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EX-31.2 - EXHIBIT 31.2 - LegacyTexas Financial Group, Inc.exhibit3122015630.htm
EX-31.1 - EXHIBIT 31.1 - LegacyTexas Financial Group, Inc.exhibit3112015630.htm
EX-32.0 - EXHIBIT 32.0 - LegacyTexas Financial Group, Inc.exhibit3202015630.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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
 
6021
 
27-2176993
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
5851 Legacy Circle, Plano, Texas
 
 
 
75024
(Address of Principal Executive Offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code: (972) 578-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
    
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class: Common Stock
 
Shares Outstanding as of July 27, 2015:
 
 
47,619,493




LEGACYTEXAS FINANCIAL GROUP, INC.
FORM 10-Q
June 30, 2015
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART 1 - FINANCIAL INFORMATION        Item 1. Financial Statements
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
June 30,
 
December 31,
 
2015
 
2014
ASSETS
(unaudited)
 
 
Cash and due from financial institutions
$
48,911

 
$
28,416

Short-term interest-bearing deposits in other financial institutions
143,106

 
103,605

Total cash and cash equivalents
192,017

 
132,021

Securities available for sale, at fair value
314,040

 
199,699

Securities held to maturity (fair value: June 30, 2015 — $262,220, December 31, 2014— $251,112)
254,526

 
241,920

Loans held for sale, at fair value
19,903

 

Loans held for investment:
 
 
 
Loans held for investment (net of allowance for loan losses of $30,867 at June 30, 2015 and $25,549 at December 31, 2014)
4,360,522

 
2,605,204

Loans held for investment - Warehouse Purchase Program
1,084,997

 
786,416

Total loans held for investment
5,445,519

 
3,391,620

FHLB and Federal Reserve Bank stock, at cost
69,224

 
44,084

Bank-owned life insurance
54,614

 
36,193

Premises and equipment, net
80,095

 
48,743

Goodwill
180,632

 
29,650

Other assets
59,054

 
40,184

Total assets
$
6,669,624

 
$
4,164,114

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Deposits
 
 
 
Non-interest-bearing demand
$
1,084,146

 
$
494,376

Interest-bearing demand
734,430

 
472,703

Savings and money market
1,834,075

 
1,176,749

Time
875,132

 
513,981

Total deposits
4,527,783

 
2,657,809

FHLB advances
1,217,305

 
862,907

Repurchase agreements
66,172

 
25,000

Subordinated debt
11,474

 

Other liabilities
69,966

 
50,175

Total liabilities
5,892,700

 
3,595,891

Commitments and contingent liabilities


 


Shareholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2015 and December 31, 2014

 

Common stock, $.01 par value; 90,000,000 shares authorized; 47,619,493 shares issued — June 30, 2015 and 40,014,851 shares issued — December 31, 2014
476

 
400

Additional paid-in capital
571,083

 
386,549

Retained earnings
219,493

 
195,327

Accumulated other comprehensive income, net
122

 
930

Unearned Employee Stock Ownership Plan (ESOP) shares; 1,457,554 shares at June 30, 2015 and 1,549,651 shares at December 31, 2014
(14,250
)
 
(14,983
)
Total shareholders’ equity
776,924

 
568,223

Total liabilities and shareholders’ equity
$
6,669,624

 
$
4,164,114

 
 
 
 
See accompanying notes to consolidated financial statements.

3


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(Dollars in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
61,551

 
$
33,888

 
$
119,586

 
$
64,276

Taxable securities
2,252

 
2,453

 
4,751

 
5,018

Nontaxable securities
724

 
561

 
1,442

 
1,125

Interest-bearing deposits in other financial institutions
139

 
71

 
297

 
128

FHLB and Federal Reserve Bank stock and other
301

 
136

 
509

 
266

 
64,967

 
37,109

 
126,585

 
70,813

Interest expense
 
 
 
 
 
 
 
Deposits
3,049

 
2,035

 
6,176

 
4,026

FHLB advances
1,774

 
1,948

 
3,480

 
3,875

Repurchase agreements and other borrowings
323

 
204

 
782

 
405

 
5,146

 
4,187

 
10,438

 
8,306

Net interest income
59,821

 
32,922

 
116,147

 
62,507

Provision for loan losses
3,750

 
1,197

 
6,750

 
1,573

Net interest income after provision for loan losses
56,071

 
31,725

 
109,397

 
60,934

Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
7,941

 
5,113

 
14,700

 
9,621

Net gain on sale of mortgage loans
2,121

 

 
4,193

 

Bank-owned life insurance income
424

 
145

 
843

 
298

Gain on sale of available-for-sale securities (reclassified from accumulated other comprehensive income for unrealized gains on available-for-sale securities)

 

 
211

 

Gain on sale and disposition of assets
429

 
727

 
457

 
728

Other
1,049

 
(556
)
 
967

 
(256
)
 
11,964

 
5,429

 
21,371

 
10,391

Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
22,549

 
14,127

 
45,520

 
28,259

Merger and acquisition costs
8

 
652

 
1,553

 
821

Advertising
1,048

 
493

 
1,988

 
848

Occupancy and equipment
3,838

 
1,819

 
7,646

 
3,711

Outside professional services
625

 
486

 
1,375

 
1,011

Regulatory assessments
1,146

 
687

 
1,968

 
1,315

Data processing
2,537

 
1,708

 
5,332

 
3,370

Office operations
2,652

 
1,717

 
5,045

 
3,397

Other
2,505

 
1,661

 
4,258

 
2,773

 
36,908

 
23,350

 
74,685

 
45,505

Income before income tax expense
31,127

 
13,804

 
56,083

 
25,820

Income tax expense (items reclassified from accumulated other comprehensive income include an income tax expense of $74 for the six months ended June 30, 2015)
10,876

 
4,986

 
19,508

 
9,320

Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Diluted
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Dividends declared per share
$
0.13

 
$
0.12

 
$
0.26

 
$
0.24

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.


4


LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Change in unrealized gains (losses) on securities available for sale
(1,925
)
 
1,065

 
(1,034
)
 
1,775

Reclassification of amount realized through sale of securities

 

 
(211
)
 

Tax effect
675

 
(373
)
 
437

 
(622
)
Other comprehensive income, net of tax
(1,250
)
 
692

 
(808
)
 
1,153

Comprehensive income
$
19,001

 
$
9,510

 
$
35,767

 
$
17,653

See accompanying notes to consolidated financial statements.


5


 
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except per share data)
For the six months ended June 30, 2014
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income, Net
 
Unearned
ESOP Shares
 
Total
Shareholders’
Equity
Balance at January 1, 2014
$
399

 
$
377,657

 
$
183,236

 
$
(383
)
 
$
(16,449
)
 
$
544,460

Net income

 

 
16,500

 

 

 
16,500

Other comprehensive income, net of tax

 

 

 
1,153

 

 
1,153

Dividends declared ($0.24 per share)

 

 
(9,586
)
 

 

 
(9,586
)
ESOP shares earned (92,097 shares)

 
1,664

 

 

 
733

 
2,397

Share-based compensation expense

 
1,835

 

 

 

 
1,835

Net issuance of common stock under employee stock plans (56,904 shares)
1

 
652

 

 

 

 
653

Balance at June 30, 2014
$
400

 
$
381,808

 
$
190,150

 
$
770

 
$
(15,716
)
 
$
557,412

For the six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
400

 
$
386,549

 
$
195,327

 
$
930

 
$
(14,983
)
 
$
568,223

Net income

 

 
36,575

 

 

 
36,575

Other comprehensive income (loss), net of tax

 

 

 
(808
)
 

 
(808
)
Dividends declared ($0.26 per share)

 

 
(12,409
)
 

 

 
(12,409
)
ESOP shares earned (92,097 shares)

 
1,505

 

 

 
733

 
2,238

Share-based compensation expense

 
3,219

 

 

 

 
3,219

Net issuance of common stock under employee stock plans (112,522 shares)
1

 
650

 

 

 

 
651

Share repurchase (357,950 shares)
(4
)
 
(7,985
)
 

 

 

 
(7,989
)
Acquisition of LegacyTexas Group, Inc. (7,850,070 shares)
79

 
187,145

 

 

 

 
187,224

Balance at June 30, 2015
$
476

 
$
571,083

 
$
219,493

 
$
122

 
$
(14,250
)
 
$
776,924


See accompanying notes to consolidated financial statements.

6


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

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income
$
36,575

 
$
16,500

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
6,750

 
1,573

Depreciation and amortization
3,636

 
2,211

Deferred tax expense
4,174

 
1,043

Premium amortization and accretion of securities, net
2,006

 
1,803

Accretion related to acquired loans
(6,548
)
 
(869
)
Gain on sale of available for sale securities
(211
)
 

ESOP compensation expense
2,238

 
2,397

Share-based compensation expense
3,219

 
1,835

Net gain on loans held for sale
(4,193
)
 

Loans originated or purchased for sale
(114,637
)
 

Proceeds from sale of loans held for sale
116,566

 

FHLB stock dividends
(65
)
 
(42
)
Bank-owned life insurance income
(843
)
 
(298
)
(Gain) loss on sale and disposition of assets
(176
)
 
49

Net change in deferred loan fees
470

 
432

Net change in accrued interest receivable
(1,922
)
 
(716
)
Net change in other assets
5,913

 
3,295

Net change in other liabilities
2,094

 
5,580

Net cash provided by operating activities
55,046

 
34,793

Cash flows from investing activities
 
 
 
Available-for-sale securities:
 
 
 
Maturities, prepayments and calls
31,352

 
305,686

Purchases
(44,730
)
 
(281,000
)
Proceeds from sale of AFS securities
16,581

 

Held-to-maturity securities:
 
 
 
Maturities, prepayments and calls
26,710

 
32,003

Purchases
(6,335
)
 
(5,919
)
Originations of Warehouse Purchase Program loans
(7,987,452
)
 
(5,377,239
)
Proceeds from pay-offs of Warehouse Purchase Program loans
7,688,871

 
5,281,143

Net change in loans held for investment, excluding Warehouse Purchase Program loans
(356,801
)
 
(299,638
)
Purchase of FHLB and Federal Reserve Bank stock
(21,386
)
 
(9,607
)
Cash received in excess of cash paid for acquisition of LegacyTexas Group, Inc.
128,598

 

Purchases of premises and equipment
(3,476
)
 
(744
)
Proceeds from sale of assets
8,225

 
532

Net cash (used in) investing activities
(519,843
)
 
(354,783
)

7


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

 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Net change in deposits
240,192

 
171,087

Proceeds from FHLB advances
1,075,000

 
691,000

Repayments on FHLB advances
(720,602
)
 
(455,230
)
Share repurchase
(7,989
)
 

Repayments of borrowings
(50,050
)
 

Payment of dividends
(12,409
)
 
(9,586
)
Proceeds from stock option exercises
651

 
653

Net cash provided by financing activities
524,793

 
397,924

Net change in cash and cash equivalents
59,996

 
77,934

Beginning cash and cash equivalents
132,021

 
87,974

Ending cash and cash equivalents
$
192,017

 
$
165,908

Supplemental noncash disclosures:
 
 
 
Transfers from loans to other real estate owned
$
589

 
$
409

Common stock issued in consideration of LegacyTexas Group, Inc. acquisition
187,224

 

See accompanying notes to consolidated financial statements.

8

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


NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated 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, 2014 (“2014 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
On January 1, 2015 (the "Effective Time"), the Company completed its merger (the "Merger") with LegacyTexas Group, Inc., pursuant to the Agreement and Plan of Merger, dated as of November 25, 2013, as amended, by and between the Company and LegacyTexas Group, Inc. (the "Merger Agreement"). At the Effective Time, LegacyTexas Group, Inc. merged into the Company, with the Company as the surviving corporation in the Merger. Immediately following the Effective Time, ViewPoint Bank, N.A., merged with and into LegacyTexas Bank, the wholly-owned subsidiary of LegacyTexas Group, Inc. prior to the Merger, with LegacyTexas Bank surviving the bank merger. At the Effective Time, the Company changed its name from ViewPoint Financial Group, Inc. to LegacyTexas Financial Group, Inc. and changed its ticker symbol on the Nasdaq Global Select Market to LTXB. The financial results reported in these consolidated financial statements for periods prior to the Effective Time only include historical activity of ViewPoint Financial Group, Inc.
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 2014 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.


NOTE 2 - SHARE TRANSACTIONS
On January 27, 2015, the Company announced the resumption of its existing stock repurchase program. The open-ended stock repurchase program, which commenced in August 2012, allows for the repurchase of up to 1,978,871 shares in the open market and in negotiated transactions, depending on market conditions. Stock repurchases under this program were suspended in November 2013 as a result of the Company's announced acquisition of LegacyTexas Group, Inc., which automatically triggered termination of the Company's then-existing 10b5-1 trading plan with Sandler O'Neill & Partners, LP. At the time the stock repurchase program was suspended, 83,800 shares had been repurchased, leaving 1,895,071 shares available for future repurchases under the program.
Upon completion of the acquisition of LegacyTexas Group, Inc. on January 1, 2015, the Company entered into a new trading plan with Sandler O’Neill & Partners, LP in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate repurchases of its common stock pursuant to the above mentioned stock repurchase program. No shares were repurchased in the second quarter of 2015. During the first quarter of 2015, 357,950 shares were repurchased and retired at an average price of $22.32.

9

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 share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended June 30, 2015 and 2014 is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Basic earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income
$
20,251

 
$
8,818

 
$
36,575

 
$
16,500

Distributed and undistributed earnings to participating securities
(160
)
 
(97
)
 
(299
)
 
(187
)
Income available to common shareholders
$
20,091

 
$
8,721

 
$
36,276

 
$
16,313

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
47,611,263

 
39,966,568

 
47,680,597

 
39,954,509

Less: Average unallocated ESOP shares
(1,487,747
)
 
(1,671,941
)
 
(1,510,641
)
 
(1,694,835
)
  Average unvested restricted stock awards
(363,284
)
 
(420,956
)
 
(377,612
)
 
(434,729
)
Average shares for basic earnings per share
45,760,232

 
37,873,671

 
45,792,344

 
37,824,945

Basic earnings per common share
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

Diluted earnings per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income available to common shareholders
$
20,091

 
$
8,721

 
$
36,276

 
$
16,313

Denominator:
 
 
 
 
 
 
 
Average shares for basic earnings per share
45,760,232

 
37,873,671

 
45,792,344

 
37,824,945

Dilutive effect of share-based compensation plan
271,035

 
247,703

 
214,267

 
247,786

Average shares for diluted earnings per share
46,031,267

 
38,121,374

 
46,006,611

 
38,072,731

Diluted earnings per common share
$
0.44

 
$
0.23

 
$
0.79

 
$
0.43

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
841,623

 
86,910

 
1,053,800

 
134,790



10

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 were as follows:
June 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
221,689

 
$
1,311

 
$
1,173

 
$
221,827

Agency residential collateralized mortgage obligations 2
40,734

 
209

 
103

 
40,840

US government and agency securities
15,223

 
161

 

 
15,384

Municipal bonds
36,207

 
70

 
288

 
35,989

Total securities
$
313,853

 
$
1,751

 
$
1,564

 
$
314,040

December 31, 2014
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
144,368

 
$
1,760

 
$
610

 
$
145,518

Agency residential collateralized mortgage obligations 2
50,424

 
211

 
81

 
50,554

US government and agency securities
3,475

 
152

 

 
3,627

Total securities
$
198,267

 
$
2,123

 
$
691

 
$
199,699

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
The carrying amount, unrealized gains and losses, and fair value of securities held to maturity were as follows:
June 30, 2015
Amortized Cost
 
Gross Unrealized Gains
 
Gross
Unrealized
Losses
 
Fair Value
Agency residential mortgage-backed securities 1
$
90,159

 
$
2,441

 
$
108

 
$
92,492

Agency commercial mortgage-backed securities 2
25,076

 
1,096

 
35

 
26,137

Agency residential collateralized mortgage obligations 3
71,307

 
1,752

 
61

 
72,998

Municipal bonds
67,984

 
3,139

 
530

 
70,593

Total securities
$
254,526

 
$
8,428

 
$
734

 
$
262,220

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
63,161

 
$
3,124

 
$
13

 
$
66,272

Agency commercial mortgage-backed securities 2
25,301

 
1,144

 
49

 
26,396

Agency residential collateralized mortgage obligations 3
86,470

 
1,766

 
80

 
88,156

Municipal bonds
66,988

 
3,535

 
235

 
70,288

Total securities
$
241,920

 
$
9,569

 
$
377

 
$
251,112

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


11

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

The carrying amount and fair value of held to maturity debt securities and the fair value of available for sale debt securities at June 30, 2015 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.
 
Held to maturity
 
Available for sale
 
Carrying
Amount
 
Fair Value
 
Fair Value
Due in one year or less
$
1,508

 
$
1,536

 
$
1,789

Due after one to five years
7,434

 
7,814

 
25,470

Due after five to ten years
41,454

 
44,061

 
17,764

Due after ten years
17,588

 
17,182

 
6,350

Agency residential mortgage-backed securities 1
90,159

 
92,492

 
221,827

Agency commercial mortgage-backed securities 2
25,076

 
26,137

 

Agency residential collateralized mortgage obligations 3
71,307

 
72,998

 
40,840

Total
$
254,526

 
$
262,220

 
$
314,040

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Information regarding securities and letters of credit pledged is summarized below:
 
June 30, 2015
 
December 31, 2014
Public fund certificates of deposit
$
200,398

 
$
132,320

Public fund demand deposit accounts
110,252

 
11,355

Commercial demand deposit accounts
317

 
2,956

Repurchase agreements
66,172

 
25,000

Federal Reserve Bank primary credit - collateral value
43,307

 
51,271

Carrying value of securities pledged on above funds
260,185

 
250,525

FHLB Letters of Credit pledged on the above funds
231,280

 

Sales activity of securities for the three and six months ended June 30, 2015 and 2014 was as follows. All securities sold were classified as available for sale.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds
$

 
$

 
$
16,581

 
$

Gross gains

 

 
211

 


Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method.

12

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

Securities with unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
AFS
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
130,416

 
$
973

 
$
11,503

 
$
200

 
$
141,919

 
$
1,173

Agency residential collateralized mortgage obligations 2
10,203

 
41

 
4,873

 
62

 
15,076

 
103

Municipal bonds
19,588

 
288

 

 

 
19,588

 
288

Total temporarily impaired
$
160,207

 
$
1,302

 
$
16,376

 
$
262

 
$
176,583

 
$
1,564

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$
6,534

 
$
14

 
$
50,729

 
$
596

 
$
57,263

 
$
610

Agency residential collateralized mortgage obligations 2
9,499

 
38

 
4,769

 
43

 
14,268

 
81

Total temporarily impaired
$
16,033

 
$
52

 
$
55,498

 
$
639

 
$
71,531

 
$
691

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
HTM
Less than 12 Months
 
12 Months or More
 
Total
June 30, 2015
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Agency residential mortgage-backed securities 1
$
16,364

 
$
108

 
$

 
$

 
$
16,364

 
$
108

Agency commercial mortgage-backed securities 2
3,871

 
35

 

 

 
3,871

 
35

Agency residential collateralized mortgage obligations 3
2,195

 
19

 
3,465

 
42

 
5,660

 
61

Municipal bonds
12,450

 
253

 
6,332

 
277

 
18,782

 
530

Total temporarily impaired
$
34,880


$
415

 
$
9,797

 
$
319

 
$
44,677


$
734

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Agency residential mortgage-backed securities 1
$

 
$

 
$
3,430

 
$
13

 
$
3,430

 
$
13

Agency commercial mortgage-backed securities 2

 

 
3,895

 
49

 
3,895

 
49

Agency residential collateralized mortgage obligations 3
8,984

 
33

 
4,697

 
47

 
13,681

 
80

Municipal bonds

 

 
11,415

 
235

 
11,415

 
235

Total temporarily impaired
$
8,984

 
$
33

 
$
23,437

 
$
344

 
$
32,421

 
$
377

1 Residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
2 Commercial mortgage-backed securities issued and /or guaranteed by U.S. government agencies or government-sponsored enterprises.
3 Collateralized mortgage obligations issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of June 30, 2015, 132 securities had unrealized losses, 20 of which had been in an unrealized loss position for over 12 months at June 30, 2015. The Company does not believe these unrealized losses are other-than-temporary and, at June 30, 2015, had 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. All principal and interest payments are being received on time and in full.


13

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

NOTE 5 - LOANS
Loans consist of the following:
 
June 30,
 2015
 
December 31, 2014
 
 
 
 
Loans held for sale
$
19,903

 
$

 
 
 
 
Loans held for investment:
 
 
 
Commercial real estate
$
1,930,256

 
$
1,265,868

Commercial and industrial
1,308,168

 
781,824

Construction and land
230,582

 
21,298

Consumer real estate
845,982

 
524,199

Other consumer
79,798

 
40,491

Gross loans held for investment, excluding Warehouse Purchase Program
4,394,786

 
2,633,680

Net of:
 
 
 
Deferred fees and discounts, net
(3,397
)
 
(2,927
)
Allowance for loan losses
(30,867
)
 
(25,549
)
Net loans held for investment, excluding Warehouse Purchase Program
4,360,522

 
2,605,204

Warehouse Purchase Program
1,084,997

 
786,416

Total loans held for investment
$
5,445,519

 
$
3,391,620



14

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

Activity in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014, segregated by portfolio segment and evaluation for impairment, is set forth below. All Warehouse Purchase Program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. These safeguards include the requirement that our mortgage company customers have a takeout commitment for each loan and multiple investors for purchases. To date, the Company has not experienced a loss on these loans and no allowance for loan losses has been allocated to them. At June 30, 2015 and 2014, the allowance for loan impairment related to purchased credit impaired ("PCI") loans totaled $127 and $272, respectively.
For the three months ended June 30, 2015
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - April 1, 2015
$
12,610

 
$
10,741

 
$
463

 
$
3,983

 
$
479

 
$
28,276

Charge-offs
(78
)
 
(977
)
 

 
(27
)
 
(275
)
 
(1,357
)
Recoveries

 
42

 

 
14

 
142

 
198

Provision expense (benefit)
(1,247
)
 
3,415

 
1,068

 
150

 
364

 
3,750

Ending balance - June 30, 2015
$
11,285

 
$
13,221

 
$
1,531

 
$
4,120

 
$
710

 
$
30,867

For the six months ended June 30, 2015
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2015
$
11,830

 
$
9,068

 
$
174

 
$
4,069

 
$
408

 
$
25,549

Charge-offs
(82
)
 
(1,041
)
 

 
(215
)
 
(523
)
 
(1,861
)
Recoveries
21

 
101

 

 
60

 
247

 
429

Provision expense (benefit)
(484
)
 
5,093

 
1,357

 
206

 
578

 
6,750

Ending balance - June 30, 2015
$
11,285

 
$
13,221

 
$
1,531

 
$
4,120

 
$
710

 
$
30,867

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
897

 
$
1,078

 
$

 
$
56

 
$
10

 
$
2,041

Collectively evaluated for impairment
10,388

 
12,143

 
1,531

 
4,064

 
700

 
28,826

Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
4,282

 
12,648

 
141

 
5,041

 
191

 
22,303

Collectively evaluated for impairment
1,914,846

 
1,293,671

 
230,000

 
840,099

 
79,258

 
4,357,874

PCI loans
11,128

 
1,849

 
441

 
842

 
349

 
14,609

Ending balance
$
1,930,256

 
$
1,308,168

 
$
230,582

 
$
845,982

 
$
79,798

 
$
4,394,786


For the three months ended June 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - April 1, 2014
$
10,668

 
$
4,802

 
$
243

 
$
3,327

 
$
362

 
$
19,402

Charge-offs

 
(92
)
 

 
(74
)
 
(128
)
 
(294
)
Recoveries

 
39

 

 
20

 
76

 
135

Provision expense
518

 
536

 
9

 
66

 
68

 
1,197

Ending balance - June 30, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440



15

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

For the six months ended June 30, 2014
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
 
Other Consumer
 
Total
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance - January 1, 2014
$
10,944

 
$
4,536

 
$
212

 
$
3,280

 
$
386

 
$
19,358

Charge-offs

 
(302
)
 

 
(156
)
 
(307
)
 
(765
)
Recoveries

 
57

 

 
25

 
192

 
274

Provision expense
242

 
994

 
40

 
190

 
107

 
1,573

Ending balance - June 30, 2014
$
11,186

 
$
5,285

 
$
252

 
$
3,339

 
$
378

 
$
20,440

Allowance ending balance:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
$
964

 
$
1,535

 
$

 
$
189

 
$
1

 
$
2,689

Collectively evaluated for impairment
10,222

 
3,750

 
252

 
3,150

 
377

 
17,751

Loans:
 
 
 
 
 
 
 
 
 
 

Individually evaluated for impairment
8,052

 
6,407

 
52

 
5,152

 
453

 
20,116

Collectively evaluated for impairment
1,149,741

 
604,396

 
31,889

 
495,083

 
42,597

 
2,323,706

PCI loans
4,242

 
184

 

 
1,093

 
168

 
5,687

Ending balance
$
1,162,035

 
$
610,987

 
$
31,941

 
$
501,328

 
$
43,218

 
$
2,349,509

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 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. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data and external economic indicators, which may not yet be 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 classified 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, 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 loan 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.

16

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

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
Impaired loans at June 30, 2015 and December 31, 2014, were as follows 1:
June 30, 2015
 
Unpaid
Contractual Principal
Balance
 
Recorded
Investment With No Allowance
 
Recorded
Investment With Allowance
 
Total Recorded Investment
 
Related
Allowance
Commercial real estate
 
$
4,900

 
$
918

 
$
3,364

 
$
4,282

 
$
824

Commercial and industrial
 
15,115

 
9,493

 
3,155

 
12,648

 
1,068

Construction and land
 
201

 
141

 

 
141

 

Consumer real estate
 
5,523

 
4,875

 
166

 
5,041

 
22

Other consumer
 
272

 
191

 

 
191

 

Total
 
$
26,011

 
$
15,618

 
$
6,685

 
$
22,303

 
$
1,914

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,372

 
$
4,162

 
$
3,243

 
$
7,405

 
$
784

Commercial and industrial
 
7,043

 
2,008

 
3,921

 
5,929

 
1,768

Construction and land
 
109

 
103

 

 
103

 

Consumer real estate
 
6,037

 
4,735

 
872

 
5,607

 
161

Other consumer
 
336

 
282

 
2

 
284

 
2

Total
 
$
21,897

 
$
11,290

 
$
8,038

 
$
19,328

 
$
2,715

1 No Warehouse Purchase Program loans were impaired at June 30, 2015 or December 31, 2014. Loans reported do not include PCI loans.

Income on impaired loans at June 30, 2015 and 2014, was as follows1:
June 30, 2015
 
Current Quarter Average
Recorded
Investment
 
Year-to-Date Average
Recorded
Investment
 
Current Quarter Interest
Income
Recognized
 
Year-to-Date Interest
Income
Recognized
Commercial real estate
 
$
5,886

 
$
6,537

 
$
9

 
$
19

Commercial and industrial
 
9,881

 
8,187

 
2

 
5

Construction and land
 
141

 
125

 

 

Consumer real estate
 
5,103

 
5,319

 
3

 
5

Other consumer
 
216

 
245

 
1

 
2

Total
 
$
21,227

 
$
20,413

 
$
15

 
$
31

June 30, 2014
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,067

 
$
8,021

 
$
3

 
$
3

Commercial and industrial
 
6,163

 
5,973

 
3

 
6

Construction and land
 
13

 
9

 

 

Consumer real estate
 
4,759

 
4,675

 
11

 
23

Other consumer
 
482

 
510

 
1

 
2

Total
 
$
19,484

 
$
19,188

 
$
18

 
$
34

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

17

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

of collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual 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. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans past due over 90 days that were still accruing interest totaled $49 at June 30, 2015 and $612 at December 31, 2014, which consisted entirely of PCI loans. At June 30, 2015, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at June 30, 2015 or December 31, 2014. Non-performing (nonaccrual) loans were as follows:
 
June 30,
 2015
 
December 31, 2014
Commercial real estate
$
3,549

 
$
6,703

Commercial and industrial
12,498

 
5,778

Construction and land
141

 
149

Consumer real estate
10,419

 
10,591

Other consumer
243

 
286

Total
$
26,850

 
$
23,507


A modified loan 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 6 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 6 months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans.

18

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

The outstanding balances of TDRs are shown below:
 
June 30, 2015
 
December 31, 2014
Nonaccrual TDRs(1)
$
8,966

 
$
12,982

Performing TDRs (2)
1,112

 
1,098

Total
$
10,078

 
$
14,080

Specific reserves on TDRs
$
979

 
$
992

Outstanding commitments to lend additional funds to borrowers with TDR loans

 

1 Nonaccrual TDR loans are included in the nonaccrual loan totals.
2 Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans.
The following tables provide the recorded balances of loans modified as a TDR during the three and six months ended June 30, 2015 and 2014.
 
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
 
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
Commercial and industrial
 
$

 
$

 
$

 
$

 
$

 
$

 
$
80

 
$
80

Consumer real estate
 
87

 

 

 
87

 
87

 
62

 

 
149

Total
 
$
87

 
$

 
$

 
$
87

 
$
87

 
$
62

 
$
80

 
$
229

 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
 
Principal Deferrals (1)
 
Combination of Rate Reduction and Principal Deferral
 
Other
 
Total
Commercial and industrial
 
$

 
$

 
$

 
$

 
$

 
$

 
$
1,913

 
$
1,913

Consumer real estate
 
130

 

 
113

 
243

 
130

 
269

 
113

 
512

Other consumer
 

 

 

 

 
13

 
6

 

 
19

Total
 
$
130

 
$

 
$
113

 
$
243

 
$
143

 
$
275

 
$
2,026

 
$
2,444

1 Principal deferrals include Chapter 7 bankruptcy loans for which the court has discharged the borrower's obligation and the borrower has not reaffirmed the debt. Such loans are placed on non-accrual status.

Loans modified as a TDR during three and six months ending June 30, 2015 or 2014 which experienced a subsequent payment default during the periods are shown below. A payment default is defined as a loan that was 90 days or more past due.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Commercial and industrial
$

 
$
66

 
$

 
$
66

Construction and land
101

 

 
101

 

Consumer real estate
65

 
210

 
65

 
210

Total
$
166

 
$
276

 
$
166

 
$
276



19

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

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 June 30, 2015 and December 31, 2014 were as follows. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
 
June 30, 2015
 
December 31, 2014
Carrying amount 1
$
14,482

 
$
6,408

Outstanding balance
16,687

 
7,372

1 The carrying amounts are reported net of allowance for loan losses of $127 and $180 as of June 30, 2015 and December 31, 2014.
Changes in the accretable yield for PCI loans for the three and six months ended June 30, 2015, are as follows:
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Beginning balance
$
3,736

 
$
2,100

Additions

 
1,907

Reclassifications (to) from nonaccretable
299

 
406

Disposals
(350
)
 
(354
)
Accretion
(375
)
 
(749
)
Balance at end of period
$
3,310

 
$
3,310


Below is an analysis of the age of recorded investment in loans that were past due at June 30, 2015 and December 31, 2014. No Warehouse Purchase Program loans were delinquent at June 30, 2015 or December 31, 2014 and therefore were not included in the following table.
June 30, 2015
 
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
 
$
611

 
$
2,380

 
$
174

 
$
3,165

 
$
1,927,091

 
$
1,930,256

Commercial and industrial
 
1,622

 
428

 
6,236

 
8,286

 
1,299,882

 
1,308,168

Construction and land
 
211

 
441

 
141

 
793

 
229,789

 
230,582

Consumer real estate
 
839

 
4,417

 
2,831

 
8,087

 
837,895

 
845,982

Other consumer
 
420

 
219

 

 
639

 
79,159

 
79,798

Total
 
$
3,703

 
$
7,885

 
$
9,382

 
$
20,970

 
$
4,373,816

 
$
4,394,786

December 31, 2014
 
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
 
$
590

 
$
338

 
$

 
$
928

 
$
1,264,940

 
$
1,265,868

Commercial and industrial
 
1,014

 
191

 
357

 
1,562

 
780,262

 
781,824

Construction and land
 
103

 

 
46

 
149

 
21,149

 
21,298

Consumer real estate
 
6,145

 
3,678

 
3,885

 
13,708

 
510,491

 
524,199

Other consumer
 
281

 
26

 
10

 
317

 
40,174

 
40,491

Total
 
$
8,133

 
$
4,233

 
$
4,298

 
$
16,664

 
$
2,617,016

 
$
2,633,680

1 Includes acquired PCI loans with a total carrying value of $13,761 and $5,945 at June 30, 2015 and December 31, 2014, 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

20

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

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 make “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 consumer loans, credit exposure is monitored by payment history of the loans. Non-performing consumer loans are on nonaccrual status and are generally greater than 90 days past due.
The recorded investment in loans by credit quality indicators at June 30, 2015 and December 31, 2014, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
June 30, 2015
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
1,895,012

 
$
1,199,855

 
$
229,904

 
$
828,044

Special Mention
 
15,562

 
23,890

 

 
3,513

Substandard
 
18,872

 
84,359

 
537

 
11,406

Doubtful
 
810

 
64

 
141

 
3,019

Total
 
$
1,930,256

 
$
1,308,168

 
$
230,582

 
$
845,982

December 31, 2014
 
Commercial Real Estate
 
Commercial and Industrial
 
Construction and Land
 
Consumer Real Estate
Grade: 1
 
 
 
 
 
 
 
 
Pass
 
$
1,231,053

 
$
752,748

 
$
20,990

 
$
505,028

Special Mention
 
17,745

 
7,280

 
159

 
4,230

Substandard
 
16,242

 
21,577

 
103

 
10,467

Doubtful
 
828

 
219

 
46

 
4,474

Total
 
$
1,265,868

 
$
781,824

 
$
21,298

 
$
524,199

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 June 30, 2015 and December 31, 2014.
Consumer Other Credit Exposure
Credit Risk Profile Based on Payment Activity
 
June 30, 2015
 
December 31, 2014
Performing
$
79,555

 
$
40,205

Non-performing
243

 
286

Total
$
79,798

 
$
40,491



21

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.
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).
The Company elects the fair value option for residential mortgage loans held for sale in accordance with ASC 825. This election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, “Derivatives and Hedging.” Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (1) 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. At June 30, 2015, loans held for sale had an aggregate fair value of $19,903 and an aggregate outstanding principal balance of $19,521 and were recorded in mortgage loans held for sale in the consolidated balance sheet. There were no mortgage loans held for sale that were 90 days or greater past due or on non-accrual at June 30, 2015.

The Company enters into a variety of derivative instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the balance sheet. The majority of these derivatives 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. In addition, the Company enters into interest rate lock commitments ("IRLCs") with prospective borrowers. These commitments are carried at fair value based on the fair value of the underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. IRLCs are recorded in other assets or other liabilities in the consolidated balance sheet. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. Please see Note 7 - Derivative Financial Instruments for more information.
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). The fair value of these derivative positions outstanding are included in other assets and other liabilities in the accompanying consolidated balance sheets. Please see Note 7 - Derivative Financial Instruments for more information.
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. Net losses of $147 and net gains of $158 resulting from changes in the fair value of these loans were recorded in net gain on sale of mortgage loans during the three and six months ended June 30, 2015, respectively, and were offset by economic hedging gains of $268 and $102, respectively. These gains and losses were not attributable to credit-specific risk.

22

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

Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
June 30, 2015
 
Fair Value Measurements Using Significant Other Observable Inputs (Level 2)
Assets:
 
 
Agency residential mortgage-backed securities
 
$
221,827

Agency residential collateralized mortgage obligations
 
40,840

US government and agency securities
 
15,384

Municipal bonds
 
35,989

Total securities available for sale
 
$
314,040

 
 
 
Loans held for sale
 
$
19,903

Derivative financial instruments:
 
 
Interest rate lock commitments
 
572

Forward mortgage-backed securities trades
 
59

Loan customer counterparty
 
133

Liabilities:
 
 
Derivative financial instruments:
 
 
Interest rate lock commitments
 

Forward mortgage-backed securities trades
 

Financial institution counterparty
 
133

December 31, 2014
 
 
Assets:
 
 
Agency residential mortgage-backed securities
 
$
145,518

Agency residential collateralized mortgage obligations
 
50,554

US government and agency securities
 
3,627

Total securities available for sale
 
$
199,699

Derivative financial instruments:
 
 
Loan customer counterparty
 
$
64

Liabilities:
 
 
Derivative financial instruments:
 
 
Financial institution counterparty
 
64


23

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

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 June 30, 2015 or December 31, 2014.
June 30, 2015
 
Fair Value Measurements Using Significant Unobservable
Inputs (Level 3)
Assets:
 
 
Impaired loans
 
$
4,771

Foreclosed assets- commercial real estate 1
 
2,616

Foreclosed assets- construction and land 1
 
1,917

Foreclosed assets- other
 
20

December 31, 2014
 
 
Assets:
 
 
Impaired loans
 
$
5,323

Foreclosed assets- commercial real estate
 
551

1 Foreclosed assets acquired in the LegacyTexas Group, Inc. acquisition.

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 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. Foreclosed assets acquired from LegacyTexas Group, Inc. were recorded at their estimated fair value on the acquisition date of January 1, 2015. At June 30, 2015, the Company had $542 in residential mortgage loans in the process of foreclosure.
The Credit Administration department evaluates the valuations on impaired loans and foreclosed assets at least quarterly. The valuations on impaired loans are reviewed at least quarterly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs, such as discounts to collateral, are monitored and adjusted if market conditions change.

24

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

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 June 30, 2015 and at December 31, 2014, were as follows:
 
 
 
 
Fair Value
June 30, 2015
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
192,017

 
$
192,017

 
$

 
$

Securities held to maturity
 
254,526

 

 
262,220

 

Loans held for investment, net
 
4,360,522

 

 

 
4,415,535

Loans held for investment - Warehouse Purchase Program
 
1,084,997

 

 

 
1,085,318

FHLB and Federal Reserve Bank stock
 
69,224

 

 
69,224

 

Accrued interest receivable
 
16,210

 
16,210

 

 

Financial liabilities
 
 
 
 
 
 
 
 
Deposits
 
$
4,527,783

 
$

 
$

 
$
4,257,513

FHLB advances
 
1,217,305

 

 

 
1,222,466

Repurchase agreements
 
66,172

 

 

 
66,174

Subordinated debt
 
11,474

 

 

 
11,474

Accrued interest payable
 
1,303

 
1,303

 

 

 
 
 
 
Fair Value
December 31, 2014
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
132,021

 
$
132,021

 
$

 
$

Securities held to maturity
 
241,920

 

 
251,112

 

Loans held for investment, net
 
2,605,204

 

 

 
2,629,098

Loans held for investment - Warehouse Purchase Program
 
786,416

 

 

 
786,714

FHLB and Federal Reserve Bank stock
 
44,084

 

 
44,084

 

Accrued interest receivable
 
10,347

 
10,347

 

 

Financial liabilities
 
 
 
 
 
 
 
 
Deposits
 
$
2,657,809

 
$

 
$

 
$
2,517,446

FHLB advances
 
862,907

 

 

 
870,022

Repurchase agreement
 
25,000

 

 

 
26,780

Accrued interest payable
 
899

 
899

 

 


25

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

The methods and assumptions used to estimate fair value are as follows:
Estimated fair value is the carrying amount for cash and cash equivalents and accrued interest receivable and payable. The fair values of securities held to maturity 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). For loans held for investment (including Warehouse Purchase Program loans), fair value is based on discounted cash flows using current market offering rates, estimated life, and applicable credit risk. For deposits, FHLB advances and overnight repurchase agreements with depositors, fair value is calculated using the FHLB advance curve to discount cash flows for the estimated life for deposits and according to the contractual repayment schedule for FHLB advances. The fair value of the structured repurchase agreement is based on discounting the estimated cash flows using the current rate at which similar borrowings would be made with similar terms and remaining maturities. The fair value of subordinated debt (consisting of trust preferred securities) is based on current market rates on similar debt in the market. It is not practicable to determine the fair value of FHLB and Federal Reserve Bank stock due to restrictions on its transferability. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements and are not considered significant to this presentation.


26

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 Company enters into IRLCs with prospective residential mortgage borrowers whereby the interest rate on the loan is determined prior to funding and the borrowers have locked into that interest rate. These commitments are carried at fair value in accordance with ASC 815, Derivatives and Hedging. The estimated fair values of IRLCs are based on observable market data and are recorded in other assets or other liabilities in the consolidated balance sheets. The Company adjusts the outstanding IRLCs with prospective borrowers based on the expectation that it will be exercised and the loan will be funded. The initial and subsequent changes in the fair value of IRLCs are a component of net gain on sale of mortgage loans.
The Company actively manages the risk profiles of its IRLCs and mortgage loans held for sale on a daily basis. To manage the price risk associated with IRLCs, the Company enters into forward sales of mortgage-backed securities in an amount similar to the portion of the IRLC expected to close, assuming no change in mortgage interest rates. In addition, to manage the interest rate risk associated with mortgage loans held for sale, the Company enters into forward sales of mortgage-backed securities to deliver mortgage loan inventory to investors. The estimated fair values of forward sales of mortgage-backed securities and forward sale commitments are based on quoted market values and are recorded in other assets or other liabilities in the consolidated balance sheets. The initial and subsequent changes in value on forward sales of mortgage-backed securities are a component of net gain on sale of mortgage loans.
The following table provides the outstanding notional balances and fair values of outstanding positions at June 30, 2015 and recorded gains (losses) during the three or six months ended June 30, 2015 The Company did not have any outstanding derivative positions related to mortgage loans held for sale during the three or six months ended June 30, 2014.
 
 
 
 
 
 
 
 
Recorded Gains/(Losses)
Derivative Positions related to Mortgage Loans Held for Sale:
 
Expiration Dates
 
Outstanding Notional Balance
 
Fair Value
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
IRLCs
 
2015
 
$
16,249

 
$
572

 
$
(147
)
 
$
158

Forward mortgage-backed securities trades
 
2015
 
20,697

 
59

 
268

 
102


The Company enters into certain interest rate derivative positions that are not designated as hedging instruments. These derivative positions related to transactions in which we entered into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, 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. The transaction allows our customer to effectively convert a variable rate loan to a fixed rate. 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. The Company presents derivative instruments at fair value in other assets and other liabilities in the accompanying consolidated balance sheets.


27

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

The notional amounts and estimated fair values of interest rate swap derivative positions outstanding and weighted-average receive and pay interest rates at June 30, 2015 and December 31, 2014 are presented in the following table.

Derivative Positions related to Commercial Loan Interest Rate Swaps:
 
Outstanding
Notional Amount
 
Estimated Fair Value
 
Weighted-Average Interest Rate
 
 
 
Received
 
Paid
June 30, 2015
 
 
 
 
 
 
 
 
Loan customer counterparty
 
$
13,004

 
$
133


5.01
%
 
3.35
%
Financial institution counterparty
 
(13,004
)
 
(133
)
 
3.35

 
5.01

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Loan customer counterparty
 
$
6,199

 
$
64

 
4.38
%
 
2.91
%
Financial institution counterparty
 
(6,199
)
 
(64
)
 
2.91

 
4.38


Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty. In some cases, collateral may be required from the counterparties involved if the net value of the swaps exceed a nominal amount considered to be immaterial. 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 $150 at June 30, 2015 and December 31, 2014, is in excess of our credit exposure. The Company does not offset fair value amounts recognized for derivative instruments and the amounts collected and/or deposited on derivative instruments in its consolidated balance sheets.


28

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


NOTE 8 - REPURCHASE AGREEMENTS
At June 30, 2015, the Company had a $25,000 outstanding structured repurchase agreement with Credit Suisse, as well as $41,172 in overnight repurchase agreements with depositors.
Repurchase agreements, or "repos", which are classified as securities transactions, are not insured by the Federal Deposit Insurance Corporation (“FDIC”), are not guaranteed, and may lose value. A repo is an agreement between two parties whereby one party (a bank as counterparty) sells the other (as customer) a security at a specified price with a commitment to buy the security back at a fixed time and price. Maturities can vary from overnight to greater than a year, with the longer-maturity repos commonly referred to as “structured” or “term” repos. Repos are accounted for as collateralized borrowings and are recorded at amounts equal to cash received. The contractual terms of the repo may require the Company to provide additional collateral if the fair value of the securities underlying the borrowing decline during the term of the agreement. Risks associated with repos primarily relate to the risk of default and deterioration of collateral value. Risks of default generally include 1) failure to deliver cash or securities as required under the transaction, 2) failure to provide or return cash or securities as used for margining purposes, 3) breach of representation, and 4) a repudiation of obligations under the agreement.
Repos are generally designed so that if a bank counterparty fails to perform its obligations under the repo, the customer may take possession of the collateral. While counterparty selection and collateral requirements provide the customer some protection, repos remain subject to counterparty risk. If a counterparty defaults, a loss may be realized on the sale of the underlying security to the extent that the proceeds from the sale and accrued interest of the security are less than the resale price provided in the repurchase agreement, including interest. Moreover, should a bank counterparty declare bankruptcy or become insolvent, a customer may incur delays and costs in selling the underlying security or may suffer a loss of principal and interest.
To mitigate this risk to the customer, the Company, as the bank counterparty, marks securities sold under repos to fair value on a daily basis and provides 115% market value protection on overnight repos and 112% market value protection on its structured repo.
The following table gives information about the Company's repurchase agreements at June 30, 2015, including the types of collateral pledged against these repos and the remaining contractual maturity of the agreements.
 
Overnight
 
One through Three Years
 
Total
Agency mortgage-backed securities
$
51,134

 
$
15,782

 
$
66,916

US government and agency securities
12,133

 

 
12,133

Agency collateralized mortgage obligations

 
15,825

 
15,825

Total repurchase agreements
$
63,267

 
$
31,607

 
94,874

Excess of pledged securities over repurchase obligation
 
 
 
 
(28,702
)
Gross amount of recognized liabilities for repurchase agreements
 
 
 
 
$
66,172


29

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


NOTE 9 - LONG-TERM DEBT

Subordinated debt: Upon the acquisition of LegacyTexas Group, Inc., the Company acquired $15,000 (15,000 shares with a liquidation amount of $1 per security) of Floating Rate Cumulative Trust Preferred Securities ("TruPS") and $464 of common stock through an unconsolidated subsidiary, Legacy Capital Trust II ("Trust II"). Trust II invested the total proceeds from the sale of the TruPS and common stock (totaling $15,464) in floating rate Junior Subordinated Debentures (the "Trust II Debentures") issued by LegacyTexas Group, Inc. The terms of the Trust II Debentures were such that they qualified as Tier I capital under the Federal Reserve Board’s regulatory capital guidelines applicable to bank holding companies. On April 7, 2015, the Company paid this debt in full.

Also upon the acquisition of LegacyTexas Group, Inc., the Company acquired $15,000 (15,000 shares with a liquidation amount of $1 per security) of TruPS and $464 of common stock through an unconsolidated subsidiary, Legacy Capital Trust III ("Trust III"). Trust III invested the total proceeds from the sale of the TruPS and common stock (totaling $15,464) in floating rate Junior Subordinated Debentures (the "Trust III Debentures") issued by the Company. The terms of the Trust III Debentures are such that they qualify as Tier I capital under the Federal Reserve Board’s regulatory capital guidelines applicable to bank holding companies. Interest on the Trust III Debentures is payable quarterly on March 15, June 15, September 15 and December 15 of each year, at a rate equal to the three month LIBOR rate plus 1.70% (1.98% at June 30, 2015). Principal is due at maturity on December 15, 2036. The TruPS are guaranteed by the Company and are subject to redemption. The Company may redeem the Trust III Debentures, in whole or in part, on any March 15, June 15, September 15 and December 15 at an amount equal to the principal amount being redeemed plus accrued and unpaid interest to the redemption date. The Company’s debt obligation related to Trust III was $15,464 at June 30, 2015.

At June 30, 2015, the Trust III TruPS were reduced by a purchase accounting fair value discount of $3,990.

Other long-term debt: Upon the acquisition of LegacyTexas Group, Inc., the Company assumed long-term notes totaling $8,900. These notes were paid off during the first quarter of 2015.



30

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

NOTE 10 - SHARE-BASED COMPENSATION

Compensation cost charged to income for share-based compensation is presented below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Restricted stock
$
1,070

 
$
640

 
$
2,262

 
$
1,295

Stock options
430

 
276

 
957

 
540

Income tax benefit
525

 
320

 
1,127

 
642


A summary of activity in the restricted stock portion of the Company's stock plans is presented below:
 
Six Months Ended June 30, 2015
 
Time-Vested Shares
 
Performance-Based Shares
 
Shares
 
Weighted-Average Grant Date Fair Value 1
 
Shares
 
Weighted-Average Grant Date Fair Value 2
Non-vested at December 31, 2014
297,603

 
$
20.45

 
82,400

 
$
23.89

Granted
80,000

 
21.23

 

 

Vested
(90,339
)
 
20.73

 
(20,600
)
 
23.89

Non-vested at June 30, 2015
287,264

 
$
21.03

 
61,800

 
$
30.20

1For 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 quarterly based upon the closing stock price as quoted on the NASDAQ Stock Market near the last business day of each calendar quarter end.

As of June 30, 2015, there was $6,379 of total unrecognized compensation expense related to non-vested restricted shares awarded under the Company's stock plans. That expense is expected to be recognized over a weighted-average period of 1.98 years.

A summary of activity in the stock option portion of the Company's stock plans as of June 30, 2015 is presented below:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Term
 
Aggregate
Intrinsic Value
Outstanding at December 31, 2014
1,370,873

 
$
20.27

 
8.0

 
$
5,679

Granted
603,500

 
25.51

 
10.0

 

Exercised
(32,522
)
 
17.07

 

 
248

Forfeited
(35,693
)
 
20.07

 

 

Outstanding at June 30, 2015
1,906,158

 
21.99

 
8.3

 
15,646

Fully vested and expected to vest
1,872,584

 
21.93

 
8.3

 
15,495

Exercisable at June 30, 2015
514,322

 
$
17.48

 
6.7

 
$
6,543


As of June 30, 2015, there was $8,206 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 3.78 years.

31

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

NOTE 11 - INCOME TAXES
A summary of the net deferred tax assets as of June 30, 2015 and December 31, 2014, is presented below:
 
June 30, 2015
 
December 31, 2014
Net deferred tax assets
$
16,816

 
$
13,026

Estimated annual effective tax rate
35
%
 
 


NOTE 12 - 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 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. Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment were funded, the Company would seek payment from the customer under pre-arranged terms. The Company's policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
The contractual amounts of financial instruments with off‑balance sheet risk at June 30, 2015 and December 31, 2014, 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.
 
June 30, 2015
 
December 31, 2014
Unused commitments to extend credit
$
1,128,854

 
$
520,659

Unused capacity on Warehouse Purchase Program loans
323,003

 
414,584

Standby letters of credit
17,459

 
7,391

Total unused commitments/capacity
$
1,469,316

 
$
942,634

In addition to the commitments above, the Company had overdraft protection available in the amounts of $104,124 and $73,044 at June 30, 2015 and December 31, 2014, respectively.
In regards 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.
At June 30, 2015, the Company had $3,420 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.

32

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


NOTE 13 - RECENT ACCOUNTING DEVELOPMENTS    
In April 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This ASU simplifies the presentation of debt issuance costs by requiring these costs to be presented as a deduction from the corresponding debt liability. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts and premiums. The recognition and measurement guidance for debt issuance costs is not affected; therefore, these costs will continue to be amortized as interest expense using the effective interest method. The ASU is effective in annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Upon adoption, an entity must apply the new guidance retrospectively to all prior periods presented in the financial statements. An entity is also required in the year of adoption to provide certain disclosures about the change in accounting principle, including the nature and reason for the change, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items. The Company is evaluating the possible impact of this ASU on its disclosures but does not expect this ASU to have a significant impact on the Company's consolidated statements of income or financial condition.
In May 2015, the FASB issued ASU 2015-07, "Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share." This ASU eliminates the current requirement to categorize within the fair value hierarchy investments whose fair values are measured at net asset value ("NAV"). Instead, entities will be required to disclose the fair values of such investments so that financial statement users can reconcile amounts reported in the fair value hierarchy table and the amounts reported on the balance sheet. The ASU is effective in annual and interim periods beginning after December 15, 2015. The Company does not currently have any investments measured at NAV within its fair value hierarchy and does not expect this ASU to have a significant impact on the Company's statement of income or financial condition.

33

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

NOTE 14 - ACQUISITION
On January 1, 2015, the Company acquired LegacyTexas Group, Inc., a bank holding company and the parent company of LegacyTexas Bank. Immediately following the Merger, the Company amended its articles of incorporation and changed its name to LegacyTexas Financial Group, Inc. Also immediately following the Merger, the Bank merged with and into LegacyTexas Bank and assumed the LegacyTexas Bank name.
The Company issued 7,850,070 shares of common stock and paid out $115,150 in cash to LegacyTexas Group, Inc. shareholders in consideration for the Merger.
This business combination was accounted for under the acquisition method of accounting. Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. As the consideration paid for LegacyTexas Group, Inc. exceeded the provisional value of the net assets acquired, goodwill of $150,982 was recorded related to the Merger. This goodwill resulted from the combination of expected operational synergies and increased market share in the Company's North Texas market area. Goodwill is not tax deductible. The merger also resulted in a core deposit intangible of $880, which will be amortized on an accelerated basis over the estimated life, currently expected to be eight years.
In the second quarter of 2015, management became aware of a misappropriation of approximately $2,450 in vault cash from one of the former LegacyTexas Bank branches it acquired in the Merger.  Upon determining that the misappropriation occurred, management promptly notified law enforcement officials and is cooperating with and assisting them in their investigation of this matter.  Management also subsequently engaged a team of independent third-party forensic accountants to conduct an investigation of the matter and, based on preliminary findings of this investigation, the team has informed management of its belief that the misappropriation occurred in all material respects prior to completion of the Merger.  Both investigations are still ongoing. The Company maintains first party liability insurance policies in an amount in excess of the Company’s loss and has notified its carriers.   The claim, however, may not be resolved prior to year-end 2015, and there can be no assurance if or when there will be any recovery. Therefore, the Company reduced the cash acquired from LegacyTexas Group, Inc. by $2,450 and increased goodwill by $1,592, which is net of tax. This adjustment to goodwill related to cash was partially offset by a $218 (net of tax) reduction to goodwill due to a $336 increase in the valuation of the core deposit intangible.

34

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

Fair value: The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (i) twelve months from the date of the acquisition or (ii) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The Company is currently in the process of obtaining fair values for certain acquired assets and assumed liabilities; therefore, the following estimates are preliminary. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date of January 1, 2015, showing the estimated fair value as reported at March 31, 2015 and the revised estimated fair value at June 30, 2015.
 
 
 
 
 
 
 
Initial Estimate
 
Adjustments
 
Revised Estimate
Assets
 
 
 
 
 
Cash and cash equivalents
$
246,198

 
$
(2,450
)
1 
$
243,748

Securities
153,566

 

 
153,566

Loans held for sale
17,639

 

 
17,639

Loans held for investment
1,399,778

 

 
1,399,778

Premises and equipment, net
36,605

 

 
36,605

Goodwill
149,608

 
1,374

1,2,3 
150,982

Core deposit intangible
544

 
336

2 
880

Other assets
49,254

 
740

3 
49,994

Total assets
$
2,053,192

 
$

 
$
2,053,192

Liabilities
 
 
 
 
 
Deposits
$
1,629,782

 
$

 
$
1,629,782

Borrowings
102,636

 

 
102,636

Other liabilities
18,400

 

 
18,400

Total liabilities
$
1,750,818

 
$

 
$
1,750,818

 
 
 
 
 
 
Consideration
 
 
 
 
 
Market value of common stock issued
$
187,224

 
 
 
 
Cash paid
115,150

 
 
 
 
Total fair value of consideration
$
302,374

 
 
 
 
1 To reflect the $2,450 adjustment to cash acquired discussed above.
2 Valuation assumptions for attrition, explicit interest rates and account service expense revised.
3 Tax impact of the adjustments described above
Merger-related expenses and pro forma information: The below table presents pre-tax merger and acquisition expenses incurred by the Company related the Merger. Merger and acquisition expenses are reflected on the Company's income statement for the applicable periods in non-interest expense.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Merger and acquisition costs
$
8

 
$
652

 
$
1,553

 
$
821


35

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

The following pro forma information presents the results of operations for the year ended December 31, 2014, as if the LegacyTexas Group, Inc. acquisition had occurred on January 1, 2014.
 
December 31,
 
2014
Net interest income
$
204,758

Net income
48,402

Basic earnings per share
1.05

Diluted earnings per share
1.04

The above pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the merged companies that would have been achieved had the Merger occurred on January 1, 2014, nor are they intended to represent or be indicative of future results of operations. The pro forma results do not include expected operating cost savings as a result of the Merger. These pro forma results require significant estimates and judgments, particularly as it relates to valuation and accretion of income associated with acquired loans. Pro forma adjustments included the estimated purchase accounting adjustment on acquired non-impaired loans based on the difference between the fair value and the outstanding principal balance of those loans, recognized over the estimated remaining term of the loans, the estimated purchase accounting adjustment to reflect amortization of the core deposit intangible, as well as the tax effects of these adjustments. Additionally, because LegacyTexas Group, Inc. was a Subchapter S corporation before the Merger, and did not incur any federal income tax liability, an adjustment has been included to estimate the impact of federal income taxes on LegacyTexas Group, Inc.'s net income for the year presented. The tax adjustment was calculated at a 35% tax rate.
Acquired Loans and Purchased Credit Impaired Loans: Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over from LegacyTexas Group, Inc.
The Company has identified certain acquired loans which have experienced credit deterioration since origination (“purchased credit impaired loans” or “PCI” loans). PCI loan identification considers payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality since origination. Accretion of purchase discounts on PCI loans are based on estimated future cash flows, regardless of contractual maturities, that include undiscounted expected principal and interest payments and use credit risk, interest rate and prepayment risk models to incorporate management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. Accretion of purchase discounts on acquired non-impaired loans will be recognized on a level-yield basis based on contractual maturity of individual loans per ASC 310-20.
The following table discloses the preliminary fair value and contractual value of loans acquired from LegacyTexas Group, Inc. on January 1, 2015:
 
PCI Loans
 
Acquired Non-Impaired Loans
 
Total Acquired Loans
Commercial real estate
$
6,176

 
$
536,314

 
$
542,490

Commercial and industrial
2,245

 
365,736

 
367,981

Construction and land
430

 
195,156

 
195,586

Consumer real estate
178

 
292,843

 
293,021

Other consumer
312

 
18,027

 
18,339

Total fair value
$
9,341

 
$
1,408,076

 
$
1,417,417

Contractual principal balance
$
10,861

 
$
1,426,271

 
$
1,437,132


36

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

The following table presents additional preliminary information about PCI loans acquired from LegacyTexas Group, Inc. on January 1, 2015:
Contractually required principal and interest
$
12,574

Non-accretable difference
1,326

Cash flows expected to be collected
11,248

Accretable difference
1,907

Fair value of PCI loans
$
9,341


NOTE 15 — SUBSEQUENT EVENTS
The Company evaluated events from the date of the consolidated financial statements on June 30, 2015 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated July 29, 2015. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.

37


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
When used in filings by LegacyTexas Financial Group, Inc. (the “Company,” the “Registrant,” “we,” or “our” in these financial statements) with the Securities and Exchange Commission (the “SEC”), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “intends” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those presently anticipated or projected, including, among other things: the expected cost savings, synergies and other financial benefits from the Company's merger with LegacyTexas Group, Inc. 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; the Company's 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 the Company's 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 and our bank subsidiary by the Board of Governors of the Federal Reserve System and by the Texas Department of Banking 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; 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, 2014. The factors listed above could materially affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake - and specifically declines any obligation - to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

Overview
The Company is a Maryland corporation and LegacyTexas Bank is its wholly owned principal operating subsidiary. On January 1, 2015, LegacyTexas Group, Inc. ("LegacyTexas") merged into the Company and the Company changed its name from ViewPoint Financial Group, Inc. to LegacyTexas Financial Group, Inc. As part of the merger, ViewPoint Bank, N.A., the wholly owned subsidiary of the Company, merged with and into LegacyTexas Bank, the wholly-owned subsidiary of LegacyTexas prior to the merger, with LegacyTexas Bank as the surviving bank. In connection with the Company’s name change, its ticker symbol on the Nasdaq Global Select Market was changed from VPFG to LTXB.
Unless the context otherwise requires, references in this document to the “Company” refer to LegacyTexas Financial Group, Inc. (formerly known as ViewPoint Financial Group, Inc.) and its predecessor, ViewPoint Financial Group, a United States corporation, and references to the “Bank” include ViewPoint Bank, N.A. which was the Company's wholly owned operating subsidiary prior to January 1, 2015. References to “we,” “us,” and “our” means LegacyTexas Financial Group, Inc. or LegacyTexas Bank, unless the context otherwise requires.

38


Until its merger with LegacyTexas Bank on January 1, 2015, the Bank operated under a national bank charter, with oversight by the Office of the Comptroller of the Currency (“OCC”) and back-up oversight by the FDIC. Effective January 1, 2015, regulators of LegacyTexas Bank are the Texas Department of Banking (“TDOB”) and the Board of Governors of the Federal Reserve System (“FRB”) with back-up oversight by the FDIC. LegacyTexas Bank is required to have certain reserves and stock set by the FRB. LegacyTexas Bank is 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.

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 allows mortgage banking company customers to close one- to four-family real estate loans in their own name and manage its cash flow needs until the loans are sold to investors. We also offer brokerage services for the purchase and sale of non-deposit investment and insurance products through a third party brokerage arrangement. 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.

Performance Highlights

Gross loans held for investment at June 30, 2015, excluding Warehouse Purchase Program loans, grew $1.76 billion, or 66.9%, from December 31, 2014, with $1.17 billion of net growth resulting from loans acquired from LegacyTexas. Excluding loans acquired from LegacyTexas, gross loans held for investment, excluding Warehouse Purchase Program loans, increased by $588.7 million, or 15.5%, from December 31, 2014.

Warehouse Purchase Program loans at June 30, 2015 totaled $1.08 billion, a $298.6 million, or 38.0%, increase from December 31, 2014.

Deposits at June 30, 2015 increased by $1.87 billion, or 70.4%, from December 31, 2014, with $1.63 billion of growth resulting from deposits acquired from LegacyTexas. Excluding deposits acquired from LegacyTexas, deposits increased by $240.2 million, or 5.6%, from December 31, 2014.

Net interest margin for the quarter ended June 30, 2015 was 4.06%, a 30 basis point increase compared to the second quarter of 2014, which includes 20 basis points of accretion of interest related to purchase accounting fair value adjustments for the second quarter of 2015.

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 2014 Form 10-K.
Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and more susceptible to fluctuations in industry, market and economic conditions. While management uses available information to recognize losses on loans, changes, in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is

39


maintained at a level that represents coverage of our best estimate of inherent credit losses in the loan portfolio as of June 30, 2015.
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 loan losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Comparison of Financial Condition at June 30, 2015 and December 31, 2014
General. Total assets increased by $2.51 billion, or 60.2%, to $6.67 billion at June 30, 2015 from $4.16 billion at December 31, 2014, primarily due to the acquisition of LegacyTexas on January 1, 2015, which added $2.05 billion in assets, including $151.0 million in goodwill.
Loans. Gross loans held for investment increased by $2.06 billion, or 60.2%, to $5.48 billion at June 30, 2015 from $3.42 billion at December 31, 2014, while one- to four-family mortgage loans held for sale totaled $19.9 million at June 30, 2015. Prior to the January 1, 2015 merger with LegacyTexas, the Company did not originate for resale or sell mortgage loans to outside investors.
 
June 30,
 2015
 
December 31, 2014
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Commercial real estate
$
1,930,256

 
$
1,265,868

 
$
664,388

 
52.5
%
Commercial and industrial
1,308,168

 
781,824

 
526,344

 
67.3

Construction and land
230,582

 
21,298

 
209,284

 
982.6

Consumer real estate
845,982

 
524,199

 
321,783

 
61.4

Other consumer
79,798

 
40,491

 
39,307

 
97.1

Gross loans held for investment, excluding Warehouse Purchase Program loans
4,394,786

 
2,633,680

 
1,761,106

 
66.9

Warehouse Purchase Program loans
1,084,997

 
786,416

 
298,581

 
38.0

Gross loans held for investment
5,479,783

 
3,420,096

 
2,059,687

 
60.2

Loans held for sale
19,903

 

 
19,903

 
N/M

Gross loans
$
5,499,686

 
$
3,420,096

 
$
2,079,590

 
60.8
%
N/M - not meaningful

Gross loans held for investment at June 30, 2015, excluding Warehouse Purchase Program loans, grew $1.76 billion, or 66.9%, from December 31, 2014, with $1.17 billion of net growth resulting from loans acquired from LegacyTexas. Excluding loans acquired from LegacyTexas and Warehouse Purchase Program loans, gross loans held for investment increased by $588.7 million, or 15.5%, from December 31, 2014, with increased commercial lending driving the organic growth. Commercial and industrial loans at June 30, 2015 increased $526.3 million, or 67.3%, from December 31, 2014, with $242.6 million of net growth resulting from loans acquired from LegacyTexas. Commercial real estate loan balances at June 30, 2015 increased $664.4 million, or 52.5%, from December 31, 2014, with $523.2 million of net growth resulting from loans acquired from LegacyTexas. Construction and land loans at June 30, 2015 increased $209.3 million, or 982.6%, from December 31, 2014, with $126.2 million of net growth resulting from loans acquired from LegacyTexas, while consumer real estate loans increased $321.8 million, or 61.4%, for the same period, which includes $241.3 million of loans acquired from LegacyTexas. Following the merger with LegacyTexas, the Company now originates one- to four- family real estate loans and sells these loans to outside investors, as well as adding a small portion to the Company's consumer real estate portfolio. Also, the Company originates consumer home equity and home improvement loans.


40


Energy loans, which are reported as commercial and industrial loans, totaled $402.6 million at June 30, 2015, up $43.0 million from $359.6 million at December 31, 2014. The growth includes $5.6 million in energy loans acquired from LegacyTexas. In May 2013, the Company formed its Energy Finance group, which is comprised of a group of seasoned lenders, executives and credit risk professionals with more than 100 years of combined Texas energy experience, to focus on providing loans to private and public oil and gas companies throughout the United States. The group also offers the Bank's full array of commercial services, including Treasury Management and letters of credit, to its customers. Substantially all of the loans in the Energy portfolio are reserve based loans, secured by deeds of trust on properties containing proven oil and natural gas reserves. Three loans managed by the Energy Finance group are not secured by oil and gas reserves. These loans, with a combined commitment of $51.5 million and a total outstanding balance of $21.3 million at June 30, 2015, are categorized as “Midstream and Other” loans. Loans in this category are typically related to the transmission of oil and natural gas and would only be indirectly impacted by declining commodity prices. Please see "Classified Assets" for additional information about the credit quality of the energy portfolio.
At June 30, 2015, the Company had eight relationships in the Commercial & Industrial loan portfolio (outside of the $402.6 million reported as energy loans) that are involved in the energy exploration sector providing front-end service to companies who drill oil and gas wells and whose business could be impacted by the dramatic reduction in drilling activity as a result of the severe drop in the price of oil and gas.  These relationships totaled $6.1 million at June 30, 2015, of which two relationships totaling $1.1 million are classified as Substandard, including $950,000 that is considered impaired and non-performing. The other six relationships consisted of performing loans and were not adversely classified. 
Warehouse Purchase Program loans increased by $298.6 million, or 38.0%, to $1.08 billion at June 30, 2015 from $786.4 million at December 31, 2014. Although not bound by any legally binding commitment, when a purchase decision is made, the Company purchases a 100% participation interest in the loans originated by our mortgage banking company customers, which are then held as one- to four- family mortgage loans. 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 Company to the investor selected by the originator and approved by the Company. Loans funded by the Warehouse Purchase Program during the second quarter of 2015 consisted of 50% conforming and 50% government loans.
Mortgage reform rules mandated by the Dodd-Frank Act became effective in January 2014, requiring lenders to make a reasonable, good faith determination of a borrower’s ability to repay any consumer closed-end credit transaction secured by a dwelling and to limit prepayment penalties. Increased risks of legal challenge, private right of action and regulatory enforcement are presented by these rules. The Company originates and purchases loans that do not meet the definition of a “qualified mortgage” (“QM”). At June 30, 2015, the Company had $64.6 million in non-QM loans, consisting of home equity and home improvement loans totaling $46.2 million and residential mortgage loans totaling $18.4 million. To mitigate the risks involved with non-QM loans, the Company has implemented systems, processes, procedural and product changes, and maintains its underwriting standards, to ensure that the “ability-to-repay” requirements of the new rules are adequately addressed.
Allowance for Loan Losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with US GAAP. It is our estimate of credit losses 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 are initially 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 may 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 loan loss reserve exceeds the remaining purchase discount.
PCI loans are not considered nonperforming 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.

41


Our non-performing loans, which consist of nonaccrual loans, include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan warrant placing the loan on nonaccrual status.
At June 30, 2015, of our $10.1 million in TDRs, $1.1 million were accruing interest and $9.0 million were classified as nonaccrual. For more information about the Company's TDRs, please see Item 1 (Financial Statements) - Note 5 - "Loans" under Part 1 of this report.
Non-performing loans to total loans held for investment, excluding Warehouse Purchase Program loans, was 0.61% at June 30, 2015 compared to 0.89% at December 31, 2014. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was 0.49% at June 30, 2015 compared to 0.69% at December 31, 2014. Non-performing loans increased by $3.3 million to $26.9 million at June 30, 2015 from $23.5 million at December 31, 2014. This increase was primarily due to a $6.7 million increase in commercial and industrial non-accrual loans, which was driven by an energy loan totaling $5.2 million that was placed on non-accrual status during the second quarter of 2015. This loan was considered impaired on June 30, 2015; however the Company does not have a specific reserve set aside for this loan and is not currently anticipating a loss. The increase in non-performing loans compared to December 31, 2014 was partially offset by a $3.2 million decrease in commercial real estate non-accrual loans, which was due to a $3.2 million pay-off of a non-performing commercial real estate loan during the second quarter of 2015.
Our allowance for loan losses was $30.9 million at June 30, 2015 compared to $25.5 million at December 31, 2014, or 0.56% of total loans held for investment (including Warehouse Purchase Program loans) at June 30, 2015 compared to 0.75% at December 31, 2014. Our allowance for loan losses to total loans held for investment excluding Warehouse Purchase Program loans and loans acquired from LegacyTexas and Highlands was 0.98% at June 30, 2015 compared to 1.00% at December 31, 2014. Our allowance for loan losses to non-performing loans was 114.96% at June 30, 2015 compared to 108.69% at December 31, 2014.
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. The total amount of classified assets represented 16.0% of our total equity and 1.9% of our total assets at June 30, 2015 compared to 9.7% of our total equity and 1.3% of our total assets at December 31, 2014. The aggregate amount of classified assets at the dates indicated was as follows:
 
June 30,
 2015
 
December 31,
 2014
 
(Dollars in thousands)
Doubtful
$
4,038

 
$
5,576

Substandard
115,819

 
48,871

Total classified loans
119,857

 
54,447

Foreclosed assets
4,553

 
551

Total classified assets
$
124,410

 
$
54,998

Total classified assets reported for June 30, 2015 included $13.0 million in substandard loans and $4.5 million in other real estate owned acquired from LegacyTexas. The Company 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 could 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 $78.4 million in loans that were classified as "substandard" but were still accruing interest and were not considered impaired at June 30, 2015 (excluding PCI loans.)

42


Included in the $78.4 million are four energy lending relationships totaling $58.6 million that were downgraded as a result of collateral value deterioration due to commodity price declines. As a result of the deterioration the Company has taken action to improve the risk profile of the loans. These actions range from instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support, and requiring additional equity injections or asset sales.  Borrower response to these actions has been favorable and the Company believes the loans will be paid off or paid down to acceptable risk levels within a reasonable time frame. These loans, which were performing at June 30, 2015, have been considered in management's analysis of potential loan losses.
Securities. Our securities portfolio increased $126.9 million, or 28.7%, to $568.6 million at June 30, 2015 from $441.6 million at December 31, 2014. The increase in our securities portfolio primarily resulted from $153.6 million of securities that were acquired from LegacyTexas. During the six months ended June 30, 2015, paydowns and maturities of securities totaling $58.1 million were used to fund loan growth and were partially offset by purchases totaling $51.1 million. $16.6 million in securities were sold during the six months ended June 30, 2015, for a gain of $211,000.
Deposits. Total deposits increased $1.87 billion, or 70.4%, to $4.53 billion at June 30, 2015 from $2.66 billion at December 31, 2014, with $1.63 billion of growth resulting from deposits acquired from LegacyTexas.
 
June 30,
 2015
 
December 31, 2014
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Non-interest-bearing demand
$
1,084,146

 
$
494,376

 
$
589,770

 
119.3
%
Interest-bearing demand
734,430

 
472,703

 
261,727

 
55.4

Savings and money market
1,834,075

 
1,176,749

 
657,326

 
55.9

Time
875,132

 
513,981

 
361,151

 
70.3

Total deposits
$
4,527,783

 
$
2,657,809

 
$
1,869,974

 
70.4
%

Excluding deposits acquired from LegacyTexas, total deposits increased by $240.2 million, or 5.6%, from December 31, 2014. Savings and money market deposits at June 30, 2015 increased by $657.3 million, or 55.9%, from December 31, 2014, with $534.6 million of growth resulting from deposits acquired from LegacyTexas. Non-interest-bearing demand deposits increased by $589.8 million, or 119.3%, from December 31, 2014, with $499.7 million of growth resulting from deposits acquired from LegacyTexas. Interest-bearing demand and time deposits increased by $261.7 million and $361.2 million, respectively, from December 31, 2014; excluding $258.7 million of interest-bearing demand and $336.8 million of time deposits acquired from LegacyTexas, interest-bearing demand and time deposits increased by $3.0 million and $24.3 million, respectively.
Borrowings. FHLB advances, net of an $809,000 restructuring prepayment penalty, increased $354.4 million, or 41.1%, to $1.22 billion at June 30, 2015 from $862.9 million at December 31, 2014. The outstanding balance of FHLB advances increased due to higher Warehouse Purchase Program balances at June 30, 2015, of which a portion has been strategically funded with short-term advances. At June 30, 2015, the Company was eligible to borrow an additional $587.1 million from the FHLB.

43


The table below shows FHLB advances by maturity and weighted average rate at June 30, 2015:
 
Balance
 
Weighted Average Rate
 
(Dollars in thousands)
Less than 90 days
$
1,104,582

 
0.27
%
90 days to less than one year
29,994

 
2.65

One to three years
72,597

 
3.03

After three to five years
8,318

 
4.87

After five years
2,623

 
5.49

 
1,218,114

 
0.54
%
Restructuring prepayment penalty
(809
)
 
 
Total
$
1,217,305

 
 
Additionally, the Company has eight available federal funds lines of credit with other financial institutions totaling $250.0 million and was eligible to borrow $43.3 million from the Federal Reserve Bank discount window. In addition to FHLB advances, at June 30, 2015 the Company had a $25.0 million outstanding structured repurchase agreement with Credit Suisse, as well as $41.2 million in overnight repurchase agreements with depositors. Also, at June 30, 2015, subordinated debt consisted of $11.5 million of trust preferred securities that were acquired from LegacyTexas (reported net of a purchase accounting fair value adjustment of $4.0 million). On April 7, 2015, the Company paid off $15.0 million of TruPS (please see Note 8 - Long-Term Debt of the unaudited interim financial statements provided in this Form 10-Q.)
Shareholders’ Equity. Total shareholders' equity increased by $208.7 million, or 36.7%, to $776.9 million at June 30, 2015 from $568.2 million at December 31, 2014.
 
June 30,
 2015
 
December 31, 2014
 
Dollar
Change
 
Percent
Change
 
(Dollars in thousands)
Common stock
$
476

 
$
400

 
$
76

 
19.0
 %
Additional paid-in capital
571,083

 
386,549

 
184,534

 
47.7

Retained earnings
219,493

 
195,327

 
24,166

 
12.4

Accumulated other comprehensive income, net
122

 
930

 
(808
)
 
(86.9
)
Unearned ESOP shares
(14,250
)
 
(14,983
)
 
733

 
(4.9
)
Total shareholders’ equity
$
776,924

 
$
568,223

 
$
208,701

 
36.7
 %
The increase in shareholders' equity at June 30, 2015, compared to December 31, 2014, was primarily due to the issuance of 7,850,070 shares representing the stock portion of the merger consideration paid to LegacyTexas shareholders, which increased common stock and additional paid-in capital by a combined $187.2 million. Retained earnings were increased by net income of $36.6 million recognized during the six months ended June 30, 2015, which was partially offset by the payment of quarterly dividends totaling $0.26 per common share, or $12.4 million, during the six months ended June 30, 2015.

44


Comparison of Results of Operations for the Three Months Ended June 30, 2015 and 2014

General. Net income for the three months ended June 30, 2015 was $20.3 million, an increase of $11.4 million, or 129.7%, from net income of $8.8 million for the three months ended June 30, 2014. The increase in net income from the second quarter of 2014 was driven by a $27.7 million increase in interest income on loans and a $6.5 million increase in non-interest income, which was partially offset by a $1.0 million increase in interest expense on deposits, a $2.6 million increase in the provision for loan losses, and a $13.6 million increase in non-interest expense. Basic and diluted earnings per share for the three months ended June 30, 2015 was $0.44, a $0.21 increase from $0.23 for the three months ended June 30, 2014.

Interest Income. Interest income increased by $27.9 million, or 75.1%, to $65.0 million for the three months ended June 30, 2015 from $37.1 million for the three months ended June 30, 2014.
 
Three Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
61,551

 
$
33,888

 
$
27,663

 
81.6
 %
Securities
2,976

 
3,014

 
(38
)
 
(1.3
)
Interest-bearing deposits in other financial institutions
139

 
71

 
68

 
95.8

FHLB and Federal Reserve Bank stock and other
301

 
136

 
165

 
121.3

 
$
64,967

 
$
37,109

 
$
27,858

 
75.1
 %

The $27.9 million increase in interest income compared to the three months ended June 30, 2014 was primarily due to a $27.7 million, or 81.6%, increase in interest income on loans, which was driven by increased volume in all loan categories resulting from loans acquired from LegacyTexas on January 1, 2015, as well as organic growth during the year. The average balance of commercial real estate loans increased by $703.1 million to $1.85 billion from the second quarter of 2014, resulting in an $8.4 million increase in interest income. The $703.1 million in growth includes $551.0 million in commercial real estate loans acquired from LegacyTexas. The average balance of commercial and industrial loans increased by $658.1 million to $1.25 billion from the second quarter of 2014, resulting in an $8.6 million increase in interest income. The $658.1 million in growth includes $337.1 million in commercial and industrial loans acquired from LegacyTexas. The average balance of consumer real estate loans increased by $328.1 million to $805.6 million from the second quarter of 2014, resulting in a $4.4 million increase in interest income. The $328.1 million in growth includes $264.0 million in consumer real estate loans acquired from LegacyTexas. The average balance of Warehouse Purchase Program loans increased by $348.1 million to $920.0 million from the second quarter of 2014, which resulted in a $2.6 million increase in interest income.

Interest income on loans for the three months ended June 30, 2015 increased by $2.6 million due to accretion of purchase accounting fair value adjustments on loans acquired from LegacyTexas, which included $1.1 million in accretion income recorded on acquired commercial and industrial loans, $686,000 in accretion income recorded on acquired commercial real estate loans, $278,000 in accretion income recorded on acquired construction and land loans, and $566,000 recorded on acquired consumer real estate loans. Accretion of purchase accounting fair value adjustments resulting from the LegacyTexas acquisition, as well as a smaller amount related to the Highlands Bank acquisition in 2012, contributed 17 basis points, 37 basis point and 43 basis points to the average yields on commercial real estate, commercial and industrial and consumer real estate loans, respectively, for the second quarter of 2015.

45


Interest Expense. Interest expense increased by $1.0 million, or 22.9%, to $5.1 million for the three months ended June 30, 2015 from $4.2 million for the three months ended June 30, 2014.

 
Three Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Interest expense
 
 
 
 
 
 
 
Deposits
$
3,049

 
$
2,035

 
$
1,014

 
49.8
 %
FHLB advances
1,774

 
1,948

 
(174
)
 
(8.9
)
Repurchase agreements and subordinated debt
323

 
204

 
119

 
58.3

 
$
5,146

 
$
4,187

 
$
959

 
22.9
 %

The increase in interest expense for the three months ended June 30, 2015 compared to the same period in 2014, was primarily due to an increase in interest expense on deposits, which was driven by increased volume in all deposit categories resulting from deposits acquired from LegacyTexas on January 1, 2015, as well as organic growth during the 2015 period in savings and money market deposit balances. An $806.6 million increase in the average balance of savings and money market deposits to $1.81 billion from the second quarter of 2014 was partially offset by a 13 basis point reduction in the average rate, resulting in a $10,000 increase in interest expense. The $806.6 million in growth includes $534.6 million in savings and money market deposits acquired from LegacyTexas. The average balance of time deposits increased by $336.6 million to $839.6 million from the second quarter of 2014, resulting in a $594,000 increase in interest expense. The $336.6 million in growth includes $336.8 million in time deposits acquired from LegacyTexas. The average balance of interest-bearing demand deposits increased by $233.3 million to $701.6 million from the second quarter of 2014, resulting in a $410,000 increase in interest expense. The $233.3 million in growth includes $258.7 million in interest-bearing demand deposits acquired from LegacyTexas.

Net Interest Income. Net interest income increased by $26.9 million, or 81.7%, to $59.8 million for the three months ended June 30, 2015 from $32.9 million for the three months ended June 30, 2014. The net interest margin increased by 30 basis points to 4.06% for the three months ended June 30, 2015 from 3.76% for the same period last year. The net interest rate spread increased by 34 basis points to 3.95% for the three months ended June 30, 2015 from 3.61% for the same period last year. Accretion of interest resulting from the merger with LegacyTexas on January 1, 2015, as well as the 2012 Highlands acquisition, contributed 20 basis points to the net interest margin and average yield on earning assets for the quarter ended June 30, 2015, compared to four basis points for the quarter ended June 30, 2014. The average yield on earning assets for the second quarter of 2015 was 4.41%, a 17 basis point increase from the second quarter of 2014, which was primarily due to increased volume in higher-yielding commercial loans, as well as accretion income resulting from the merger with LegacyTexas. The average cost of interest-bearing liabilities for the three months ended June 30, 2015 was 0.46%, down 17 basis points from the three months ended June 30, 2014.

Provision for Loan Losses. The Company recorded a provision for loan losses of $3.8 million for the quarter ended June 30, 2015, compared to $1.2 million for the quarter ended June 30, 2014. The increase in the provision for loan losses compared to the second quarter of 2014 was primarily related to increased organic loan production, as well as loans acquired from LegacyTexas that were re-underwritten following completion of the merger with LegacyTexas. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to the Company's allowance for loan loss methodology.

Consistent with prior quarters, the Company has continued to apply qualitative reserve factors to provide for additional allowance for loan losses due to the economic uncertainty in Texas related to the recent decline in the price of oil. To date, the Company has not recognized a loss from loans in the Energy portfolio, which we believe is a reflection of prudent risk mitigation techniques.  These techniques include sound underwriting (reasonable advance rates based on number and diversification of wells), sound policy (requiring hedges on production sales) and conservative collateral valuations (frequent borrowing base determinations at prices below NYMEX posted rates).  All borrowing base valuations are performed by experienced and nationally recognized third party firms intimately familiar with the properties and their production history. At June 30, 2015, 1.5% of the Company's loan portfolio (excluding Warehouse Purchase Program loans) consisted of criticized energy loans, and all but one of these energy loans were performing. One energy loan totaling $5.2 million was on non-accrual status and was considered impaired at June 30, 2015; however, the Company does not have a specific reserve set aside for this loan and does not currently anticipate a loss.


46


Non-interest Income. Non-interest income increased by $6.5 million, or 120.4%, to $12.0 million for the three months ended June 30, 2015 from $5.4 million for the three months ended June 30, 2014.
 
Three Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
$
7,941

 
$
5,113

 
$
2,828

 
55.3
 %
Net gain on sale of mortgage loans
2,121

 

 
2,121

 
N/M

Bank-owned life insurance income
424

 
145

 
279

 
192.4

Gain on sale and disposition of assets
429

 
727

 
(298
)
 
(41.0
)
Other
1,049

 
(556
)
 
1,605

 
N/M

 
$
11,964

 
$
5,429

 
$
6,535

 
120.4
 %
N/M - not meaningful

The $6.5 million increase in non-interest income from the three months ended June 30, 2014 was primarily due to a $2.8 million increase in service charges and other fees, which was driven by a $299,000 increase in debit card income, a $156,000 increase in Warehouse Purchase Program fee income, as well as growth in service charges related to accounts acquired from LegacyTexas and the addition of $1.3 million of title income through the acquisition of LegacyTexas' title subsidiary. Additionally, the Company recognized $2.1 million in net gains on the sale of mortgage loans during the second quarter of 2015, which includes the gain recognized on $61.5 million of one-to four-family mortgage loans that were sold or committed for sale during the second quarter of 2015, fair value changes on mortgage derivatives and mortgage fees collected. Prior to the January 1, 2015 merger with LegacyTexas, the Company did not originate for resale or sell mortgage loans to outside investors; therefore, a comparable gain was not recorded in the second quarter of 2014. Other non-interest income for the second quarter of 2015 included a $55,000 net increase in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the "CRA Funds"), compared to a $637,000 net decrease in the CRA Funds recorded in the second quarter of 2014, as well as $790,000 of insurance income added through the acquisition of LegacyTexas.
Non-interest Expense. Non-interest expense increased by $13.6 million, or 58.1%, to $36.9 million for the three months ended June 30, 2015 from $23.4 million for the three months ended June 30, 2014.
 
Three Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
22,549

 
$
14,127

 
$
8,422

 
59.6
 %
Merger and acquisition costs
8

 
652

 
(644
)
 
(98.8
)
Advertising
1,048

 
493

 
555

 
112.6

Occupancy and equipment
3,838

 
1,819

 
2,019

 
111.0

Outside professional services
625

 
486

 
139

 
28.6

Regulatory assessments
1,146

 
687

 
459

 
66.8

Data processing
2,537

 
1,708

 
829

 
48.5

Office operations
2,652

 
1,717

 
935

 
54.5

Other
2,505

 
1,661

 
844

 
50.8

 
$
36,908

 
$
23,350

 
$
13,558

 
58.1
 %

The increase in non-interest expense from the three months ended June 30, 2014 was driven by an $8.4 million increase in salaries and employee benefits expense, primarily due to the addition of employees and grants of share-based compensation related to the merger with LegacyTexas. Compared to the quarter ended June 30, 2014, non-interest expense increased due to the merger with LegacyTexas, including a $2.0 million increase in occupancy and equipment expense, an $829,000 increase in data processing expense, a $555,000 increase in advertising expense and a $935,000 increase in office operations expense. These increases in non-interest expense from the three months ended June 30, 2014 were partially offset

47


by a $644,000 decrease in merger and acquisition costs related to the merger with LegacyTexas.
Income Tax Expense. For the three months ended June 30, 2015 we recognized income tax expense of $10.9 million on our pre-tax income, which was an effective tax rate of 34.9%, compared to income tax expense of $5.0 million for the three months ended June 30, 2014 which was an effective tax rate of 36.1%. The decrease in the effective tax rate was primarily due to non-deductible merger costs associated with the merger with LegacyTexas recognized in 2014, as well as increased amounts of tax-exempt income on municipal securities and bank-owned life insurance in 2015.
Comparison of Results of Operations for the Six Months Ended June 30, 2015 and 2014

General. Net income for the six months ended June 30, 2015 was $36.6 million, an increase of $20.1 million, or 121.7%, from net income of $16.5 million for the six months ended June 30, 2014. The increase in net income was driven by a $53.6 million increase in net interest income and an increase in non-interest income of $11.0 million, which was partially offset by a $5.2 million increase in the provision for loan losses and a $29.2 million increase in non-interest expense. Basic and diluted earnings per share for the six months ended June 30, 2015 was $0.79, an increase of $0.36 from $0.43 for the six months ended June 30, 2014.

Interest Income. Interest income increased by $55.8 million, or 78.8%, to $126.6 million for the six months ended June 30, 2015 from $70.8 million for the six months ended June 30, 2014.
 
Six Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Interest and dividend income
 
 
 
 
 
 
 
Loans, including fees
$
119,586

 
$
64,276

 
$
55,310

 
86.1
%
Securities
6,193

 
6,143

 
50

 
0.8

Interest-bearing deposits in other financial institutions
297

 
128

 
169

 
132.0

FHLB and Federal Reserve Bank stock and other
509

 
266

 
243

 
91.4

 
$
126,585

 
$
70,813

 
$
55,772

 
78.8
%

The increase in interest income for the six months ended June 30, 2015 compared to the same period in 2014, was primarily due to a $55.3 million, or 86.1%, increase in interest income on loans, which was driven by increased volume in all loan categories resulting from loans acquired from LegacyTexas on January 1, 2015, as well as organic growth during the year. The average balance of commercial real estate loans increased by $709.1 million to $1.84 billion from the six months ended June 30, 2014, resulting in an $17.7 million increase in interest income. The $709.1 million in growth includes $551.0 million in commercial real estate loans acquired from LegacyTexas. The average balance of commercial and industrial loans increased by $662.6 million to $1.19 billion from the six months ended June 30, 2014, resulting in a $17.6 million increase in interest income. The $662.6 million in growth includes $337.1 million in commercial and industrial loans acquired from LegacyTexas. The average balance of consumer real estate loans increased by $338.3 million to $796.4 million from the six months ended June 30, 2014, resulting in an $8.3 million increase in interest income. The $338.3 million in growth includes $264.0 million in consumer real estate loans acquired from LegacyTexas. The average balance of Warehouse Purchase Program loans increased by $294.6 million to $804.4 million from the six months ended June 30, 2014, which resulted in a $4.3 million increase in interest income.


48


Interest Expense. Interest expense increased by $2.1 million, or 25.7%, to $10.4 million for the six months ended June 30, 2015 from $8.3 million for the six months ended June 30, 2014.
 
Six Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Interest expense
 
 
 
 
 
 
 
Deposits
$
6,176

 
$
4,026

 
$
2,150

 
53.4
 %
FHLB advances
3,480

 
3,875

 
(395
)
 
(10.2
)
Repurchase agreements and subordinated debt
782

 
405

 
377

 
93.1

 
$
10,438

 
$
8,306

 
$
2,132

 
25.7
 %

The increase in interest expense for the six months ended June 30, 2015 compared to the same period in 2014, was primarily due to increased volume in all deposit categories resulting from deposits acquired from LegacyTexas on January 1, 2015, as well as organic growth during the 2015 period in savings and money market deposit balances. An $848.4 million increase in the average balance of savings and money market deposits to $1.81 billion from the six months ended June 30, 2014 was partially offset by a ten basis point reduction in the average rate, resulting in a $372,000 increase in interest expense. The $848.4 million in growth includes $534.6 million in savings and money market deposits acquired from LegacyTexas. The average balance of time deposits increased by $331.7 million to $829.9 million from the six months ended June 30, 2014, resulting in a $1.1 million increase in interest expense. The $331.7 million in growth includes $336.8 million in time deposits acquired from LegacyTexas. The average balance of interest-bearing demand deposits increased by $237.4 million to $702.0 million from the six months ended June 30, 2014, resulting in a $706,000 increase in interest expense. The $237.4 million in growth includes $258.7 million in interest-bearing demand deposits acquired from LegacyTexas.

Net Interest Income. Net interest income increased by $53.6 million, or 85.8%, to $116.1 million for the six months ended June 30, 2015 from $62.5 million for the six months ended June 30, 2014. The net interest margin increased by 29 basis points to 4.04% for the six months ended June 30, 2015 from 3.75% for the same period last year. The net interest rate spread increased by 35 basis points to 3.93% for the six months ended June 30, 2015 from 3.58% for the same period last year. The average yield on earning assets for the six months ended June 30, 2015 was 4.41%, a 16 basis point increase from the six months ended June 30, 2014, which was primarily due to increased volume in higher-yielding commercial loans, as well as accretion income resulting from the merger with LegacyTexas. The average cost of interest-bearing liabilities for the six months ended June 30, 2015 was 0.48%, down 19 basis points from the six months ended June 30, 2014.

Provision for Loan Losses. The provision for loan losses was $6.8 million for the six months ended June 30, 2015, an increase of $5.2 million from $1.6 million for the six months ended June 30, 2014. The increase in the provision for loan losses compared to the six months ended June 30, 2014 was primarily related to increased organic loan production, as well as loans acquired from LegacyTexas that were re-underwritten following completion of the merger with LegacyTexas. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to the Company's allowance for loan loss methodology. Consistent with prior quarters, the Company has continued to apply qualitative reserve factors to provide for additional allowance for loan losses due to the economic uncertainty in Texas related to the recent decline in the price of oil.

49


Non-interest Income. Non-interest income increased by $11.0 million, or 105.7%, to $21.4 million for the six months ended June 30, 2015 from $10.4 million for the six months ended June 30, 2014.
 
Six Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Non-interest income
 
 
 
 
 
 
 
Service charges and other fees
$
14,700

 
$
9,621

 
$
5,079

 
52.8
 %
Net gain on sale of mortgage loans
4,193

 

 
4,193

 
N/M

Bank-owned life insurance income
843

 
298

 
545

 
182.9

Gain on sale of available for sale securities
211

 

 
211

 
N/M

Gain on sale and disposition of assets
457

 
728

 
(271
)
 
(37.2
)
Other
967

 
(256
)
 
1,223

 
N/M

 
$
21,371

 
$
10,391

 
$
10,980

 
105.7
 %
N/M - not meaningful

The increase in non-interest income from the six months ended June 30, 2014 was primarily due to a $5.1 million increase in service charges and other fees, which was driven by a $326,000 increase in Warehouse Purchase Program fee income, as well as growth in service charges related to accounts acquired from LegacyTexas and the addition of $2.2 million of title income through the acquisition of LegacyTexas' title subsidiary. Additionally, the Company recognized $4.2 million in net gains on the sale of mortgage loans during the six months ended June 30, 2015, which includes the gain recognized on $116.0 million of one-to four-family mortgage loans that were sold or committed for sale during the six months ended June 30 2015, fair value changes on mortgage derivatives and mortgage fees collected. Prior to the merger with LegacyTexas, the Company did not originate for resale or sell mortgage loans to outside investors; therefore, a comparable gain was not recorded in the 2014 period. Other non-interest income for the six months ended June 30, 2015 included $1.4 million of insurance income added through the acquisition of LegacyTexas.

Non-interest Expense. Non-interest expense increased by $29.2 million, or 64.1%, to $74.7 million for the six months ended June 30, 2015 from $45.5 million for the six months ended June 30, 2014.
 
Six Months Ended June 30,
 
Dollar Change
 
Percent Change
 
2015
 
2014
 
 
 
(Dollars in thousands)
Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
$
45,520

 
$
28,259

 
$
17,261

 
61.1
%
Merger and acquisition costs
1,553

 
821

 
732

 
89.2

Advertising
1,988

 
848

 
1,140

 
134.4

Occupancy and equipment
7,646

 
3,711

 
3,935

 
106.0

Outside professional services
1,375

 
1,011

 
364

 
36.0

Regulatory assessments
1,968

 
1,315

 
653

 
49.7

Data processing
5,332

 
3,370

 
1,962

 
58.2

Office operations
5,045

 
3,397

 
1,648

 
48.5

Other
4,258

 
2,773

 
1,485

 
53.6

 
$
74,685

 
$
45,505

 
$
29,180

 
64.1
%

The increase in non-interest expense from the six months ended June 30, 2014 was driven by a $17.3 million, or 61.1%, increase in salaries and employee benefits expense, primarily due to the addition of 289 full-time equivalent employees related to the merger with LegacyTexas. Additionally, shortly following the completion of the LegacyTexas merger, certain senior managers from LegacyTexas who joined the Company received immediately-vested stock awards, which resulted in $600,000 of share-based compensation expense recognized during the six months ended June 30, 2015. Compared to the six months ended June 30, 2014, occupancy and equipment expense increased by $3.9 million, or 106.0%, and office operations

50


expense increased by $1.6 million, or 48.5%, primarily due to the addition of LegacyTexas' 11 owned buildings and 14 leased spaces. Data processing expense increased by $2.0 million, or 58.2%, from the 2014 period, as the Company added LegacyTexas into their information technology infrastructure and upgraded various systems to enhance customer service and increase efficiency.
Income Tax Expense. For the six months ended June 30, 2015 we recognized income tax expense of $19.5 million on our pre-tax income, which was an effective tax rate of 34.8%, compared to income tax expense of $9.3 million for the six months ended June 30, 2014 which was an effective tax rate of 36.1%. The decrease in the effective tax rate was primarily due to non-deductible merger costs associated with the merger with LegacyTexas recognized in 2014, as well as increased amounts of tax-exempt income on municipal securities and bank-owned life insurance in 2015.

51


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.

 
 
Three Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,850,134

 
$
24,061

 
5.20
%
 
$
1,147,028

 
$
15,654

 
5.46
%
 
Warehouse Purchase Program
920,034

 
7,720

 
3.36

 
571,922

 
5,094

 
3.56

 
Commercial and industrial
1,248,447

 
14,811

 
4.75

 
590,353

 
6,168

 
4.18

 
Construction and land
214,038

 
3,347

 
6.25

 
25,517

 
377

 
5.91

 
Consumer real estate
805,573

 
10,292

 
5.11

 
477,451

 
5,925

 
4.96

 
Other consumer
83,296

 
1,143

 
5.49

 
44,162

 
670

 
6.07

 
Loans held for sale
19,414

 
177

 
3.65

 

 

 

 
Less: deferred fees and allowance for loan loss
(31,991
)
 

 

 
(21,683
)
 

 

 
Loans receivable 1
5,108,945

 
61,551

 
4.82

 
2,834,750

 
33,888

 
4.78

 
Agency mortgage-backed securities
318,986

 
1,630

 
2.04

 
267,218

 
1,493

 
2.23

 
Agency collateralized mortgage obligations
118,649

 
574

 
1.94

 
171,330

 
943

 
2.20

 
Investment securities
116,597

 
772

 
2.65

 
69,582

 
578

 
3.32

 
FHLB and FRB stock
65,839

 
301

 
1.83

 
37,814

 
136

 
1.44

 
Interest-earning deposit accounts
164,499

 
139

 
0.34

 
118,529

 
71

 
0.24

Total interest-earning assets
5,893,515

 
64,967

 
4.41

 
3,499,223

 
37,109

 
4.24

Non-interest-earning assets
422,195

 
 
 
 
 
183,819

 
 
 
 
Total assets
$
6,315,710

 
 
 
 
 
$
3,683,042

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
701,592

 
838

 
0.48

 
$
468,283

 
428

 
0.37

 
Savings and money market
1,806,857

 
748

 
0.17

 
1,000,243

 
738

 
0.30

 
Time
839,604

 
1,463

 
0.70

 
503,035

 
869

 
0.69

 
Borrowings
1,112,198

 
2,097

 
0.75

 
678,817

 
2,152

 
1.27

Total interest-bearing liabilities
4,460,251

 
5,146

 
0.46

 
2,650,378

 
4,187

 
0.63

Non-interest-bearing demand
1,024,108

 
 
 
 
 
414,746

 
 
 
 
Non-interest-bearing liabilities
68,854

 
 
 
 
 
63,417

 
 
 
 
Total liabilities
5,553,213

 
 
 
 
 
3,128,541

 
 
 
 
Total shareholders’ equity
762,497

 
 
 
 
 
554,501

 
 
 
 
Total liabilities and shareholders’ equity
$
6,315,710

 
 
 
 
 
$
3,683,042

 
 
 
 
Net interest income and margin
 
 
$
59,821

 
4.06
%
 
 
 
$
32,922

 
3.76
%
Net interest income and margin (tax-equivalent basis) 2
 
 
$
60,075

 
4.08
%
 
 
 
$
33,120

 
3.79
%
Net interest rate spread
 
 
 
 
3.95
%
 
 
 
 
 
3.61
%
Net earning assets
$
1,433,264

 
 
 
 
 
$
848,845

 
 
 
 
Average interest-earning assets to average interest-bearing liabilities
132.13
%
 
 
 
 
 
132.03
%
 
 
 
 
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 has been computed using a federal income tax rate of 35% for 2015 and 2014. Tax-exempt investments and loans had an average balance of $101.1 million and $67.5 million for the three months ended June 30, 2015 and 2014, respectively.

52


 
 
Six Months Ended June 30,
 
 
2015
 
2014
 
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
Average
Outstanding
Balance
 
Interest
Earned/Paid
 
Yield/
Rate
 
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
$
1,842,557

 
$
48,360

 
5.25
%
 
$
1,133,474

 
$
30,690

 
5.42
%
 
Warehouse Purchase Program
804,407

 
13,496

 
3.36

 
509,773

 
9,156

 
3.59

 
Commercial and industrial
1,192,074

 
28,720

 
4.82

 
529,441

 
11,099

 
4.19

 
Construction and land
218,899

 
6,661

 
6.09

 
19,115

 
586

 
6.13

 
Consumer real estate
796,428

 
19,671

 
4.94

 
458,113

 
11,384

 
4.97

 
Other consumer
86,193

 
2,323

 
5.39

 
45,301

 
1,361

 
6.01

 
Loans held for sale
19,542

 
355

 
3.63

 

 

 

 
Less: deferred fees and allowance for loan loss
(30,552
)
 

 

 
(21,228
)
 

 

 
Loans receivable 1
4,929,548

 
119,586

 
4.85

 
2,673,989

 
64,276

 
4.81

 
Agency mortgage-backed securities
321,780

 
3,372

 
2.10

 
271,368

 
3,012

 
2.22

 
Agency collateralized mortgage obligations
125,182

 
1,261

 
2.01

 
177,751

 
1,972

 
2.22

 
Investment securities
116,553

 
1,560

 
2.68

 
71,449

 
1,159

 
3.24

 
FHLB and FRB stock
56,764

 
509

 
1.79

 
33,661

 
266

 
1.58

 
Interest-earning deposit accounts
193,170

 
297

 
0.31

 
107,472

 
128

 
0.24

Total interest-earning assets
5,742,997

 
126,585

 
4.41

 
3,335,690

 
70,813

 
4.25

Non-interest-earning assets
426,567

 
 
 
 
 
184,072

 
 
 
 
Total assets
$
6,169,564

 
 
 
 
 
$
3,519,762

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand
$
701,961

 
1,556

 
0.44

 
$
464,535

 
850

 
0.37

 
Savings and money market
1,808,017

 
1,759

 
0.19

 
959,665

 
1,387

 
0.29

 
Time
829,881

 
2,861

 
0.69

 
498,142

 
1,789

 
0.72

 
Borrowings
997,964

 
4,262

 
0.85

 
572,362

 
4,280

 
1.50

Total interest-bearing liabilities
4,337,823

 
10,438

 
0.48

 
2,494,704

 
8,306

 
0.67

Non-interest-bearing demand
999,723

 
 
 
 
 
414,832

 
 
 
 
Non-interest-bearing liabilities
70,698

 
 
 
 
 
59,355

 
 
 
 
Total liabilities
5,408,244

 
 
 
 
 
2,968,891

 
 
 
 
Total shareholders’ equity
761,320

 
 
 
 
 
550,871

 
 
 
 
Total liabilities and shareholders’ equity
$
6,169,564

 
 
 
 
 
$
3,519,762

 
 
 
 
Net interest income and margin
 
 
$
116,147

 
4.04
%
 
 
 
$
62,507

 
3.75
%
Net interest income and margin (tax-equivalent basis) 2
 
 
$
116,652

 
4.06
%
 
 
 
$
62,904

 
3.77
%
Net interest rate spread
 
 
 
 
3.93
%
 
 
 
 
 
3.58
%
Net earning assets
$
1,405,174

 
 
 
 
 
$
840,986

 
 
 
 
Average interest-earning assets to average interest-bearing liabilities
132.39
%
 
 
 
 
 
133.71
%
 
 
 
 
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 has been computed using a federal income tax rate of 35% for 2015 and 2014. Tax-exempt investments and loans had an average balance of $101.0 million and $67.8 million for the six months ended June 30, 2015 and 2014, respectively.



53


Rate/Volume Analysis
The following tables 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 June 30,
 
2015 versus 2014
 
Increase (Decrease) Due to
 
Total Increase
 
Volume
 
Rate
 
(Decrease)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Commercial real estate
$
9,176

 
$
(769
)
 
$
8,407

Warehouse Purchase Program
2,937

 
(311
)
 
2,626

Commercial and industrial
7,706

 
937

 
8,643

Construction and land
2,947

 
23

 
2,970

Consumer real estate
4,187

 
180

 
4,367

Other consumer
543

 
(70
)
 
473

Loans held for sale
177

 

 
177

Loans receivable
27,673

 
(10
)
 
27,663

Agency mortgage-backed securities
272

 
(135
)
 
137

Agency collateralized mortgage obligations
(265
)
 
(104
)
 
(369
)
Investment securities
330

 
(136
)
 
194

FHLB and FRB stock
121

 
44

 
165

Interest-earning deposit accounts
33

 
35

 
68

Total interest-earning assets
28,164

 
(306
)
 
27,858

Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
254

 
156

 
410

Savings and money market
426

 
(416
)
 
10

Time
586

 
8

 
594

Borrowings
1,033

 
(1,088
)
 
(55
)
Total interest-bearing liabilities
2,299

 
(1,340
)
 
959

Net interest income
$
25,865

 
$
1,034

 
$
26,899

 
 
 
 
 
 

54


 
Six Months Ended June 30,
 
2015 versus 2014
 
Increase (Decrease) Due to
 
Total Increase
 
Volume
 
Rate
 
(Decrease)
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
Commercial real estate
$
18,638

 
$
(968
)
 
$
17,670

Warehouse Purchase Program
4,979

 
(639
)
 
4,340

Commercial and industrial
15,744

 
1,877

 
17,621

Construction and land
6,079

 
(4
)
 
6,075

Consumer real estate
8,356

 
(69
)
 
8,287

Other consumer
1,115

 
(153
)
 
962

Loans held for sale
355

 

 
355

Loans receivable
55,266

 
44

 
55,310

Agency mortgage-backed securities
536

 
(176
)
 
360

Agency collateralized mortgage obligations
(542
)
 
(169
)
 
(711
)
Investment securities
631

 
(230
)
 
401

FHLB and FRB stock
203

 
40

 
243

Interest-earning deposit accounts
124

 
45

 
169

Total interest-earning assets
56,218

 
(446
)
 
55,772

Interest-bearing liabilities:
 
 
 
 
 
Interest-bearing demand
499

 
207

 
706

Savings and money market
934

 
(562
)
 
372

Time
1,146

 
(74
)
 
1,072

Borrowings
2,317

 
(2,335
)
 
(18
)
Total interest-bearing liabilities
4,896

 
(2,764
)
 
2,132

Net interest income
$
51,322

 
$
2,318

 
$
53,640




55


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 sources in order to meet its potential liquidity demands. The primary sources are increases in deposit accounts and cash flows from loan payments and the securities portfolio.
In addition to the primary sources of funds, management has several secondary sources available to meet potential funding requirements. At June 30, 2015, the Company had an additional borrowing capacity of $587.1 million with the FHLB. Also, at June 30, 2015, the Company had $250.0 million in federal funds lines of credit available with other financial institutions. The Company 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 June 30, 2015, securities pledged had a collateral value of $43.3 million.
At June 30, 2015, the Company had classified 55.2% of its 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 the Company's 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 $11.0 million on an unconsolidated basis at June 30, 2015. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders as well as for any Company stock repurchases. 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 18 of the Notes to Consolidated Financial Statements contained in Item 8 of the Company's 2014 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 $1.47 billion and $942.6 million at June 30, 2015, and December 31, 2014, 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 June 30, 2015 totaled $604.6 million with a weighted average rate of 0.56%.
During the six months ended June 30, 2015, cash and cash equivalents increased by $60.0 million, or 45.4%, to $192.0 million at June 30, 2015 from $132.0 million at December 31, 2014. Operating activities provided cash of $55.0 million and financing activities provided cash of $524.8 million, which was partially offset by cash used in investing activities of $519.8 million. Primary sources of cash for the six months ended June 30, 2015 included proceeds from pay-offs of Warehouse Purchase Program loans totaling $7.69 billion and proceeds from FHLB advances of $1.08 billion. Primary uses of cash for the six months ended June 30, 2015 included originations of Warehouse Purchase Program loans totaling $7.99 billion, repayments on FHLB advances of $720.6 million and net fundings of loans held for investment totaling $356.8 million.

56


Please see Item 1A (Risk Factors) under Part 1 of the Company's 2014 Form 10-K for information regarding liquidity risk.
Off-Balance Sheet Arrangements, Contractual Obligations and Commitments

The following table presents our longer term, non-deposit related, 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 $104.1 million and credit card guarantees outstanding in the amount of $655,000 at June 30, 2015.
 
June 30, 2015
 
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
$
3,652,651

 
$

 
$

 
$

 
$
3,652,651

Certificates of deposit (gross of purchase accounting discount of $457)
604,555

 
224,817

 
46,143

 
74

 
875,589

FHLB advances (gross of restructuring prepayment penalty of $809)
1,134,576

 
72,597

 
8,318

 
2,623

 
1,218,114

Repurchase agreements
41,172

 
25,000

 

 

 
66,172

Subordinated debt (gross of purchase accounting discount of $3,990)

 

 

 
15,464

 
15,464

Private equity fund for Community Reinvestment Act purposes
3,420

 

 

 

 
3,420

Operating leases (premises)
6,024

 
9,567

 
6,404

 
16,210

 
38,205

Total contractual obligations
$
5,442,398

 
$
331,981

 
$
60,865

 
$
34,371

 
5,869,615

Off-balance sheet loan commitments: 1
 
 
 
 
 
 
 
 
 
Unused commitments to extend credit
$
636,012

 
$
300,676

 
$
122,926

 
$
69,240

 
1,128,854

Unused capacity on Warehouse Purchase Program loans
323,003

 

 

 

 
323,003

Standby letters of credit
9,985

 
7,474

 

 

 
17,459

Total loan commitments
$
969,000

 
$
308,150

 
$
122,926

 
$
69,240

 
1,469,316

Total contractual obligations and loan commitments
 
 
 
 
 
 
 
 
$
7,338,931

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



57


Capital Resources

At December 31, 2014, the Bank and the Company were subject to minimum capital requirements imposed by the OCC and the FRB. Effective on January 1, 2015, upon completion of the merger with LegacyTexas, the Bank was merged into LegacyTexas Bank, with regulatory oversight by the TDOB and the FRB. 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 June 30, 2015, and December 31, 2014 the Bank and the Company were considered to be well-capitalized.

At June 30, 2015, the Bank's equity totaled $755.5 million. The Company's consolidated equity totaled $776.9 million, or 11.6% of total assets, at June 30, 2015.
 
Actual
 
Required for Capital Adequacy Purposes
 
To Be Well-Capitalized Under Prompt Corrective Action Regulations
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
June 30, 2015
(Dollars in thousands)
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
$
638,505

 
10.91
%
 
$
468,358

 
8.00
%
 
$
585,447

 
10.00
%
Bank
605,606

 
10.34

 
468,344

 
8.00

 
585,430

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
607,638

 
10.38

 
351,268

 
6.00

 
468,358

 
8.00

Bank
574,739

 
9.82

 
351,258

 
6.00

 
468,344

 
8.00

Common equity tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
596,164

 
10.18

 
263,451

 
4.50

 
380,540

 
6.50

Bank
574,739

 
9.82

 
263,444

 
4.50

 
380,530

 
6.50

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Company
607,638

 
9.91

 
245,333

 
4.00

 
306,666

 
5.00

Bank
574,739

 
9.37

 
245,345

 
4.00

 
306,681

 
5.00

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
$
562,448

 
15.87
%
 
$
283,618

 
8.00
%
 
$
354,522

 
10.00
%
Bank
495,171

 
13.98

 
283,314

 
8.00

 
354,142

 
10.00

Tier 1 risk-based capital
 
 
 
 
 
 
 
 
 
 
 
Company
536,899

 
15.14

 
141,809

 
4.00

 
212,713

 
6.00

Bank
469,622

 
13.26

 
141,657

 
4.00

 
212,485

 
6.00

Tier 1 leverage
 
 
 
 
 
 
 
 
 
 
 
Company
536,899

 
13.86

 
154,900

 
4.00

 
193,625

 
5.00

Bank
469,622

 
12.13

 
154,910

 
4.00

 
193,638

 
5.00


58


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 ("FFEIC") 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.

59


The Bank's asset/liability management strategy sets acceptable limits for the percentage change in EVE and EAR given changes in interest rates. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank's policy indicates that the EVE ratio should not fall below 7.00%, and for increases of 200, 300 and 400 basis points, the EVE ratio should not fall below 6.00%, 5.25% and 5.00%, respectively. For an instantaneous, parallel, and sustained interest rate increase or decrease of 100 basis points, the Bank's policy indicates that EAR should not decrease by more than 7%, and for increases of 200, 300, and 400 basis points, EAR should not decrease by more than 10%, 13%, and 15%, respectively.
As illustrated in the tables below, the Bank was within policy limits for all scenarios tested. The tables presented below, as of June 30, 2015, and December 31, 2014, are internal analyses of our interest rate risk as measured by changes in EVE and EAR for instantaneous, parallel, and sustained shifts for all market rates and yield curves, in 100 basis point increments, up 400 basis points and down 100 basis points.
As illustrated in the tables below, our EVE would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates. Such an increase in rates would negatively impact EVE as a result of the duration of assets, including loans and investments, being longer than the duration of liabilities, primarily deposit accounts and FHLB borrowings. As illustrated in the table below, at June 30, 2015, our EAR would be negatively impacted by a parallel, instantaneous, and sustained increase in market rates of 200, 300, or 400 basis points. As market interest rates rise and variable liability rates are modeled to increase faster than assets mature or reprice.
June 30, 2015
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

 
833,698

 
(69,127
)
 
(7.66
)
 
13.59
 
238,095

 
(4,481
)
 
(1.85
)
300

 
855,544

 
(47,281
)
 
(5.24
)
 
13.72
 
237,199

 
(5,377
)
 
(2.22
)
200

 
873,056

 
(29,769
)
 
(3.30
)
 
13.78
 
236,238

 
(6,338
)
 
(2.61
)
100

 
890,819

 
(12,006
)
 
(1.33
)
 
13.82
 
235,450

 
(7,126
)
 
(2.94
)

 
902,825

 

 

 
13.78
 
242,576

 

 

(100
)
 
885,250

 
(17,575
)
 
(1.95
)
 
13.28
 
238,430

 
(4,146
)
 
(1.71
)
December 31, 2014
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

 
605,514

 
(60,025
)
 
(9.02
)
 
15.59
 
162,556

 
15,223

 
10.33

300

 
630,460

 
(35,079
)
 
(5.27
)
 
15.90
 
157,116

 
9,783

 
6.64

200

 
643,841

 
(21,698
)
 
(3.26
)
 
15.94
 
151,746

 
4,413

 
3.00

100

 
656,792

 
(8,747
)
 
(1.31
)
 
15.95
 
146,275

 
(1,058
)
 
(0.72
)

 
665,539

 

 

 
15.87
 
147,333

 

 

(100
)
 
677,979

 
12,440

 
1.87

 
15.83
 
143,450

 
(3,883
)
 
(2.64
)

The Bank's EVE was $902.8 million, or 13.78%, of the market value of portfolio assets as of June 30, 2015, a $237.3 million increase from $665.5 million, or 15.87%, of the market value of portfolio assets as of December 31, 2014. Based upon the assumptions utilized, an immediate 200 basis point increase in market interest rates would result in a $29.8 million decrease

60


in our EVE at June 30, 2015 compared to a $21.7 million decrease at December 31, 2014, and would result in no change to our EVE ratio of 13.78% at June 30, 2015 compared to a seven basis point increase to 15.94% at December 31, 2014. An immediate 100 basis point decrease in market interest rates would result in a $17.6 million decrease in our EVE at June 30, 2015 compared to a $12.4 million increase at December 31, 2014, and would result in a 50 basis point decrease in our EVE ratio to 13.28% at June 30, 2015, as compared to a four basis point decrease in our EVE ratio to 15.83% at December 31, 2014.
The Bank's projected EAR for the twelve months ending June 30, 2016 is $242.6 million, compared to $147.3 million for the twelve months ending December 31, 2015. Based on the assumptions utilized, an immediate 200 basis point increase in market rates would result in a $6.3 million, or 2.61%, decrease in net interest income for the twelve months ending June 30, 2016 compared to a $4.4 million, or 3.00%, increase for the twelve months ending December 31, 2015. An immediate 100 basis point decrease in market rates would result in a $4.1 million decrease in net interest income for the twelve months ending June 30, 2016 compared to a $3.9 million decrease for the twelve months ending December 31, 2015. In May 2015, we increased non-maturity deposit betas utilized in our interest rate risk model. The primary goal is to model anticipated higher sensitivities due to the current prolonged low rate environment and the signaled impending rate rise from the Federal Reserve.
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.

61


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 June 30, 2015. 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.


62


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 2014 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 June 30, 2015.
Item 3.
Defaults upon Senior Securities
Not applicable.

Item 4.
Mine Safety Disclosures
Not applicable.

Item 5.
Other Information
Not applicable.

63



Item 6.
 
Exhibits
Exhibit
 
 
Number
 
Description
 
 
 
2.1

 
Agreement and Plan of Merger by and between the Registrant and Highlands Bancshares, Inc. (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 9, 2011 (File No. 001-34737))
 
 
 
2.2

 
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))
 
 
 
2.3

 
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))
 
 
 
2.4

 
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 January 6, 2015 (File No. 001-34737))
 
 
 
3.2

 
Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on January 6, 2015 (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

 
2013 Executive Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.4

 
Form of Director's Agreement between the Registrant and James B. McCarley (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.5

 
Form of Director's Agreement between the Registrant and Gary D. Basham (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.6

 
Form of Director's Agreement between the Registrant and Jack D. Ersman (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 
10.7

 
Form of Director's Agreement between the Registrant and V. Keith Sockwell (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 001-34737))
 
 
 

64


10.8

 
Resignation, Release and Consulting Agreement between the Registrant and Pathie E. McKee (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the SEC on July 3, 2013 (File No. 001-34737))
 
 
 
10.9

 
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)).
 
 
 
10.10

 
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)).
 
 
 
10.11

 
Amended and Restated Executive Employment Agreement entered into by the Registrant on December 2, 2013 with 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)).
 
 
 
11

 
Statement regarding computation of per share earnings (See Note 3 of the Condensed Notes to Unaudited Consolidated Interim Financial Statements included in this Form 10-Q).
 
 
 
31.1

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

 
Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)
 
 
 
32

 
Section 1350 Certifications
 
 
 
101*

 
Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended June 30, 2015, 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.
 
 
 
 
 
*This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.


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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:
July 29, 2015
 
By:
/s/ Kevin J. Hanigan
 
 
 
 
Kevin J. Hanigan,
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Duly Authorized Officer)
 
 
 
 
 
Date:
July 29, 2015
 
By:
/s/ J. Mays Davenport
 
 
 
 
J. Mays Davenport
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)


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EXHIBIT INDEX
Exhibits:

31.1
Certification of the Chief Executive Officer
31.2
Certification of the Chief Financial Officer
32.0
Section 1350 Certifications
101*
Financial statements from Quarterly Report on Form 10-Q of the Registrant for the quarter ended June 30, 2015, 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.*
 
* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.



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