2018. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $47.4 million decrease in our EVE at March 31, 2019 compared to a $56.2 million decrease at December 31, 2018, and would result in a one basis point increase in our EVE ratio to 15.93% at March 31, 2019 compared to a six basis point decrease to 16.94% at December 31, 2018. An immediate 200 basis point decrease in market interest rates would result in a $129.8 million decrease in our EVE at March 31, 2019 compared to a $125.8 million decrease at December 31, 2018, and would result in a 183 basis point decrease in our EVE ratio to 14.09% at March 31, 2019, as compared to a 187 basis point decrease in our EVE ratio to 15.13% at December 31, 2018.
The Bank’s projected EAR for the twelve months ending March 31, 2020 is $360.4 million, compared to $360.5 million for the twelve months ending December 31, 2019. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in an $11.6 million, or 3.23%, increase in net interest income for the twelve months ending March 31, 2020 compared to an $11.6 million, or 3.22%, increase for the twelve months ending December 31, 2019. An immediate 200 basis point decrease in market rates would result in a $28.8 million, or 8.00%, decrease in net interest income for the twelve months ending March 31, 2020 compared to a $31.3 million, or 8.68%, decrease for the twelve months ending December 31, 2019.
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.

51

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 March 31, 2019. 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.


52

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 2018 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 March 31, 2019.
Item 3.
Defaults upon Senior Securities
Not applicable.

Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
Not applicable.


53

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))
 
 
 

54

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))
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32
 
 
 
 
101
 
Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended March 31, 2019, 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.



55


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:
April 23, 2019
 
By:
/s/ Kevin J. Hanigan
 
 
 
 
Kevin J. Hanigan,
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Duly Authorized Officer)
 
 
 
 
 
Date:
April 23, 2019
 
By:
/s/ J. Mays Davenport
 
 
 
 
J. Mays Davenport
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)


56