Prosperity Bancshares Inc 8-K/A, filed Jan 17, 2020
Prosperity Bancshares Inc (PB)
About this 8-K/A
Prosperity Bancshares Inc filed this 8-K/A on January 17, 2020, reporting on events of November 1, 2019.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
As previously disclosed, on November 1, 2019, the transactions contemplated by the Agreement and Plan of Reorganization, dated as of June 16, 2019 (the “Merger Agreement”), by and between LegacyTexas Financial Group, Inc., a Maryland corporation (“LegacyTexas”), and Prosperity Bancshares, Inc., a Texas corporation (“Prosperity”), were consummated, including the merger of LegacyTexas with and into Prosperity (the “Merger”), with Prosperity continuing as the surviving corporation in the Merger.
This Amendment No. 1 on Form 8-K/A is being filed to amend Item 9.01 of Prosperity’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 4, 2019 in order to include the historical financial statements of LegacyTexas required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K.
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial Statements of Business Acquired. |
The audited consolidated balance sheets of LegacyTexas as of December 31, 2018 and 2017 and consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years ended December 31, 2018, 2017 and 2016 and related notes are included as Exhibit 99.1 to this Form 8-K/A.
The unaudited consolidated balance sheet of LegacyTexas at June 30, 2019 and the consolidated statements of income for the three and six months ended June 30, 2019 and 2018, consolidated statements of comprehensive income for the three and six months ended June 30, 2019 and 2018, consolidated statements of changes in shareholders’ equity for the three and six months ended June 30, 2019 and 2018 and consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 and related notes are included as Exhibit 99.2 to this Form 8-K/A.
| (b) | Pro Forma Financial Information. |
The unaudited pro forma condensed combined balance sheet of Prosperity as of June 30, 2019 and the unaudited pro forma condensed combined statement of income for the six months ended June 30, 2019 and for the year ended December 31, 2018, after giving effect to the Merger and the adjustments described in such pro forma financial statements, are included as Exhibit 99.3 to this Form 8-K/A.
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| (d) | Exhibits. |
| Exhibit |
Description | |||
| 21.1 |
Consent of Ernst & Young LLP, independent registered public accounting firm for LegacyTexas. | |||
| 99.1 |
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| 99.2 |
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| 99.3 |
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| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||
Cautionary Notes on Forward-Looking Statements
This communication contains statements which, to the extent they are not statements of historical fact, constitute “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, oral or written forward-looking statements may also be included in other information released to the public. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,” “estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is expected,” “is intended,” “objective,” “plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including where the word “could,” “may,” or “would” is used rather than the word “will” in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. These forward-looking statements may include information about Prosperity’s possible or assumed future economic performance or future results of operations, including future revenues, income, expenses, provision for loan losses, provision for taxes, effective tax rate, earnings per share, cash flows, future capital expenditures and dividends, future financial condition and changes therein, including changes in loan portfolio and allowance for loan losses, future capital structure or changes therein, as well as the plans and objectives of management for Prosperity’s future operations and integrating the operations of LegacyTexas, future or proposed acquisitions, the future or expected effect of acquisitions on Prosperity’s operations, results of operations, financial condition, and future economic performance, statements about the anticipated benefits of the transaction with LegacyTexas, and statements about the assumptions underlying any such statement. The forward-looking statements are based on expectations and assumptions Prosperity currently believes to be valid. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Many possible events or factors could adversely affect the future financial results and performance of Prosperity and could cause those results or performance to differ materially from those expressed in the forward-looking statements. Such risks and
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uncertainties include, among others: the possibility that the anticipated benefits of the transaction with LegacyTexas are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors generally, or specifically in the Dallas/Fort Worth area where LegacyTexas did a majority of its business and Prosperity continues to have a significant presence, the possibility that the integration of LegacyTexas may be more expensive than anticipated, including as a result of unexpected factors or events, diversion of management’s attention from previous business operations and opportunities, potential adverse reactions or changes to business or employee relationships, and the dilution caused by Prosperity’s issuance of additional shares of its common stock in connection with the LegacyTexas transaction. Prosperity disclaims any obligation to update such factors or to publicly announce the results of any revisions to any of the forward-looking statements included herein to reflect future events or developments. Further information on Prosperity and factors which could affect the forward-looking statements contained herein can be found in Prosperity’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, its Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 30, 2019 and its other filings with the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: January 17, 2020
| PROSPERITY BANCSHARES | ||
| By: |
/s/ Charlotte M. Rasche | |
| Name: |
Charlotte M. Rasche | |
| Title: |
Executive Vice President and General Counsel | |
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Exhibit 21.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
| (1) | Registration Statement (Form S-8 No. 333-194046) pertaining to the 2012 Stock Incentive Plan of Prosperity Bancshares, Inc., and |
| (2) | Registration Statement (Form S-8 No. 333-123366) pertaining to the 2004 Stock Incentive Plan of Prosperity Bancshares, Inc., |
of our report dated February 7, 2019, with respect to the consolidated financial statements of LegacyTexas Financial Group, Inc. included in this Current Report on Form 8-K.
/s/ Ernst & Young LLP
Dallas, Texas
January 17, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of LegacyTexas Financial Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LegacyTexas Financial Group, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 7, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether these consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of these consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in these consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of these consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2009.
Dallas, Texas
February 7, 2019
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CONSOLIDATED BALANCE SHEETS
Years ended December 31,
(Dollar amounts in thousands, except share and per share data)
| 2018 | 2017 | |||||||
| ASSETS |
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| Cash and due from financial institutions |
$ | 60,416 | $ | 61,713 | ||||
| Short-term interest-bearing deposits in other financial institutions |
208,777 | 231,743 | ||||||
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| Total cash and cash equivalents |
269,193 | 293,456 | ||||||
| Securities available for sale, at fair value |
471,746 | 419,717 | ||||||
| Securities held to maturity (fair value: $144,791 and $ 174,926 at December 31, 2018 and 2017, respectively) |
146,046 | 173,509 | ||||||
| Loans held for sale, at fair value |
23,193 | 16,707 | ||||||
| Loans held for investment: |
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| Loans held for investment (net of allowance for loan losses of $67,428 and $71,301 at December 31, 2018 and 2017, respectively) |
6,733,692 | 6,418,271 | ||||||
| Loans held for investment—Warehouse Purchase Program |
960,404 | 1,320,846 | ||||||
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| Total loans held for investment |
7,694,096 | 7,739,117 | ||||||
| Federal Home Loan Bank (“FHLB”) stock and other restricted securities, at cost |
56,226 | 64,790 | ||||||
| Bank-owned life insurance |
59,036 | 57,684 | ||||||
| Premises and equipment, net |
73,073 | 69,693 | ||||||
| Goodwill |
178,559 | 178,559 | ||||||
| Other assets |
79,974 | 72,964 | ||||||
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| Total assets |
$ | 9,051,142 | $ | 9,086,196 | ||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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| Deposits |
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| Non-interest-bearing demand |
$ | 1,773,762 | $ | 1,635,622 | ||||
| Interest-bearing demand |
826,755 | 1,029,375 | ||||||
| Savings and money market |
2,455,787 | 2,735,296 | ||||||
| Time |
1,785,411 | 1,367,390 | ||||||
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| Total deposits |
6,841,715 | 6,767,683 | ||||||
| FHLB advances |
825,409 | 1,043,163 | ||||||
| Repurchase agreements |
50,340 | 84,676 | ||||||
| Subordinated debt |
135,012 | 134,522 | ||||||
| Accrued expenses and other liabilities |
104,299 | 96,278 | ||||||
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| Total liabilities |
7,956,775 | 8,126,322 | ||||||
| Commitments and contingent liabilities (See Note 18) |
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| Shareholders’ equity |
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| Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued at December 31, 2018 and 2017 |
— | — | ||||||
| Common stock, $.01 par value; 90,000,000 shares authorized; 48,505,261 and 48,117,390 shares issued at December 31, 2018 and 2017, respectively |
485 | 481 | ||||||
| Additional paid-in capital |
619,983 | 603,884 | ||||||
| Retained earnings |
491,948 | 370,858 | ||||||
| Accumulated other comprehensive income (loss), net |
(6,658 | ) | (3,429 | ) | ||||
| Unearned Employee Stock Ownership Plan (ESOP) shares; 1,139,140 and 1,192,093 shares at December 31, 2018 and 2017, respectively |
(11,391 | ) | (11,920 | ) | ||||
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| Total shareholders’ equity |
1,094,367 | 959,874 | ||||||
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| Total liabilities and shareholders’ equity |
$ | 9,051,142 | $ | 9,086,196 | ||||
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Dollar amounts in thousands, except per share data)
| 2018 | 2017 | 2016 | ||||||||||
| Interest and dividend income |
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| Loans, including fees |
$ | 392,499 | $ | 347,438 | $ | 301,542 | ||||||
| Taxable securities |
12,760 | 10,800 | 9,254 | |||||||||
| Nontaxable securities |
2,525 | 2,907 | 3,052 | |||||||||
| Interest-bearing deposits in other financial institutions |
4,941 | 4,009 | 1,878 | |||||||||
| FHLB and FRB stock and other |
2,257 | 1,703 | 1,626 | |||||||||
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| 414,982 | 366,857 | 317,352 | ||||||||||
| Interest expense |
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| Deposits |
57,475 | 36,694 | 21,034 | |||||||||
| FHLB advances |
16,009 | 9,650 | 7,167 | |||||||||
| Repurchase agreements and other borrowings |
8,990 | 9,082 | 6,882 | |||||||||
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| 82,474 | 55,426 | 35,083 | ||||||||||
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| Net interest income |
332,508 | 311,431 | 282,269 | |||||||||
| Provision for credit losses |
35,797 | 39,456 | 26,900 | |||||||||
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| Net interest income after provision for credit losses |
296,711 | 271,975 | 255,369 | |||||||||
| Non-interest income |
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| Service charges and other fees |
35,320 | 35,742 | 36,690 | |||||||||
| Net gain on sale of mortgage loans held for sale |
6,573 | 7,322 | 8,225 | |||||||||
| Bank-owned life insurance income |
1,890 | 1,727 | 1,744 | |||||||||
| Net gain (loss) on securities transactions |
(138 | ) | (39 | ) | 56 | |||||||
| Gain (loss) on sale and disposition of assets |
2,981 | (1,572 | ) | 3,356 | ||||||||
| Other |
2,615 | 402 | 1,860 | |||||||||
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| 49,241 | 43,582 | 51,931 | ||||||||||
| Non-interest expense |
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| Salaries and employee benefits |
100,170 | 95,136 | 92,568 | |||||||||
| Advertising |
4,371 | 4,378 | 3,861 | |||||||||
| Occupancy and equipment |
15,643 | 14,385 | 15,007 | |||||||||
| Outside professional services |
5,804 | 4,889 | 3,872 | |||||||||
| Regulatory assessments |
3,521 | 4,479 | 4,948 | |||||||||
| Data processing |
21,378 | 16,796 | 14,974 | |||||||||
| Office operations |
9,005 | 9,238 | 9,901 | |||||||||
| Other |
11,238 | 11,043 | 11,246 | |||||||||
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| 171,130 | 160,344 | 156,377 | ||||||||||
| Income before income tax expense |
174,822 | 155,213 | 150,923 | |||||||||
| Income tax expense |
20,633 | 65,719 | 53,102 | |||||||||
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| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
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| Earnings per share: |
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| Basic |
$ | 3.27 | $ | 1.91 | $ | 2.11 | ||||||
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| Diluted |
$ | 3.23 | $ | 1.89 | $ | 2.09 | ||||||
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| Dividends declared per share |
$ | 0.70 | $ | 0.61 | $ | 0.58 | ||||||
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
(Dollar amounts in thousands)
| 2018 | 2017 | 2016 | ||||||||||
| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
| Change in unrealized gains (losses) on securities available for sale |
(3,285 | ) | (1,144 | ) | (3,917 | ) | ||||||
| Reclassification of amount realized through securities transactions |
138 | 39 | (56 | ) | ||||||||
| Tax effect |
659 | 389 | 1,393 | |||||||||
| Reclassification of income tax effects of the Tax Cuts and Jobs Act (see Note 15 for more information) |
(741 | ) | — | — | ||||||||
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| Other comprehensive income (loss), net of tax |
(3,229 | ) | (716 | ) | (2,580 | ) | ||||||
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| Comprehensive income |
$ | 150,960 | $ | 88,778 | $ | 95,241 | ||||||
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31,
(Dollar amounts in thousands, except per share data)
| Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss), Net |
Unearned ESOP Shares |
Total Shareholders’ Equity |
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| Balance at December 31, 2015 |
$ | 476 | $ | 576,753 | $ | 240,496 | $ | (133 | ) | $ | (13,516 | ) | $ | 804,076 | ||||||||||
| Net income |
— | — | 97,821 | — | — | 97,821 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax |
— | — | — | (2,580 | ) | — | (2,580 | ) | ||||||||||||||||
| Dividends declared, ($0.58 per share) |
— | — | (27,676 | ) | — | — | (27,676 | ) | ||||||||||||||||
| ESOP shares earned, (120,411 shares) |
— | 2,889 | — | — | 1,066 | 3,955 | ||||||||||||||||||
| Share-based compensation expense |
— | 6,014 | — | — | — | 6,014 | ||||||||||||||||||
| Activity in employee stock plans, (230,372 shares) |
3 | 3,752 | — | — | — | 3,755 | ||||||||||||||||||
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| Balance at December 31, 2016 |
479 | 589,408 | 310,641 | (2,713 | ) | (12,450 | ) | 885,365 | ||||||||||||||||
| Net income |
— | — | 89,494 | — | — | 89,494 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax |
— | — | — | (716 | ) | — | (716 | ) | ||||||||||||||||
| Dividends declared, ($0.61 per share) |
— | — | (29,277 | ) | — | — | (29,277 | ) | ||||||||||||||||
| ESOP shares earned, (52,953 shares) |
— | 2,304 | — | — | 530 | 2,834 | ||||||||||||||||||
| Share-based compensation expense |
— | 7,462 | — | — | — | 7,462 | ||||||||||||||||||
| Activity in employee stock plans, (241,192 shares) |
2 | 4,710 | — | — | — | 4,712 | ||||||||||||||||||
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| Balance at December 31, 2017 |
481 | 603,884 | 370,858 | (3,429 | ) | (11,920 | ) | 959,874 | ||||||||||||||||
| Net income |
— | — | 154,189 | — | — | 154,189 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax |
— | — | — | (3,229 | ) | — | (3,229 | ) | ||||||||||||||||
| Reclassification of income tax effects of the Tax Cuts and Jobs Act (see Note 15 for more information) |
— | — | 741 | — | — | 741 | ||||||||||||||||||
| Dividends declared, ($0.70 per share) |
— | — | (33,840 | ) | — | — | (33,840 | ) | ||||||||||||||||
| ESOP shares earned, (52,953 shares) |
— | 2,530 | — | — | 529 | 3,059 | ||||||||||||||||||
| Share-based compensation expense |
— | 6,954 | — | — | — | 6,954 | ||||||||||||||||||
| Activity in employee stock plans, (387,871 shares) |
4 | 6,615 | — | — | — | 6,619 | ||||||||||||||||||
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| Balance at December 31, 2018 |
$ | 485 | $ | 619,983 | $ | 491,948 | $ | (6,658 | ) | $ | (11,391 | ) | $ | 1,094,367 | ||||||||||
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See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Dollar amounts in thousands)
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from operating activities |
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| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Provision for credit losses |
35,797 | 39,456 | 26,900 | |||||||||
| Depreciation and amortization |
6,829 | 7,142 | 7,081 | |||||||||
| Deferred tax expense (benefit) |
45,957 | (4,115 | ) | (6,798 | ) | |||||||
| Impact of Tax Cuts and Jobs Act on deferred taxes |
(15,289 | ) | 13,493 | — | ||||||||
| Premium amortization and accretion of securities, net |
3,859 | 4,337 | 4,359 | |||||||||
| Accretion related to acquired loans |
(1,836 | ) | (3,097 | ) | (4,613 | ) | ||||||
| Net (gain) loss on securities transactions |
138 | 39 | (56 | ) | ||||||||
| ESOP compensation expense |
3,059 | 2,834 | 3,955 | |||||||||
| Share-based compensation expense |
6,954 | 7,462 | 6,014 | |||||||||
| Excess tax benefit on vesting of stock awards |
907 | 1,578 | — | |||||||||
| Net gain on loans held for sale |
(6,573 | ) | (7,322 | ) | (8,225 | ) | ||||||
| Loans originated or purchased for sale |
(187,796 | ) | (195,161 | ) | (218,288 | ) | ||||||
| Proceeds from sale of loans held for sale |
187,883 | 207,055 | 227,769 | |||||||||
| FHLB stock dividends |
(1,032 | ) | (548 | ) | (539 | ) | ||||||
| Bank-owned life insurance income |
(1,890 | ) | (1,727 | ) | (1,744 | ) | ||||||
| (Gain) loss on sale and disposition of repossessed assets, premises and equipment |
(801 | ) | 2,099 | (3,524 | ) | |||||||
| Disposition of insurance subsidiary goodwill upon sale of subsidiary operations |
— | — | 2,217 | |||||||||
| Net change in deferred loan fees/costs |
(4,017 | ) | (8,631 | ) | 391 | |||||||
| Net change in accrued interest receivable |
(2,508 | ) | (4,249 | ) | (3,238 | ) | ||||||
| Net change in other assets |
(31,135 | ) | (1,299 | ) | (2,947 | ) | ||||||
| Net change in other liabilities |
(2,805 | ) | 40,176 | 5,913 | ||||||||
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| Net cash provided by operating activities |
189,890 | 189,016 | 132,448 | |||||||||
| Cash flows from investing activities |
||||||||||||
| Available for sale securities: |
||||||||||||
| Maturities, prepayments and calls |
2,027,407 | 2,028,905 | 2,276,913 | |||||||||
| Purchases |
(2,085,851 | ) | (2,098,681 | ) | (2,334,558 | ) | ||||||
| Proceeds from sale of AFS securities |
— | — | 7,700 | |||||||||
| Held to maturity securities: |
||||||||||||
| Maturities, prepayments and calls |
38,566 | 35,973 | 41,384 | |||||||||
| Purchases |
(11,869 | ) | — | (12,477 | ) | |||||||
| Originations of Warehouse Purchase Program loans |
(20,917,368 | ) | (21,917,085 | ) | (19,966,527 | ) | ||||||
| Proceeds from pay-offs of Warehouse Purchase Program loans |
21,277,810 | 21,817,838 | 19,954,905 | |||||||||
| Net change in loans held for investment, excluding Warehouse Purchase Program |
(346,475 | ) | (620,066 | ) | (1,014,500 | ) | ||||||
| Redemption (purchase) of FHLB and FRB stock and other |
9,596 | (20,976 | ) | 20,348 | ||||||||
| Purchases of premises and equipment |
(10,021 | ) | (3,602 | ) | (8,420 | ) | ||||||
| Proceeds from sale of assets |
9,331 | 7,814 | 15,803 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) investing activities |
(8,874 | ) | (769,880 | ) | (1,019,429 | ) | ||||||
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31,
(Dollar amounts in thousands)
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from financing activities |
||||||||||||
| Net change in deposits |
74,032 | 402,207 | 1,138,765 | |||||||||
| Proceeds from FHLB advances |
820,000 | 825,000 | 200,000 | |||||||||
| Repayments on FHLB advances |
(1,037,754 | ) | (615,519 | ) | (806,222 | ) | ||||||
| Proceeds from borrowings |
— | — | 76,861 | |||||||||
| Repayments of borrowings |
(34,336 | ) | (2,015 | ) | (24,929 | ) | ||||||
| Payment of dividends |
(33,840 | ) | (29,277 | ) | (27,676 | ) | ||||||
| Activity in employee stock plans |
6,619 | 4,712 | 3,755 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) financing activities |
(205,279 | ) | 585,108 | 560,554 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net change in cash and cash equivalents |
(24,263 | ) | 4,244 | (326,427 | ) | |||||||
| Beginning cash and cash equivalents |
293,456 | 289,212 | 615,639 | |||||||||
|
|
|
|
|
|
|
|||||||
| Ending cash and cash equivalents |
$ | 269,193 | $ | 293,456 | $ | 289,212 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental cash flow information: |
||||||||||||
| Interest paid |
$ | 80,775 | $ | 54,808 | $ | 34,625 | ||||||
| Income taxes paid |
15,323 | 57,482 | 60,854 | |||||||||
| Supplemental noncash disclosures: |
||||||||||||
| Transfers from loans to other real estate owned |
745 | 4,553 | 10,780 | |||||||||
See accompanying notes to consolidated financial statements.
8
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
Note 1—Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation: The consolidated financial statements include LegacyTexas Financial Group, Inc. (the “Company”), whose business at December 31, 2018 primarily consisted of the operations of its wholly-owned subsidiary, LegacyTexas Bank (the “Bank”). In addition, the Company also offers title services through LegacyTexas Title Co., which is a wholly-owned subsidiary of the Bank. Intercompany transactions and balances are eliminated in consolidation.
At December 31, 2018, the Company provided financial services through 42 banking offices in the Dallas/Fort Worth Metroplex and surrounding counties. Its primary deposit products are demand, savings and certificate of deposit accounts, and its primary lending products are commercial real estate, commercial and industrial and consumer lending, including one- to four-family real estate loans. Most loans are secured by specific items of collateral, including business assets, commercial and residential real estate and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses.
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles (“US GAAP”), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, valuation of other real estate owned, other-than-temporary impairment of securities, realization of deferred tax assets, and fair values of financial instruments are subject to change.
Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, federal funds purchased, Federal Home Loan Bank advances and repurchase agreements.
Restrictions on Cash: The Company maintains deposits with other financial institutions in amounts that exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents. Cash balances equaling or exceeding escrow amounts are maintained at correspondent banks.
Securities: Securities that the Company has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at amortized cost. Securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity, are classified as available for sale and are carried at fair value. Unrealized gains and losses on securities classified as available for sale have been accounted for as accumulated other comprehensive income (loss), net of taxes.
Gains and losses on the sale of securities classified as available for sale are recorded on the trade date using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity. Premiums and discounts on securities are amortized using the level-yield method without anticipating prepayment, except for mortgage-backed securities where prepayments are anticipated.
The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when economic, market, or security specific concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and 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. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition. The Company conducts regular reviews of the bond agency ratings of securities and considers whether the securities were issued by or have principal and interest payments guaranteed by the federal government or its agencies. These reviews focus on the underlying rating of the issuer and also include the insurance rating of securities that have an insurance component or guarantee. The ratings and financial condition of the issuers are monitored, as well as the financial condition and ratings of the insurers and guarantors.
9
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
For periods in which other-than-temporary impairment of a debt security is recognized, the credit portion of the amount is determined by subtracting the present value of the stream of estimated cash flows as calculated in a discounted cash flow model and discounted at book yield from the prior period’s ending carrying value. The non-credit portion of the amount is determined by subtracting the credit portion of the impairment from the difference between the book value and fair value of the security. The credit related portion of the impairment is charged against income and the non-credit related portion is charged to equity as a component of accumulated other comprehensive income. The Company did not recognize any other-than-temporary impairment on its securities portfolio for the years ended December 31, 2018 and 2017.
Mortgage Loans Held for Sale: The Company elects the fair value option for recording residential mortgage loans held for sale in accordance with Accounting Standards Codification (“ASC”) 825, “Financial Instruments.” 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.”
Warehouse Purchase Program Loans: The Warehouse Purchase Program allows unaffiliated mortgage originators to close one- to four-family real estate loans in their own name and manage their cash flow needs until the loans are sold to investors. The mortgage banking company customer closes mortgage loans consistent with underwriting standards established by the Bank and approved investors and, once all pertinent documents are received, the participation interest is delivered by the Bank to the investor selected by the originator and approved by us. Although not subject to any legally binding commitment, when we make a purchase decision, we acquire a 100% participation interest in the mortgage loans originated by our mortgage banking company customers. 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 or similar arrangement for each loan. To date, the Company has not experienced a loss on these loans and no allowance for loan losses has been allocated to them.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, purchase premiums and discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Past due status is based on the contractual terms of the loan. Loans that are past due 30 days are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
For loans collateralized by real property and commercial and industrial loans, credit exposure is monitored by internally assigned grades used for classification of loans. A loan is considered “special mention” when management has determined that there is a potential weakness that deserves management’s close attention. Loans rated as “special mention” are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. A loan is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected, and the loan may or may not meet the criteria for impairment. Loans classified as “doubtful” have all of the weaknesses of those classified as “substandard” with the added characteristic that the weaknesses present makes “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” All other loans that do not fall into the above mentioned categories are considered “pass” loans. Updates to internally assigned grades are made monthly and/or upon significant developments.
For other consumer loans (non-real estate), credit exposure is monitored by payment history of the loans. Non-performing other consumer loans are on nonaccrual status and are generally greater than 90 days past due.
10
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Acquired Loans: Loans acquired through the completion of a transfer, including loans acquired in a business combination, that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized on the balance sheet and do not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to be received). Revolving loans, including lines of credit, are excluded from acquired credit impaired loan accounting.
For acquired loans not deemed credit-impaired at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. Subsequent to the acquisition date, methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans; however, a provision for credit losses will be recorded only to the extent the required allowance exceeds any remaining credit discounts.
Concentration of Credit Risk: Most of the Company’s business activity is with customers located within the North Texas region and a large portion of loans are secured by real estate in this area. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy of the North Texas area.
Allowance for Loan Losses: The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.
The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations, inclusive of estimated loss emergence periods. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which are not yet reflected in the historical loss ratios, and that could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and adversely rated loans within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy and capitalization rates and other pertinent economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower’s ability to repay and on individually analyzed loans found to be impaired. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, estimated discounted cash flows are used to determine the amount of impairment, if any. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement.
11
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
A loan that has been modified is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate), forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans.
FHLB stock and other restricted securities: FHLB, FRB and other restricted stock is carried at cost, classified as restricted securities and periodically evaluated for impairment based on the ultimate recoverability of the par value. Both cash and stock dividends are reported as interest income.
Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain key employees. The purchase of these life insurance policies allows the Company to use tax-advantaged rates of return. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are generally depreciated using the straight-line method with useful lives ranging from 10 to 30 years. Furniture, fixtures and equipment are generally depreciated using the straight-line method with useful lives ranging from 3 to 7 years. The cost of leasehold improvements is amortized over the shorter of the lease term or useful life using the straight-line method.
Goodwill: Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. According to ASC 350-20, “Intangibles- Goodwill and Other,” goodwill shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Deterioration in economic market conditions, changes in key personnel, increased estimates of the effects of recent regulatory or legislative changes, or additional regulatory or legislative changes may result in declines in projected business performance beyond management’s current expectations. Such declines in business performance could cause the estimated fair value of goodwill to decline, which could result in an impairment charge to earnings in a future period related to goodwill.
The Company evaluates goodwill for impairment on an annual basis at October 1 or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount, in accordance with ASC 350-20. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining the need to perform the two-step test for goodwill impairment (the qualitative method). If the qualitative method cannot be used or if it determines, based on the qualified method, that the fair value is more likely than not less than the carrying amount, the Company uses the two-step test. Under the two-step test, the Company compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that unit’s goodwill, an impairment loss is recognized in an amount equal to that excess. Additional information regarding goodwill and impairment testing can be found in Note 10—Goodwill and Core Deposit Intangibles.
12
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Identifiable Intangibles: Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. The Company’s intangible assets relate to core deposits and customer relationships. Intangible assets with definite useful lives are amortized on an accelerated basis over their estimated life. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Foreclosed Assets: Assets acquired through loan foreclosure are initially recorded at the lower of the recorded investment in the loan at the time of foreclosure or the fair value less costs to sell, establishing a new cost basis. Any write-down in the carrying value of a property at the time of acquisition is charged-off to the allowance for loan losses. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.
Derivative Financial Instruments: The Company enters into the following derivative financial instruments: interest rate lock commitments, forward mortgage-backed securities trades and interest rate swaps and caps. These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs. All derivatives are carried at fair value in either other assets or other liabilities. For additional information on derivative financial instruments, see Note 8—Derivative Financial Instruments.
Fair Value of Financial Instruments: In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Fair value measurements and disclosures guidance establishes a three-level fair value hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. For additional information on fair value measurements see Note 7—Fair Value.
Repurchase/Resell Agreements: The Company sells certain securities under agreements to repurchase. The securities sold under these agreements are treated as collateralized borrowings and are recorded at amounts equal to the cash received. The contractual terms of the agreements to repurchase may require the Company to provide additional collateral if the fair value of the securities underlying the borrowings declines during the term of the agreement.
Revenue Recognition: Revenue recognized from contracts with customers, which is accounted for under ASC 606, is entirely included in the Company’s non-interest income. Interest income and certain types of non-interest income are not accounted for under ASC 606 as it is accounted for under other accounting standards. Please see “Adoption of New Accounting Standards” contained in this Note 1 for more information about the adoption of ASU 2014-09, which changed the accounting for revenue recognition, as well as Note 3—Revenue Recognition for information about the Company’s material revenue streams.
Advertising Expense: The Company expenses all advertising costs as they are incurred. Advertising expenses were $4,371, $4,378, and $3,861 in 2018, 2017 and 2016, respectively.
Share-Based Compensation: The Company has shareholder approved share-based compensation plans that are accounted for under ASC 718, Compensation—Stock Compensation, which requires companies to record compensation cost for share-based payment transactions with employees in return for employment service. Compensation cost is recognized for stock options and restricted stock awards based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with time-based vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. For awards with performance-based vesting conditions, compensation cost is recognized when the achievement of the performance condition is considered probable of achievement. If a performance condition is subsequently determined to be improbable of achievement, compensation cost is reversed.
Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions as determined by formula. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
13
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company did not have any material uncertain tax positions which would require accrual at December 31, 2018 or 2017.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense and did not have any amounts accrued for interest and penalties for the years ended December 31, 2018 or 2017. The Company files a consolidated income tax return with its subsidiaries. Federal income tax expense or benefit has been allocated to subsidiaries on a separate return basis.
Earnings per common share: The Company calculated earnings per common share in accordance with ASC 260, “Earnings Per Share,” which provides that unvested share-based payment 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. The Company has determined that its outstanding non-vested stock awards are participating securities. Accordingly, earnings per common share is computed using the two-class method prescribed under ASC 260.
Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in Note 4 — Earnings Per Common Share.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, net of taxes, which are also recognized as a separate component of equity.
Employee stock ownership plan (ESOP): The Company accounts for its ESOP in accordance with ASC 718-40, “Employee Stock Ownership Plans.” Accordingly, since the Company sponsors the ESOP with an employer loan, neither the ESOP’s loan payable nor the Company’s loan receivable are reported in the Company’s consolidated balance sheet. Likewise, the Company does not recognize interest income or interest cost on the loan.
Unallocated shares held by the ESOP are recorded as unearned ESOP shares in the consolidated statement of changes in shareholders’ equity. As shares are committed to be released for allocation, the Company recognizes compensation expense equal to the average market price of the shares for the period. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce principal and accrued interest payable on the ESOP loan.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return specific assets.
14
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Operating Segments: The Company has determined that all of its banking operations comprise one segment under ASC 280, Segment Reporting, since all offer similar products and services, operate with similar processes, and have similar customers. Additionally, the Company has determined that the Bank’s title subsidiary does not meet the materiality threshold to require segment disclosure under ASC 280.
Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
Adoption of New Accounting Standards:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU stated that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU affected entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 for public entities to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach effective on January 1, 2018 to all existing contracts with customers covered under the scope of the standard. The Company did not have an aggregate effect of modification resulting from the adoption of ASU 2014-09, and no financial statement line items were affected by this change in accounting standard. We have included the newly applicable revenue disclosures in the footnotes to these financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurements of Financial Assets and Financial Liabilities. This ASU required that all equity investments be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee). This ASU also required that an entity present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. Additionally, this ASU required that public business entities base their fair value disclosures for financial instruments that are not measured at fair value in the financial statements on the exit price notion. We adopted ASU 2016-01 in the first quarter of 2018, and have estimated fair values of loans held for investment for the 2018 period on cash flows, adjusted for credit and prepayments, discounted using current market yields. The adoption of this ASU did not have a material impact on the Company’s financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU was intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investments. For public business entities, this ASU was effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. The adoption of this ASU did not have a significant impact on the Company’s financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets other than Inventory. This ASU eliminated the exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity recognizes the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. For public business entities, this ASU was effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods therein. The adoption of this ASU did not have a significant impact on the Company’s financial statements.
15
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Effect of Newly Issued But Not Yet Effective Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to current accounting treatment. For public business entities, this ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein. The Company will adopt the standard by applying the alternative transition method whereby comparative periods will not be restated, and any cumulative effect adjustment to the opening balance of retained earnings would be recognized as of January 1, 2019. The impact to retained earnings is expected to be immaterial. We also expect to elect the ASU’s package of three practical expedients, which allows the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. The Company has implemented a lease management system to assist in centralizing, maintaining and accounting for all leases and is finalizing its evaluation of the ASU on its financial statements and disclosures, as well as any additional changes to processes and internal controls to ensure we meet the ASU’s reporting and disclosure requirements. While the Company continues to assess the impact of this ASU on its consolidated financial statements, the Company currently expects to record right-of-use assets and additional lease liabilities in the range of $35,000 to $45,000, based on the present value of the expected remaining lease payments. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated statement of income.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current US GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. This revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available for sale debt securities. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. We are currently testing our financial models that we anticipate using to calculate lifetime expected credit losses and are continuing to evaluate the impact of this ASU on our financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates today’s requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. For public business entities, this ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements and disclosures.
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. Under current GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements and disclosures.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements, by expanding an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. Additionally, this ASU also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2018. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements and disclosures.
16
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting. This ASU aligns much of the guidance on measuring and classifying nonemployee awards with that of awards to employees. The guidance applies to nonemployee awards issued in exchange for goods or services used or consumed in an entity’s own operations and to awards granted by an investor to employees and nonemployees of an equity method investee for goods or services used or consumed in the investee’s operations. There are no new disclosure requirements. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2018. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this ASU is not expected to have a significant impact on the Company’s financial statements and disclosures.
17
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 2—Share Transactions
On December 10, 2018, the Company announced that the Board of Directors had established a share repurchase program which authorizes the repurchase of up to 5% of the Company’s common stock outstanding as of December 7, 2018, or approximately 2,425,280 shares. The repurchase program is authorized to continue through December 31, 2019 and may be modified, suspended or discontinued at any time, at the Company’s discretion. The repurchase program does not require the Company to repurchase any specific number of shares. As of December 7, 2018, the Company had 48,505,611 shares of common stock outstanding.
In connection with its establishment of this repurchase program, the Company’s Board of Directors terminated the Company’s existing repurchase program, which had authorized the repurchase of up to 5% of its total common shares outstanding, or approximately 1,978,871 shares. No shares of Company stock were repurchased under this program in 2018 or in 2017. Prior to its termination in December 2018, 1,537,121 shares were available for repurchase under the program.
18
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 3—Revenue Recognition
Significant revenue streams recognized by the Company from contracts with customers accounted for under ASC 606 for the years ended December 31, 2018, 2017 and 2016, are below:
| Years ended December 31, | ||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||
| Card services income |
(a | ) | $ | 13,000 | $ | 12,048 | $ | 10,879 | ||||||||
| Service charges on deposits |
(b | ) | 8,052 | 7,382 | 8,863 | |||||||||||
| Title income |
(c | ) | 3,928 | 4,975 | 5,590 | |||||||||||
| Gains (losses) on the sale of other real estate owned |
(d | ) | 1,232 | (3,618 | ) | (366 | ) | |||||||||
(a) Card services income -
Card services income includes interchange income, which is income earned by the Company for each transaction a cardholder performs at a merchant. This performance obligation is settled on a daily basis as transactions are processed. Card services income also includes revenue earned from companies who provide our customers with debit cards and/or provide card processing services in exchange for the Company’s promotion of their card programs to the Company’s depositors. These payments are remitted based on contractual terms that dictate how much payment is remitted based on volume expectations. This performance obligation settles on a daily basis as our customers use cards and card processing services at merchants.
(b) Service charges on deposits -
The Company receives non-interest income for providing services related to deposit accounts, including fee income generated from non-sufficient funds transactions, wire transfers, ATM activity and treasury management services. This income is recorded when incurred in the case of deposit account service charges or when collected in the case of miscellaneous one-time fees, like wire transfer fees. Since most deposit agreements have a day-to-day term, the performance obligation between the Company and the depositor is satisfied on a daily basis, or as incurred.
(c) Title income -
Title services offered by the Company through its wholly-owned subsidiary, LegacyTexas Title, consists of referring title insurance policies to other title companies and performing real estate closing duties for a set fee. The performance obligation (referring title policies to other title insurance agencies and handling customary closing services) settles daily at each real estate closing.
(d) Gains/losses on the sale of other real estate owned -
The performance obligation in the sale of other real estate owned typically will be delivery of control over the property to the buyer. If the Company is not providing financing, the transaction price is typically identified in the purchase and sale agreement. However, if the Company provides seller financing, the Company must determine a transaction price, depending on if the sale contract is at market terms and taking into account the credit risk inherent in the sales arrangement.
The performance obligations described in (b), (c), and (d) above are typically related to contracts that have an original expected duration of less than one year.
In regards to card services income, because the Company has a right to consideration from card service providers in the form of transaction-based and support income, and from cardholders in the form of interchange income in an amount that corresponds directly with the value to the card service provider and cardholder of the Company’s performance completed to date, the Company recognizes revenue as incurred when transactions with merchants settle on a daily basis.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.
19
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 4—Earnings Per Common Share
Basic earnings per common share is computed by dividing net income (which has been adjusted for distributed and undistributed earnings to participating securities) by the weighted-average number of common shares outstanding for the period, reduced for average unallocated ESOP shares and average unvested restricted stock awards. Unvested restricted stock awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in ASC 260-10-45-60B. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock awards and options) were exercised or converted to common stock, or resulted in the issuance of common stock that then shared in the Company’s earnings. Diluted earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the years ended December 31, 2018, 2017 and 2016 is as follows:
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Basic earnings per share: |
||||||||||||
| Numerator: |
||||||||||||
| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
| Distributed and undistributed earnings to participating securities |
(497 | ) | (318 | ) | (497 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income available to common shareholders |
$ | 153,692 | $ | 89,176 | $ | 97,324 | ||||||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Weighted average common shares outstanding |
48,355,192 | 47,998,439 | 47,721,179 | |||||||||
| Less: Average unallocated ESOP shares |
(1,167,563 | ) | (1,220,516 | ) | (1,301,356 | ) | ||||||
| Average unvested restricted stock awards |
(152,154 | ) | (166,143 | ) | (235,749 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Average shares for basic earnings per share |
47,035,475 | 46,611,780 | 46,184,074 | |||||||||
|
|
|
|
|
|
|
|||||||
| Basic earnings per common share |
$ | 3.27 | $ | 1.91 | $ | 2.11 | ||||||
|
|
|
|
|
|
|
|||||||
| Diluted earnings per share: |
||||||||||||
| Numerator: |
||||||||||||
| Income available to common shareholders |
$ | 153,692 | $ | 89,176 | $ | 97,324 | ||||||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Average shares for basic earnings per share |
47,035,475 | 46,611,780 | 46,184,074 | |||||||||
| Dilutive effect of share-based compensation plan |
618,251 | 526,738 | 300,893 | |||||||||
|
|
|
|
|
|
|
|||||||
| Average shares for diluted earnings per share |
47,653,726 | 47,138,518 | 46,484,967 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted earnings per common share |
$ | 3.23 | $ | 1.89 | $ | 2.09 | ||||||
|
|
|
|
|
|
|
|||||||
| 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 anti-dilutive |
657,657 | 623,666 | 1,384,784 | |||||||||
20
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 5—Securities
The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), and the fair value of securities available for sale (“AFS”) were as follows:
| December 31, 2018 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 153,671 | $ | 283 | $ | 4,083 | $ | 149,871 | ||||||||
| Agency commercial mortgage-backed securities 1 |
9,063 | — | 143 | 8,920 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
284,886 | 603 | 4,850 | 280,639 | ||||||||||||
| US government and agency securities |
1,500 | 43 | — | 1,543 | ||||||||||||
| Municipal bonds |
31,053 | 87 | 367 | 30,773 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 480,173 | $ | 1,016 | $ | 9,443 | $ | 471,746 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2017 |
||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 191,216 | $ | 419 | $ | 2,169 | $ | 189,466 | ||||||||
| Agency commercial mortgage-backed securities 1 |
9,360 | — | 125 | 9,235 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
187,637 | 4 | 3,425 | 184,216 | ||||||||||||
| US government and agency securities |
1,590 | 81 | — | 1,671 | ||||||||||||
| Municipal bonds |
35,196 | 241 | 308 | 35,129 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 424,999 | $ | 745 | $ | 6,027 | $ | 419,717 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
The amortized cost (carrying amount), unrealized gains and losses, and fair value of securities held to maturity (“HTM”) were as follows:
| December 31, 2018 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 53,377 | $ | 266 | $ | 1,151 | $ | 52,492 | ||||||||
| Agency commercial mortgage-backed securities 1 |
21,872 | 60 | 167 | 21,765 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
17,645 | 25 | 124 | 17,546 | ||||||||||||
| Municipal bonds |
53,152 | 305 | 469 | 52,988 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 146,046 | $ | 656 | $ | 1,911 | $ | 144,791 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2017 |
||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 57,334 | $ | 616 | $ | 646 | $ | 57,304 | ||||||||
| Agency commercial mortgage-backed securities 1 |
27,435 | 589 | 98 | 27,926 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
27,112 | 265 | 99 | 27,278 | ||||||||||||
| Municipal bonds |
61,628 | 1,079 | 289 | 62,418 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 173,509 | $ | 2,549 | $ | 1,132 | $ | 174,926 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
21
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
The amortized cost (carrying amount) and fair value of held to maturity debt securities and the fair value of available for sale debt securities at December 31, 2018 by contractual maturity are set forth below in the table below. Securities with contractual payments not due at a single maturity date, including mortgage backed securities and collateralized mortgage obligations, are shown separately.
| HTM | AFS | |||||||||||
| Amortized Cost |
Fair Value | Fair Value | ||||||||||
| Due in one year or less |
$ | 251 | $ | 254 | $ | 3,332 | ||||||
| Due after one to five years |
14,876 | 14,988 | 13,052 | |||||||||
| Due after five to ten years |
37,129 | 36,864 | 13,543 | |||||||||
| Due after ten years |
896 | 882 | 2,389 | |||||||||
| Agency residential mortgage-backed securities |
53,377 | 52,492 | 149,871 | |||||||||
| Agency commercial mortgage-backed securities |
21,872 | 21,765 | 8,920 | |||||||||
| Agency residential collateralized mortgage obligations |
17,645 | 17,546 | 280,639 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 146,046 | $ | 144,791 | $ | 471,746 | ||||||
|
|
|
|
|
|
|
|||||||
Securities with a carrying value of $211,198 and $256,451 at December 31, 2018 and 2017, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At December 31, 2018 and 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies or U.S. Government Sponsored Enterprises, in an amount greater than 10% of shareholders’ equity.
Sales activity of securities for the years ended December 31, 2018, 2017 and 2016 was as follows. All securities sold were classified as available for sale.
| December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Proceeds |
$ | — | $ | — | $ | 7,700 | ||||||
| Gross gains |
— | — | 72 | |||||||||
| Gross losses |
— | — | 7 | |||||||||
| Tax expense of securities gains/losses reclassified from accumulated other comprehensive income |
— | — | 23 | |||||||||
22
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Securities with unrealized losses at December 31, 2018 and 2017, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
| AFS |
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| December 31, 2018 |
Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 4,770 | $ | 27 | $ | 123,413 | $ | 4,056 | $ | 128,183 | $ | 4,083 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
— | — | 8,921 | 143 | 8,921 | 143 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
32,668 | 195 | 153,131 | 4,655 | 185,799 | 4,850 | ||||||||||||||||||
| Municipal bonds |
6,326 | 59 | 16,260 | 308 | 22,586 | 367 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 43,764 | $ | 281 | $ | 301,725 | $ | 9,162 | $ | 345,489 | $ | 9,443 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2017 |
||||||||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 59,545 | $ | 412 | $ | 100,214 | $ | 1,757 | $ | 159,759 | $ | 2,169 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
9,235 | 125 | — | — | 9,235 | 125 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
128,869 | 1,860 | 49,171 | 1,565 | 178,040 | 3,425 | ||||||||||||||||||
| Municipal bonds |
10,114 | 72 | 6,583 | 236 | 16,697 | 308 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 207,763 | $ | 2,469 | $ | 155,968 | $ | 3,558 | $ | 363,731 | $ | 6,027 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| HTM |
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| December 31, 2018 |
Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
Fair Value | Unrealized Loss |
||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 5,002 | $ | 15 | $ | 30,180 | $ | 1,136 | $ | 35,182 | $ | 1,151 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
6,465 | 41 | 6,964 | 126 | 13,429 | 167 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
3,994 | 11 | 6,213 | 113 | 10,207 | 124 | ||||||||||||||||||
| Municipal bonds |
7,131 | 17 | 20,244 | 452 | 27,375 | 469 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 22,592 | $ | 84 | $ | 63,601 | $ | 1,827 | $ | 86,193 | $ | 1,911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2017 |
||||||||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 20,397 | $ | 206 | $ | 16,909 | $ | 440 | $ | 37,306 | $ | 646 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
3,685 | 26 | 3,484 | 72 | 7,169 | 98 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
8,008 | 64 | 2,267 | 35 | 10,275 | 99 | ||||||||||||||||||
| Municipal bonds |
9,313 | 80 | 10,486 | 209 | 19,799 | 289 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 41,403 | $ | 376 | $ | 33,146 | $ | 756 | $ | 74,549 | $ | 1,132 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
As of December 31, 2018, 316 securities had unrealized losses, 258 of which had been in an unrealized loss position for over 12 months at December 31, 2018. The Company does not believe these unrealized losses are other-than-temporary and expects full collection of the carrying amount of these securities. At December 31, 2018, the Company does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost. All principal and interest payments are being received on time and in full.
23
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 6—Loans
Loans consist of the following:
| December 31, 2018 |
December 31, 2017 |
|||||||
| Loans held for sale, at fair value |
$ | 23,193 | $ | 16,707 | ||||
|
|
|
|
|
|||||
| Loans held for investment: |
||||||||
| Commercial real estate |
$ | 3,026,754 | $ | 3,019,339 | ||||
| Commercial and industrial |
2,057,791 | 1,927,049 | ||||||
| Construction and land |
270,629 | 277,864 | ||||||
| Consumer real estate |
1,390,378 | 1,213,434 | ||||||
| Other consumer |
45,171 | 45,506 | ||||||
|
|
|
|
|
|||||
| Gross loans held for investment, excluding Warehouse Purchase Program |
6,790,723 | 6,483,192 | ||||||
| Net of: |
||||||||
| Deferred costs (fees) and discounts, net |
10,397 | 6,380 | ||||||
| Allowance for loan losses |
(67,428 | ) | (71,301 | ) | ||||
|
|
|
|
|
|||||
| Net loans held for investment, excluding Warehouse Purchase Program |
6,733,692 | 6,418,271 | ||||||
| Warehouse Purchase Program |
960,404 | 1,320,846 | ||||||
|
|
|
|
|
|||||
| Total loans held for investment |
$ | 7,694,096 | $ | 7,739,117 | ||||
|
|
|
|
|
|||||
Activity in the allowance for loan losses for the years ended December 31, 2018, 2017 and 2016, segregated by portfolio segment and evaluation for impairment, is set forth below. The below activity does not include Warehouse Purchase Program loans, which are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. To date, the Company has not experienced a loss on its Warehouse Purchase Program loans and no allowance for loan losses has been allocated to them. At December 31, 2018, 2017 and 2016, the allowance for loan impairment related to purchased credit impaired (“PCI”) loans totaled $250, $269, and $180, respectively.
| For the year ended December 31, 2018 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land |
Consumer Real Estate |
Other Consumer |
Total | ||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 21,587 | $ | 39,005 | $ | 4,644 | $ | 4,838 | $ | 1,227 | $ | 71,301 | ||||||||||||
| Charge-offs |
(239 | ) | (42,356 | ) | — | (98 | ) | (1,083 | ) | (43,776 | ) | |||||||||||||
| Recoveries |
— | 3,699 | — | 34 | 235 | 3,968 | ||||||||||||||||||
| Provision expense (benefit) |
(1,303 | ) | 36,050 | (734 | ) | 1,069 | 853 | 35,935 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 20,045 | $ | 36,398 | $ | 3,910 | $ | 5,843 | $ | 1,232 | $ | 67,428 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Allowance ending balance: |
| |||||||||||||||||||||||
| Individually evaluated for impairment |
$ | 8 | $ | 4,109 | $ | — | $ | 224 | $ | 25 | $ | 4,366 | ||||||||||||
| Collectively evaluated for impairment |
20,037 | 32,289 | 3,910 | 5,619 | 1,207 | 63,062 | ||||||||||||||||||
| Loans: |
| |||||||||||||||||||||||
| Individually evaluated for impairment |
159 | 16,708 | — | 2,375 | 3 | 19,245 | ||||||||||||||||||
| Collectively evaluated for impairment |
3,026,364 | 2,040,988 | 270,629 | 1,387,313 | 44,995 | 6,770,289 | ||||||||||||||||||
| PCI loans |
231 | 95 | — | 690 | 173 | 1,189 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 3,026,754 | $ | 2,057,791 | $ | 270,629 | $ | 1,390,378 | $ | 45,171 | $ | 6,790,723 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
24
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
| For the year ended December 31, 2017 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land |
Consumer Real Estate |
Other Consumer |
Total | ||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 18,303 | $ | 35,464 | $ | 5,075 | $ | 4,484 | $ | 1,250 | $ | 64,576 | ||||||||||||
| Charge-offs |
(16 | ) | (32,846 | ) | (418 | ) | (96 | ) | (1,366 | ) | (34,742 | ) | ||||||||||||
| Recoveries |
205 | 405 | 75 | 42 | 640 | 1,367 | ||||||||||||||||||
| Provision expense (benefit) |
3,095 | 35,982 | (88 | ) | 408 | 703 | 40,100 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 21,587 | $ | 39,005 | $ | 4,644 | $ | 4,838 | $ | 1,227 | $ | 71,301 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Allowance ending balance: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | — | $ | 10,527 | $ | — | $ | 230 | $ | 34 | $ | 10,791 | ||||||||||||
| Collectively evaluated for impairment |
21,587 | 28,478 | 4,644 | 4,608 | 1,193 | 60,510 | ||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
4,134 | 84,005 | — | 2,992 | 35 | 91,166 | ||||||||||||||||||
| Collectively evaluated for impairment |
3,012,892 | 1,842,868 | 277,864 | 1,209,550 | 45,288 | 6,388,462 | ||||||||||||||||||
| PCI loans |
2,313 | 176 | — | 892 | 183 | 3,564 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 3,019,339 | $ | 1,927,049 | $ | 277,864 | $ | 1,213,434 | $ | 45,506 | $ | 6,483,192 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| For the year ended December 31, 2016 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land |
Consumer Real Estate |
Other Consumer |
Total | ||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 14,123 | $ | 24,975 | $ | 3,013 | $ | 3,992 | $ | 990 | $ | 47,093 | ||||||||||||
| Charge-offs |
(79 | ) | (7,746 | ) | — | (107 | ) | (927 | ) | (8,859 | ) | |||||||||||||
| Recoveries |
21 | 472 | — | 109 | 340 | 942 | ||||||||||||||||||
| Provision expense |
4,238 | 17,763 | 2,062 | 490 | 847 | 25,400 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 18,303 | $ | 35,464 | $ | 5,075 | $ | 4,484 | $ | 1,250 | $ | 64,576 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Allowance ending balance: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | 300 | $ | 4,521 | $ | — | $ | 138 | $ | 52 | $ | 5,011 | ||||||||||||
| Collectively evaluated for impairment |
18,003 | 30,943 | 5,075 | 4,346 | 1,198 | 59,565 | ||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
5,195 | 86,664 | 11,385 | 3,300 | 75 | 106,619 | ||||||||||||||||||
| Collectively evaluated for impairment |
2,659,644 | 1,788,459 | 283,509 | 1,070,732 | 53,683 | 5,856,027 | ||||||||||||||||||
| PCI loans |
5,616 | 233 | — | 891 | 233 | 6,973 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 2,670,455 | $ | 1,875,356 | $ | 294,894 | $ | 1,074,923 | $ | 53,991 | $ | 5,969,619 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Changes in the allowance for off-balance sheet credit losses on lending-related commitments and guarantees on credit card debt, included in “accrued expenses and other liabilities” on the consolidated balance sheets, are summarized in the following table. Please see Note 18—Commitments and Contingent Liabilities for more information.
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Balance at beginning of period |
$ | 929 | $ | 1,573 | $ | 73 | ||||||
| Charge-offs on lending-related commitments |
— | — | — | |||||||||
| Provision (recovery) for credit losses on lending-related commitments |
(200 | ) | (644 | ) | 1,500 | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at end of period |
$ | 729 | $ | 929 | $ | 1,573 | ||||||
|
|
|
|
|
|
|
|||||||
25
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Impaired loans at December 31, 2018 and 2017, were as follows 1:
| December 31, 2018 |
Unpaid Contractual Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
|||||||||||||||
| Commercial real estate |
$ | 177 | $ | 159 | $ | — | $ | 159 | $ | — | ||||||||||
| Commercial and industrial |
17,124 | 1,844 | 14,864 | 16,708 | 4,109 | |||||||||||||||
| Consumer real estate |
2,865 | 2,370 | 5 | 2,375 | 4 | |||||||||||||||
| Other consumer |
35 | — | 3 | 3 | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 20,201 | $ | 4,373 | $ | 14,872 | $ | 19,245 | $ | 4,116 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2017 |
||||||||||||||||||||
| Commercial real estate |
$ | 4,411 | $ | 4,134 | $ | — | $ | 4,134 | $ | — | ||||||||||
| Commercial and industrial |
89,713 | 48,463 | 35,542 | 84,005 | 10,502 | |||||||||||||||
| Consumer real estate |
3,545 | 2,985 | 7 | 2,992 | 7 | |||||||||||||||
| Other consumer |
71 | 16 | 19 | 35 | 13 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 97,740 | $ | 55,598 | $ | 35,568 | $ | 91,166 | $ | 10,522 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 1 | No Warehouse Purchase Program loans were impaired at December 31, 2018 or 2017. Loans reported do not include PCI loans. |
Income on impaired loans at December 31, 2018, 2017 and 2016, was as follows1
| December 31, 2018 | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||
| Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||||||||
| Commercial real estate |
$ | 4,215 | $ | 8 | $ | 4,421 | $ | 8 | $ | 5,240 | $ | 9 | ||||||||||||
| Commercial and industrial |
30,827 | — | 83,508 | — | 28,634 | 1 | ||||||||||||||||||
| Construction and land |
— | — | 2,273 | — | 901 | — | ||||||||||||||||||
| Consumer real estate |
2,711 | 38 | 2,786 | 14 | 4,831 | 14 | ||||||||||||||||||
| Other consumer |
16 | 3 | 264 | 4 | 95 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 37,769 | $ | 49 | $ | 93,252 | $ | 26 | $ | 39,701 | $ | 28 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1 | Loans reported do not include PCI loans. |
Loans past due over 90 days that were still accruing interest at December 31, 2018 totaled $58, which consisted entirely of PCI loans. No loans past due over 90 days were still accruing interest at December 31, 2017. At December 31, 2018, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at December 31, 2018 or 2017.
Non-performing loans were as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Commercial real estate |
$ | 159 | $ | 4,134 | ||||
| Commercial and industrial |
16,710 | 84,003 | ||||||
| Consumer real estate |
5,506 | 6,190 | ||||||
| Other consumer |
46 | 76 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 22,421 | $ | 94,403 | ||||
|
|
|
|
|
|||||
26
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
For the years ended December 31, 2018, 2017 and 2016, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $656, $4,229 and $1,746, respectively. No interest income was recorded on these loans for the years ended December 31, 2018, 2017 and 2016.
The outstanding balances of TDRs are shown below:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Nonaccrual TDRs (1) |
$ | 1,160 | $ | 17,294 | ||||
| Performing TDRs (2) |
926 | 768 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 2,086 | $ | 18,062 | ||||
|
|
|
|
|
|||||
| Outstanding commitments to lend additional funds to borrowers with TDR loans | — | — | ||||||
| 1 | Nonaccrual TDR loans are included in the nonaccrual loan totals. |
| 2 | Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans. |
The following table provides the recorded balances of loans modified as a TDR during the years ended December 31, 2018, 2017 and 2016.
| December 31, 2018 |
Principal Deferrals | Combination of Rate Reduction & Principal Deferral |
Other | Total | ||||||||||||
| Commercial and industrial |
$ | 71 | $ | 45 | $ | — | $ | 116 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 71 | $ | 45 | $ | — | $ | 116 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2017 |
||||||||||||||||
| Commercial and industrial |
$ | 38 | $ | 131 | $ | 14,063 | (1) | $ | 14,232 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 38 | $ | 131 | $ | 14,063 | $ | 14,232 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2016 |
||||||||||||||||
| Commercial and industrial |
$ | 685 | $ | — | $ | 7,090 | (1) | $ | 7,775 | |||||||
| Consumer real estate |
— | 79 | — | 79 | ||||||||||||
| Other consumer |
1 | — | — | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 686 | $ | 79 | $ | 7,090 | $ | 7,855 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Reserve-based energy relationships where the primary modification consisted of suspension of required borrowing base payments. |
Loans modified as a TDR during the years ended December 31, 2018, 2017 and 2016, 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.
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Consumer real estate |
$ | — | $ | — | $ | 31 | ||||||
27
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
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 December 31, 2018 and 2017 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Carrying amount 1 |
$ | 939 | $ | 3,295 | ||||
| Outstanding balance |
1,170 | 3,992 | ||||||
| 1 | The carrying amounts are reported net of allowance for loan losses of $250 and $269 as of December 31, 2018 and 2017. |
Changes in the accretable yield for PCI loans for the years ended December 31, 2018 and 2017, are as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Balance at beginning of period |
$ | 2,279 | $ | 2,515 | ||||
| Reclassifications from nonaccretable |
157 | 687 | ||||||
| Disposals |
(1,493 | ) | (272 | ) | ||||
| Accretion |
(319 | ) | (651 | ) | ||||
|
|
|
|
|
|||||
| Balance at end of period |
$ | 624 | $ | 2,279 | ||||
|
|
|
|
|
|||||
Below is an analysis of the age of recorded investment in loans that were past due at December 31, 2018 and 2017. No Warehouse Purchase Program loans were delinquent at December 31, 2018 or 2017 and therefore are not included in the following table.
| December 31, 2018 |
30-59 Days Past Due |
60-89 Days Past Due |
90 Days and Greater Past Due |
Total Loans Past Due |
Current Loans 1 |
Total Loans | ||||||||||||||||||
| Commercial real estate |
$ | 6 | $ | — | $ | — | $ | 6 | $ | 3,026,748 | $ | 3,026,754 | ||||||||||||
| Commercial and industrial |
289 | — | 217 | 506 | 2,057,285 | 2,057,791 | ||||||||||||||||||
| Construction and land |
557 | — | — | 557 | 270,072 | 270,629 | ||||||||||||||||||
| Consumer real estate |
18,885 | 4,241 | 1,632 | 24,758 | 1,365,620 | 1,390,378 | ||||||||||||||||||
| Other consumer |
271 | 15 | 29 | 315 | 44,856 | 45,171 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 20,008 | $ | 4,256 | $ | 1,878 | $ | 26,142 | $ | 6,764,581 | $ | 6,790,723 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2017 |
||||||||||||||||||||||||
| Commercial real estate |
$ | 9,414 | $ | — | $ | 250 | $ | 9,664 | $ | 3,009,675 | $ | 3,019,339 | ||||||||||||
| Commercial and industrial |
918 | 284 | 7,350 | 8,552 | 1,918,497 | 1,927,049 | ||||||||||||||||||
| Construction and land |
9,354 | — | — | 9,354 | 268,510 | 277,864 | ||||||||||||||||||
| Consumer real estate |
16,436 | 2,928 | 1,367 | 20,731 | 1,192,703 | 1,213,434 | ||||||||||||||||||
| Other consumer |
891 | 34 | 2 | 927 | 44,579 | 45,506 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 37,013 | $ | 3,246 | $ | 8,969 | $ | 49,228 | $ | 6,433,964 | $ | 6,483,192 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1 | Includes acquired PCI loans with a total carrying value of $1,120 and $3,338 at December 31, 2018 and 2017, respectively. |
28
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
The recorded investment in loans by credit quality indicators at December 31, 2018 and 2017, was as follows.
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
| December 31, 2018 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land | Consumer Real Estate | ||||||||||||
| Grade:1 |
||||||||||||||||
| Pass |
$ | 3,007,810 | $ | 1,935,786 | $ | 270,629 | $ | 1,382,388 | ||||||||
| Special Mention |
17,322 | 56,016 | — | 1,218 | ||||||||||||
| Substandard |
1,622 | 65,987 | — | 6,429 | ||||||||||||
| Doubtful |
— | 2 | — | 343 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 3,026,754 | $ | 2,057,791 | $ | 270,629 | $ | 1,390,378 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2017 |
||||||||||||||||
| Grade:1 |
||||||||||||||||
| Pass |
$ | 2,980,656 | $ | 1,787,238 | $ | 277,864 | $ | 1,203,236 | ||||||||
| Special Mention |
30,656 | 43,161 | — | 1,408 | ||||||||||||
| Substandard |
8,027 | 96,546 | — | 7,762 | ||||||||||||
| Doubtful |
— | 104 | — | 1,028 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 3,019,339 | $ | 1,927,049 | $ | 277,864 | $ | 1,213,434 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | PCI loans are included in the substandard or doubtful categories for December 31, 2018 and 2017, respectively. These categories are generally 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 December 31, 2018 and 2017.
Consumer Other Credit Exposure
Credit Risk Profile Based on Payment Activity
| December 31, 2018 | December 31, 2017 | |||||||
| Performing |
$ | 45,125 | $ | 45,430 | ||||
| Non-performing |
46 | 76 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 45,171 | $ | 45,506 | ||||
|
|
|
|
|
|||||
29
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 7—Fair Value
ASC 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
| Fair Value Measurements Using Level 2 | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| Assets: |
||||||||
| Agency residential mortgage-backed securities |
$ | 149,871 | $ | 189,466 | ||||
| Agency commercial mortgage-backed securities |
8,920 | 9,235 | ||||||
| Agency residential collateralized mortgage obligations |
280,639 | 184,216 | ||||||
| US government and agency securities |
1,543 | 1,671 | ||||||
| Municipal bonds |
30,773 | 35,129 | ||||||
|
|
|
|
|
|||||
| Total securities available for sale |
$ | 471,746 | $ | 419,717 | ||||
|
|
|
|
|
|||||
| Loans held for sale1 |
$ | 23,193 | $ | 16,707 | ||||
| Derivative financial instruments: |
||||||||
| Interest rate lock commitments |
459 | 358 | ||||||
| Forward mortgage-backed securities trades |
— | 7 | ||||||
| Loan customer counterparty |
578 | — | ||||||
| Financial institution counterparty |
1,118 | 1,735 | ||||||
| Liabilities: |
||||||||
| Derivative financial instruments: |
||||||||
| Interest rate lock commitments |
— | — | ||||||
| Forward mortgage-backed securities trades |
163 | 18 | ||||||
| Loan customer counterparty |
1,118 | 1,735 | ||||||
| Financial institution counterparty |
578 | — | ||||||
| 1 | At December 31, 2018 and 2017, loans held for sale had an aggregate outstanding principal balance of $22,402 and $16,242. There were no mortgage loans held for sale that were 90 days or greater past due or on non-accrual at December 31, 2018. |
The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis:
Securities available for sale—The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
30
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Residential mortgage loans held for sale—Mortgage loans held for sale, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted to credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans held for sale in the consolidated income statement. The Company has no continuing involvement in any residential mortgage loans sold.
Derivative instruments:
Interest rate lock commitments (“IRLCs”)—The estimated fair values of IRLCs utilize current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding. The fair value of IRLCs is subject to change primarily due to changes in interest rates. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on observable market inputs.
Forward mortgage-backed securities trades—These forward mortgage-backed securities trades are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract; therefore these contracts are classified as Level 2. The estimated fair values are subject to change primarily due to changes in interest rates.
Loan customer counterparty and financial institution counterparty—The Company also enters into certain interest rate derivative positions that are not designated as hedging instruments. The estimated fair value of these commercial loan interest rate swaps are obtained from a pricing service that provides the swaps’ unwind value (Level 2 inputs). Please see Note 6—Derivative Financial Instruments for more information.
Assets and Liabilities Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a non-recurring basis as of December 31, 2018 or 2017.
| Fair Value Measurements Using Level 3 | ||||||||
| December 31, 2018 | December 31, 2017 | |||||||
| Assets: |
||||||||
| Impaired loans |
$ | 10,756 | $ | 25,046 | ||||
| Foreclosed assets: |
||||||||
| Commercial real estate |
— | 6,694 | ||||||
| Construction and land |
— | 859 | ||||||
| Consumer real estate |
720 | 192 | ||||||
| Other |
613 | 687 | ||||||
Methodologies used to measure the fair value of financial assets and liabilities valued on a non-recurring basis are shown below:
Impaired loans—Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Impaired loans secured by real estate, receivables or inventory had discounts determined by management on an individual loan basis. Impaired loans that are not collateral dependent are measured for impairment by a discounted cash flow analysis using a net present value calculation that utilizes data from the loan file before and after the modification.
Foreclosed assets—These 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. At December 31, 2018, the Company had $702 in residential mortgage loans in the process of foreclosure.
31
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
The Credit Risk Management department evaluates the valuations on impaired loans and foreclosed assets at least quarterly. The valuations on impaired loans are reviewed at least quarterly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs, such as discounts to collateral, are monitored and adjusted if market conditions change.
Fair Value of Financial Instruments Not Recorded at Fair Value
The carrying amount and fair value information of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets at December 31, 2018 and 2017, were as follows:
| Fair Value | ||||||||||||||||
| December 31, 2018 |
Carrying Amount |
Level 1 | Level 2 | Level 3 | ||||||||||||
| Financial assets |
||||||||||||||||
| Cash and cash equivalents |
$ | 269,193 | $ | 269,193 | $ | — | $ | — | ||||||||
| Securities held to maturity |
146,046 | — | 144,791 | — | ||||||||||||
| Loans held for investment, net |
6,733,692 | — | — | 6,664,703 | ||||||||||||
| Loans held for investment—Warehouse Purchase Program |
960,404 | — | — | 960,404 | ||||||||||||
| FHLB and other restricted securities, at cost |
56,226 | — | 56,226 | — | ||||||||||||
| Accrued interest receivable |
27,104 | 27,104 | — | — | ||||||||||||
| Financial liabilities |
||||||||||||||||
| Deposits |
$ | 6,841,715 | $ | — | $ | — | $ | 6,330,581 | ||||||||
| FHLB advances |
825,409 | — | — | 825,496 | ||||||||||||
| Repurchase agreements |
50,340 | — | — | 44,214 | ||||||||||||
| Subordinated debt |
135,012 | — | — | 138,524 | ||||||||||||
| Accrued interest payable |
4,428 | 4,428 | — | — | ||||||||||||
| December 31, 2017 |
||||||||||||||||
| Financial assets |
||||||||||||||||
| Cash and cash equivalents |
$ | 293,456 | $ | 293,456 | $ | — | $ | — | ||||||||
| Securities held to maturity |
173,509 | — | 174,926 | — | ||||||||||||
| Loans held for investment, net |
6,418,271 | — | — | 6,484,949 | ||||||||||||
| Loans held for investment—Warehouse Purchase Program |
1,320,846 | — | — | 1,320,846 | ||||||||||||
| FHLB and other restricted securities, at cost |
64,790 | — | 64,790 | — | ||||||||||||
| Accrued interest receivable |
24,596 | 24,596 | — | — | ||||||||||||
| Financial liabilities |
||||||||||||||||
| Deposits |
$ | 6,767,683 | $ | — | $ | — | $ | 6,326,572 | ||||||||
| FHLB advances |
1,043,163 | — | — | 1,043,416 | ||||||||||||
| Repurchase agreement |
84,676 | — | — | 81,041 | ||||||||||||
| Subordinated debt |
134,522 | — | — | 141,972 | ||||||||||||
| Accrued interest payable |
2,729 | 2,729 | — | — | ||||||||||||
32
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 8—Derivative Financial Instruments
The following table provides the outstanding notional balances and fair values of outstanding derivative positions at December 31, 2018 and 2017.
| December 31, 2018 | December 31, 2017 | |||||||||||||||||||||||
| Outstanding Notional Balance |
Asset Derivative Fair Value |
Liability Derivative Fair Value |
Outstanding Notional Balance |
Asset Derivative Fair Value |
Liability Derivative Fair Value |
|||||||||||||||||||
| IRLCs |
$ | 12,287 | $ | 459 | $ | — | $ | 10,337 | $ | 358 | $ | — | ||||||||||||
| Forward mortgage-backed securities trades |
24,133 | — | 163 | 19,788 | 7 | 18 | ||||||||||||||||||
| Commercial loan interest rate swaps and caps: |
||||||||||||||||||||||||
| Loan customer counterparty |
64,130 | 578 | 1,118 | 114,594 | — | 1,735 | ||||||||||||||||||
| Financial institution counterparty |
64,130 | 1,118 | 578 | 114,594 | 1,735 | — | ||||||||||||||||||
IRLCs—In the normal course of business, the Company enters into IRLCs with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
Forward mortgage-backed securities trades—The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the IRLC is made.
Interest rate swaps and caps—These derivative positions relate to transactions in which we enter into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution. An interest rate swap transaction allows our customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. In connection with each interest rate cap, we sell a cap to the customer and agree to pay interest if the underlying index exceeds the strike price defined in the cap agreement. Simultaneously we purchase a cap with matching terms from another financial institution which agrees to pay us if the underlying index exceeds the strike price.
The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at December 31, 2018 and 2017 are presented in the following table.
| Weighted-Average Interest Rate | ||||||||||||||||
| December 31, 2018 | December 31, 2017 | |||||||||||||||
| Received | Paid | Received | Paid | |||||||||||||
| Loan customer counterparty |
4.21 | % | 4.29 | % | 2.52 | % | 2.54 | % | ||||||||
Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $578 at December 31, 2018. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was approximately $1,123 at December 31, 2018. A credit support annex is in place and allows the bank to call collateral from upstream financial institution counter-parties. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. Our cash collateral pledged for interest rate swaps and included in our interest-bearing deposits, which totaled $2,480 and $1,950 at December 31, 2018 and 2017 respectively, is in excess of our credit exposure.
33
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-back securities are recorded in net gain on sale of mortgage loans. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps and caps, because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. Income (loss) for the years ended December 31, 2018, 2017 and 2016 was as follows:
| Years Ended December 31, | ||||||||||||
| Derivatives not designated as hedging instruments |
2018 | 2017 | 2016 | |||||||||
| IRLCs |
$ | 101 | $ | (21 | ) | $ | (43 | ) | ||||
| Forward mortgage-backed securities trades |
290 | (479 | ) | 13 | ||||||||
34
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 9—Premises and Equipment
Premises and equipment were as follows:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Land |
$ | 22,140 | $ | 22,140 | ||||
| Buildings |
57,515 | 57,079 | ||||||
| Furniture, fixtures and equipment |
24,495 | 20,218 | ||||||
| Leasehold improvements |
11,313 | 10,055 | ||||||
|
|
|
|
|
|||||
| 115,463 | 109,492 | |||||||
| Less: accumulated depreciation |
(42,390 | ) | (39,799 | ) | ||||
|
|
|
|
|
|||||
| Total |
$ | 73,073 | $ | 69,693 | ||||
|
|
|
|
|
|||||
Depreciation expense was $6,182, $6,389 and $6,186 for 2018, 2017 and 2016, respectively.
Operating Leases: The Company leases certain bank or loan production office properties and equipment under operating leases. Certain leases contain renewal options that may be exercised. Rent expense was $7,372, $7,322 and $7,928 for 2018, 2017 and 2016, respectively.
Rent commitments, before considering applicable renewal options, as of December 31, 2018, were as follows:
| Balance | ||||
| 2019 |
$ | 6,490 | ||
| 2020 |
6,306 | |||
| 2021 |
5,817 | |||
| 2022 |
5,141 | |||
| 2023 |
5,620 | |||
| Thereafter |
14,969 | |||
|
|
|
|||
| Total |
$ | 44,343 | ||
|
|
|
|||
The Company leases office space in certain locations to other unaffiliated tenants. Rental income of $163 was recognized during 2018. This rental income is recorded in the consolidated statement of income as an offset to occupancy expense. Aggregate future minimum rental payments to be received under non-cancelable subleases at December 31, 2018, were $77. At December 31, 2018, the Company had no commitments for future locations and held one parcel of land for future development.
35
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 10—Goodwill and Core Deposit Intangibles
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles (“CDI”) for years ended December 31, 2018 and 2017, were as follows:
| Goodwill | Core Deposit Intangibles | |||||||
| Balance as of December 31, 2016 |
$ | 178,559 | $ | 665 | ||||
| Amortization of core deposit intangible |
— | (263 | ) | |||||
|
|
|
|
|
|||||
| Balance as of December 31, 2017 |
178,559 | 402 | ||||||
| Amortization of core deposit intangible |
— | (157 | ) | |||||
|
|
|
|
|
|||||
| Balance as of December 31, 2018 |
$ | 178,559 | $ | 245 | ||||
|
|
|
|
|
|||||
CDI are amortized on an accelerated basis over their estimated lives with a weighted average amortization period of 8 years. The CDI amortization expense is reported in other non-interest expense on the Company’s consolidated statements of income. The estimated aggregate future amortization expense for CDI remaining as of December 31, 2018 is as follows:
| Balance | ||||
| 2019 |
$ | 101 | ||
| 2020 |
73 | |||
| 2021 |
48 | |||
| 2022 |
23 | |||
| 2023 |
— | |||
| Thereafter |
— | |||
36
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 11—Deposits
Time deposits of $250 or more totaled $1,255,635 and $1,009,855 at December 31, 2018 and 2017, respectively. The $250 FDIC insurance coverage limit applies per depositor, per insured depository institution, for each account ownership category.
The Company provides an avenue for large depositors to maintain full FDIC insurance coverage for all deposits up to $140,000, depending on product. Under an agreement with Promontory Interfinancial Network, we participate in the Certificate of Deposit Account Registry Service (CDARS®) and the Insured Cash Sweep (ICS) money market product. These are deposit-matching programs which distribute excess balances on deposit with the Bank across other participating banks. In return, those participating financial institutions place their excess customer deposits with the Bank in a reciprocal amount. These products are designed to enhance our ability to attract and retain customers and increase deposits by providing additional FDIC insurance for large deposits. We also participate in the ICS One-Way Buy program, which allows the Bank to buy cost-effective wholesale funding on customizable terms. Due to the nature of the placement of the funds, certain CDARS® and ICS deposits are classified as “brokered deposits” by regulatory agencies. In December 2018, the FDIC adopted its final rule related to the treatment of reciprocal deposits. The final rule implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act to exempt certain reciprocal deposits from being considered as brokered deposits for well-capitalized institutions. At December 31, 2018 and 2017, the Company had $380,640 and $400,716, respectively, in aggregate CDARS® and ICS deposits that were classified as brokered deposits by regulatory agencies.
At December 31, 2018, scheduled maturities of time deposits for the next five years with the weighted average rate at the end of the period were as follows:
| Balance | Weighted Average Rate |
|||||||
| 2019 |
$ | 1,252,066 | 2.01 | % | ||||
| 2020 |
434,303 | 2.60 | ||||||
| 2021 |
67,062 | 1.72 | ||||||
| 2022 |
17,827 | 1.59 | ||||||
| 2023 and thereafter |
14,153 | 2.08 | ||||||
|
|
|
|||||||
| Total |
$ | 1,785,411 | 2.14 | % | ||||
|
|
|
|||||||
At December 31, 2018 and 2017, the Company’s deposits included public funds totaling $936,927 and $972,226, respectively. At December 31, 2018 and 2017, overdrawn deposits of $801 and $473 were reclassified as unsecured consumer loans.
Interest expense on deposits is summarized as follows:
| Years Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Interest-bearing demand |
$ | 6,616 | $ | 5,475 | $ | 3,974 | ||||||
| Savings and money market |
22,786 | 16,845 | 7,288 | |||||||||
| Time |
28,073 | 14,374 | 9,772 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 57,475 | $ | 36,694 | $ | 21,034 | ||||||
|
|
|
|
|
|
|
|||||||
37
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 12—Borrowed Funds
Borrowed funds are summarized as follows:
| December 31, | ||||||||||||||||
| 2018 | 2017 | |||||||||||||||
| Amount | Rate1 | Amount | Rate1 | |||||||||||||
| Federal Home Loan Bank advances |
$ | 825,409 | 2.54 | % | $ | 1,043,163 | 1.51 | % | ||||||||
| Repurchase Agreements |
||||||||||||||||
| Credit Suisse structured repurchase agreement |
— | — | 25,000 | 3.02 | ||||||||||||
| Overnight repurchase agreements with depositors |
50,340 | 2.16 | 59,676 | 1.18 | ||||||||||||
| Subordinated Debt |
||||||||||||||||
| Fixed to floating rate note maturing on December 1, 2025 |
125,000 | 5.50 | 125,000 | 5.50 | ||||||||||||
| Junior subordinated debentures |
15,464 | 4.49 | 15,464 | 3.29 | ||||||||||||
| 1 | Rate at period-end, with the exception of the fixed to floating rate subordinated debt note, which is a weighted average rate calculated using period-end rates. |
Federal Home Loan Bank (“FHLB”) Advances
At December 31, 2018, advances from the FHLB had interest rates ranging from 2.20% to 6.00%. At December 31, 2017, advances from the FHLB had interest rates ranging from 1.30% to 6.00%. At December 31, 2018, the Company had no variable rate FHLB advances.
The FHLB advances were collateralized by mortgage and commercial loans with collateral values of $2,171,981 and $2,106,571 under a blanket lien arrangement at December 31, 2018 and 2017, respectively. Additionally, securities safekept at FHLB and FHLB stock are used as collateral for advances. Based on this collateral, the Company was eligible to borrow an additional $2,175,664 and $2,084,944 at December 31, 2018 and 2017, respectively. The current agreement provided for a maximum borrowing amount of approximately $3,934,172 and $4,072,477 at December 31, 2018 and 2017, respectively.
Repurchase Agreements
Repurchase agreements (“repos”) which are classified as securities transactions, are not insured by the 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. Repos are accounted for as collateralized borrowings and are recorded at amounts equal to cash received.
Inherent in repurchase agreements is a risk that the fair value of the collateral pledged on the agreements could decline below the amount obligated under the agreements. 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. At December 31, 2018, the Company had $50,340 in overnight repurchase agreements with depositors.
In April 2008, the Company entered into a 10-year term structured repurchase callable agreement for $25,000 to leverage the balance sheet and increase liquidity. The repurchase agreement matured in April 2018 and was paid in full.
Subordinated Debt
In November 2015, the Company issued $75,000 of Fixed-to-Floating Rate Subordinated Notes (the “Notes”) that mature on December 1, 2025 (the “Maturity Date”). In September 2016, the Company issued an additional $50,000 of Notes that mature on the Maturity Date. The Notes, which qualify as Tier 2 capital for regulatory purposes, have an interest rate of 5.50% and 5.69%, respectively, per annum, payable semi-annually on each December 1 and June 1 through December 1, 2020. From and including December 1, 2020 through maturity or earlier redemption, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month LIBOR rate plus 3.89%, payable on March 1, June 1, September 1, and December 1 of each year through the maturity date or earlier redemption. The Company may, at its option, beginning on December 1, 2020 and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption. Any partial redemption will be made pro rata among all of the holders.
38
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
The Notes were sold at an underwriting discount and the discount, as well as debt issuance costs, are netted against the subordinated debt liability on the balance sheet in accordance with ASU 2015-03. The unamortized underwriting discount and debt issuance costs totaled $2,101 at December 31, 2018. The Notes are subordinated in right of payment to all of the Company’s senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Company’s subsidiaries.
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 III (“Trust III”). Trust III invested the total proceeds from the sale of 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 for regulatory purposes. 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% (4.49% at December 31, 2018). 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. At December 31, 2018 and 2017, the Trust III Debentures were reduced by a purchase accounting fair value discount of $3,350 and $3,537, respectively.
Other Borrowing Information
At December 31, 2018, borrowed funds, reported gross of purchase accounting fair value discounts, prepayment penalties and debt issuance costs, were structured to contractually pay down as follows:
| FHLB Advances | Repurchase Agreements |
Subordinated Debt |
Total | |||||||||||||
| 2019 |
$ | 822,313 | $ | 50,340 | $ | — | $ | 872,653 | ||||||||
| 2020 |
931 | — | — | 931 | ||||||||||||
| 2021 |
856 | — | — | 856 | ||||||||||||
| 2022 |
695 | — | — | 695 | ||||||||||||
| 2023 |
156 | — | — | 156 | ||||||||||||
| Thereafter |
458 | — | 140,464 | 140,922 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 825,409 | $ | 50,340 | $ | 140,464 | $ | 1,016,213 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
At December 31, 2018 and 2017, the Company had borrowing availability representing the collateral value assigned to the securities pledged to the discount window through the FRB of $77,230 and $78,616, respectively. Additionally, uncommitted, unsecured Fed Fund lines of credit totaling $250,000 and $250,000 were available at December 31, 2018 and 2017, respectively, from multiple correspondent banks.
39
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 13—Benefits
Employee Stock Ownership (“ESOP”) and 401(k) Plan: The Company offers a KSOP plan composed of an ESOP and 401(k) plan. Employees may participate under the 401(k) portion of the KSOP as of the date they first complete an hour of service with the Bank. Employees are eligible to receive a matching contribution of 100% of employee contributions up to a maximum of 5% of the employee’s qualifying compensation. Matching expense for 2018, 2017 and 2016 was $2,857, $2,571 and $2,479, respectively.
The ESOP portion of the KSOP was established in connection with the Company’s 2006 minority stock offering. In 2006 the ESOP purchased shares of common stock financed by a term loan from the Company. This note was fully repaid in 2016, and all shares were allocated to participant accounts. In 2010, in connection with our second step conversion to a full stock company, the ESOP purchased 1,588,587 shares of common stock with proceeds from a 30 year note in the amount of $15,886 from the Company. At December 31, 2018, the ESOP held 2,166,836 shares, of which 1,027,696 shares were allocated to participants and 1,139,140 were unallocated. The fair value of unallocated shares at December 31, 2018 was $36,555.
The Company’s Board of Directors determines the amount of contribution to the ESOP annually but is required to make contributions sufficient to service the ESOP’s debt. Dividends on unallocated shares held by the ESOP are applied to the ESOP note payable. Shares are released for allocation to eligible employees as the ESOP debt is repaid. Eligible employees receive an allocation of released shares at the end of the calendar year on a relative compensation basis. Employees are eligible if they meet the minimum service and eligibility requirements. The dividends paid on allocated shares are paid to employee accounts. Contributions to the ESOP were $842, $842, and $1,468 during 2018, 2017 and 2016, and expense was $2,223, $2,074 and $3,174 for December 31, 2018, 2017 and 2016, respectively.
Deferred Compensation Plan: The Company has entered into certain non-qualified deferred compensation agreements with members of the executive management team, directors and certain employees. These agreements, which are subject to the rules of section 409(a) of the Internal Revenue Code, relate to the voluntary deferral of compensation received and do not have an employer contribution. The accrued liability as of December 31, 2018 and 2017 was $2,921 and $3,393, respectively.
Included in other assets is a universal life insurance policy, as well as variable and fixed annuity contracts, totaling $3,119 and $3,588 at December 31, 2018 and 2017, respectively. The Company is the owner and beneficiary of the policy, which pays interest on the funds invested. The life insurance policy is recorded at the net cash surrender value, or the amount that can be realized.
Bank-Owned Life Insurance: The Company is the sole owner of life insurance policies pertaining to certain employees and directors. The selected insured employees and directors agreed to a share of the death benefit while they remain actively employed with the Company or serve on its board. In the event of death while actively employed with the Company, the employee’s or director’s designated beneficiary will receive an income tax free death benefit paid.
The Company also is the sole owner of other life insurance policies that do not share the death benefit with the employees. The total balance of the bank-owned life insurance policies, reported as an asset, at December 31, 2018 and 2017 totaled $59,036 and $57,684.
40
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 14 — Share-based Compensation
The Company has three share-based compensation plans: the 2017 Omnibus Incentive Plan (the “2017 Plan”), as well as the 2012 and 2007 Equity Incentive Plans (the “Prior Plans”). All plans have been approved by the Company’s shareholders. In 2017, the 2017 Plan was established and replaced the Prior Plans. No further awards will be made under the Prior Plans and shares reserved to make new awards under the Prior Plans have been released; however, shares reserved to fund issued and outstanding awards under the Prior Plans continue to be reserved to provide for those awards.
The 2017 Plan permits the granting of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units and cash awards to employees and directors (including advisory and emeritus directors) of the Company and its subsidiaries. There are 3,250,000 total shares authorized under the 2017 Plan, with a fungible share rate of 2.5-for-1 for full-value awards (stock-based awards other than stock options and stock appreciation rights). As of December 31, 2018, 2,834,368 shares were available for issuance.
Compensation cost charged to income for share-based compensation, which is reported in non-interest expense as salaries and employee benefits expense, is presented below:
| Years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Restricted stock |
$ | 3,415 | $ | 3,581 | $ | 3,477 | ||||||
| Stock options |
3,539 | 3,881 | 2,537 | |||||||||
| Income tax benefit |
1,460 | 2,612 | 2,105 | |||||||||
Outstanding restricted stock awards vest over periods ranging from one to three years. A summary of activity in the restricted stock portion of the Company’s share-based compensation plans for 2018, 2017 and 2016 is presented below:
| Time-Vested Shares | Performance-Based Shares | |||||||||||||||
| Shares | Weighted- Average Grant Date Fair Value per Share 1 |
Shares | Weighted- Average Grant Date Fair Value per Share 2 |
|||||||||||||
| Non-vested at December 31, 2015 |
246,461 | $ | 20.98 | 61,800 | $ | 25.02 | ||||||||||
| Granted |
55,180 | 29.29 | 40,200 | 29.29 | ||||||||||||
| Vested |
(101,465 | ) | 20.70 | (20,600 | ) | 25.02 | ||||||||||
|
|
|
|
|
|||||||||||||
| Non-vested at December 31, 2016 |
200,176 | 23.79 | 81,400 | 43.06 | ||||||||||||
| Granted |
19,208 | 38.92 | 12,208 | 39.90 | ||||||||||||
| Vested |
(90,796 | ) | 21.67 | (20,600 | ) | 41.32 | ||||||||||
|
|
|
|
|
|||||||||||||
| Non-vested at December 31, 2017 |
128,588 | 27.27 | 73,008 | 42.21 | ||||||||||||
| Granted |
122,710 | 43.44 | 26,550 | 42.82 | ||||||||||||
| Vested |
(56,940 | ) | 22.18 | (20,600 | ) | 44.04 | ||||||||||
| Forfeited |
(2,555 | ) | 43.89 | — | — | |||||||||||
|
|
|
|
|
|||||||||||||
| Non-vested at December 31, 2018 |
191,803 | $ | 38.90 | 78,958 | $ | 32.09 | ||||||||||
|
|
|
|
|
|||||||||||||
| 1 | For restricted stock awards with time-based vesting conditions, the grant date fair value is based upon the closing stock price as quoted on the Nasdaq Stock Market on the grant date. |
| 2 | For restricted stock awards with performance-based vesting conditions, the value of the award is based upon the closing stock price as quoted on the Nasdaq Stock Market on the date of vesting. Until the final value is determined on the vesting date, the Company estimates the fair value based upon the closing stock price as quoted on the Nasdaq Stock Market near the last business day of each month. Performance-based awards are shown at their target value. |
41
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
As of December 31, 2018, there was $5,527 of total unrecognized compensation expense related to non-vested restricted shares awarded under the Company’s share-based compensation plans. That expense is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested during the years ended December 31, 2018 and 2017, was $2,170 and $2,819, respectively.
Under the terms of the 2017 Plan, stock options may not be granted with an exercise price less than the fair market value of the Company’s common stock on the date the option is granted and may not be exercised later than ten years after the grant date. The fair market value is the closing stock price as quoted on the Nasdaq Stock Market on the date of grant.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the stock option in effect at the time of the grant. The expected term of stock options is based on employees’ actual vesting behavior and expected volatilities are based on historical volatilities of the Company’s common stock. Expected dividends are the estimated dividend rate over the expected term of the stock options.
The weighted average fair value of stock options granted during 2018, 2017 and 2016 was $13.85, $10.76 and $7.77, respectively. The fair value of options granted was determined using the following weighted-average assumptions as of grant date:
| 2018 | 2017 | 2016 | ||||||||||
| Risk-free interest rate |
2.89 | % | 2.18 | % | 1.37 | % | ||||||
| Expected term of stock options (years) |
7.0 | 6.2 | 6.3 | |||||||||
| Expected stock price volatility |
31.33 | % | 31.85 | % | 32.07 | % | ||||||
| Expected dividends |
1.46 | % | 1.61 | % | 1.93 | % | ||||||
42
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
A summary of activity in the stock option portion of the Company’s share-based compensation plans as of the years ended December 31, 2018, 2017 and 2016 is presented below:
| Options |
Shares | Weighted- Average Exercise Price per Share |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||||
| Outstanding at December 31, 2015 |
1,865,750 | $ | 22.21 | 7.9 | $ | 6,401 | ||||||||||
| Granted |
392,838 | 29.15 | ||||||||||||||
| Exercised |
(175,192 | ) | 19.08 | |||||||||||||
| Forfeited |
(75,316 | ) | 25.57 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2016 |
2,008,080 | 23.71 | 9.5 | 38,850 | ||||||||||||
| Granted |
513,375 | 37.15 | ||||||||||||||
| Exercised |
(221,984 | ) | 21.23 | |||||||||||||
| Forfeited |
(92,228 | ) | 28.80 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2017 |
2,207,243 | 26.88 | 10.1 | 33,848 | ||||||||||||
| Granted |
1,200 | 43.12 | ||||||||||||||
| Exercised |
(267,716 | ) | 24.72 | |||||||||||||
| Forfeited |
(107,840 | ) | 30.87 | |||||||||||||
|
|
|
|||||||||||||||
| Outstanding at December 31, 2018 |
1,832,887 | $ | 26.97 | 8.8 | $ | 11,620 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fully vested and expected to vest |
1,829,134 | $ | 26.95 | 8.8 | $ | 11,614 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at December 31, 2018 |
1,249,335 | $ | 24.48 | 7.3 | $ | 10,218 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2018, there was $3,570 of total unrecognized compensation expense related to non-vested stock options. That expense is expected to be recognized over a weighted-average period of 1.2 years. At December 31, 2018, the Company applied an estimated forfeiture rate of 5% based on historical activity. The intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The total intrinsic value of stock options exercised was $5,047, $4,084 and $2,251 for years ended December 31, 2018, 2017 and 2016, respectively.
43
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 15—Income Taxes
The Tax Cuts and Jobs Act (the “Act”,) which was enacted on December 22, 2017, made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. As ASC 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21%. As a result of the Act, the Company initially recorded a remeasurement of our deferred tax asset of $13,493 in the fourth quarter of 2017. Additionally, during the fourth quarter of 2017, the Company filed an advance consent application for change in accounting method with the Internal Revenue Service (the “IRS”) to change the Company’s tax method of accounting for its Internal Revenue Code (“IRC”) Section 475 loans and securities for which it received affirmative consent from the IRS in the third quarter of 2018. In accordance with Staff Accounting Bulletin (“SAB”) 118, a company may adjust its initial assumptions and judgments, not to exceed one year from enactment, upon obtaining, preparing or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts. The 2018 adjustment to our deferred tax asset account for the tax rate changes and favorable outcome of the Company’s change in tax method of accounting for its IRC Section 475 loans and securities resulted in a $15,289 tax benefit.
The Company’s pre-tax income is subject to federal income tax and state margin tax at a combined rate of 22% for 2018, and 36% for 2017 and 2016. Income tax expense for 2018, 2017 and 2016, was as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Current expense |
$ | (10,035 | ) | $ | 56,341 | $ | 59,900 | |||||
| Deferred expense |
45,957 | (4,115 | ) | (6,798 | ) | |||||||
| Impact of Tax Cuts and Jobs Act—net future (income) deductions |
(15,289 | ) | 12,752 | — | ||||||||
| Impact of Tax Cuts and Jobs Act—unrealized loss on AFS securities |
— | 741 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total income tax expense |
$ | 20,633 | $ | 65,719 | $ | 53,102 | ||||||
|
|
|
|
|
|
|
|||||||
44
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
At December 31, 2018 and 2017, deferred tax assets and liabilities were due to the following:
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Deferred tax assets: |
||||||||
| Allowance for loan losses |
$ | — | $ | 15,168 | ||||
| Deferred compensation arrangements |
654 | 762 | ||||||
| Self-funded health insurance |
118 | 251 | ||||||
| Non-accrual interest |
— | 503 | ||||||
| Restricted stock and stock options |
3,158 | 2,577 | ||||||
| Accrued expenses |
627 | 623 | ||||||
| Fair value mark on purchased loans |
— | 965 | ||||||
| Net unrealized loss on securities available for sale |
1,770 | 1,111 | ||||||
| Other |
928 | 1,909 | ||||||
|
|
|
|
|
|||||
| 7,255 | 23,869 | |||||||
| Deferred tax liabilities: |
||||||||
| Depreciation |
(684 | ) | (270 | ) | ||||
| Partnerships — CRA-purposed private equity funds |
— | (941 | ) | |||||
| Fair value mark on loans |
(9,786 | ) | — | |||||
| Fair value mark on investment securities |
(2,033 | ) | — | |||||
| Net deferred loan costs |
(2,183 | ) | — | |||||
| Fair value mark on subordinated debt |
(704 | ) | (743 | ) | ||||
| Other |
(1,634 | ) | (1,675 | ) | ||||
|
|
|
|
|
|||||
| (17,024 | ) | (3,629 | ) | |||||
|
|
|
|
|
|||||
| Net deferred tax asset (liability) |
$ | (9,769 | ) | $ | 20,240 | |||
|
|
|
|
|
|||||
As a result of the changes in the income tax accounting treatment for loans, the Bank’s previous net deferred tax asset position changed to a net deferred tax liability position at December 31, 2018. The net deferred tax liability is recorded on the consolidated balance sheets under “other liabilities” and the net deferred tax asset is recorded on the consolidated balance sheets under “other assets.” Management performed an analysis related to the Company’s deferred tax asset for each of the years ended December 31, 2018 and 2017 and, based upon these analyses, no valuation allowance was deemed necessary as of December 31, 2018 or 2017.
45
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Effective tax rates differ from the federal statutory rate of 21% in 2018, and 35% for 2017 and 2016, applied to income before income taxes due to the following:
| At and for the Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Federal statutory rate times financial statement income |
$ | 36,713 | $ | 54,325 | $ | 52,823 | ||||||
| Effect of: |
||||||||||||
| State taxes, net of federal benefit |
211 | 239 | 267 | |||||||||
| Bank-owned life insurance income |
(284 | ) | (423 | ) | (436 | ) | ||||||
| Municipal interest income |
(499 | ) | (978 | ) | (1,041 | ) | ||||||
| ESOP shares released |
356 | 541 | 757 | |||||||||
| Restricted stock and stock options |
(907 | ) | (1,578 | ) | — | |||||||
| Sale of LegacyTexas Insurance Services, Inc. |
— | — | 640 | |||||||||
| Deferred tax adjustment due to the Tax Cuts and Jobs Act |
(15,289 | ) | 13,493 | — | ||||||||
| Other |
332 | 100 | 92 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total income tax expense |
$ | 20,633 | $ | 65,719 | $ | 53,102 | ||||||
|
|
|
|
|
|
|
|||||||
| Effective Tax Rate before deferred tax write-down |
20.55 | % | 33.65 | % | 35.18 | % | ||||||
| Effective Tax Rate |
11.80 | % | 42.34 | % | 35.18 | % | ||||||
The Company files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions. The Company is generally no longer subject to U.S. federal income tax examinations for tax years prior to 2015.
46
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 16—Related Party Transactions
Loans to executive officers, directors, and their affiliates during 2018 were as follows:
| Balance | ||||
| Beginning balance |
$ | 14,404 | ||
| New loans |
— | |||
| Effect of changes in composition of related parties |
(13,323 | ) | ||
| Repayments |
(616 | ) | ||
|
|
|
|||
| Ending balance |
$ | 465 | ||
|
|
|
|||
None of the above loans were considered non-performing or potential problem loans. These loans are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. Deposits from executive officers, directors, and their affiliates at December 31, 2018 and 2017 were $21,709 and $39,615, respectively.
47
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 17—Regulatory Capital Matters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
The Bank and the Company are regulated by the Texas Department of Banking (“TDOB”) and the Board of Governors of the Federal Reserve System (“FRB”). The ability of a subsidiary bank to pay dividends depends on its earnings and capital levels and may be limited by their regulator’s directives or orders. A bank generally must obtain regulatory approval of a dividend if the total dividends declared during the current year, including the proposed dividend, exceed net income for the current year and retained net income for the prior two years.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If an institution is adequately capitalized, regulatory approval is required to accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2018 and 2017, the most recent regulatory notification categorized the Bank and the Company as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category. Management believes that, at December 31, 2018, the Bank and the Company met all capital adequacy requirements to which they were subject.
48
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
| Actual | Required for Capital Adequacy Purposes |
To Be Well-Capitalized | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| As of 12/31/2018 |
||||||||||||||||||||||||
| Total risk-based capital |
||||||||||||||||||||||||
| Company |
$ | 1,126,019 | 13.48 | % | $ | 668,267 | 8.00 | % | $ | 835,334 | 10.00 | % | ||||||||||||
| Bank |
1,073,807 | 12.85 | 668,282 | 8.00 | 835,352 | 10.00 | ||||||||||||||||||
| Tier 1 risk-based capital |
||||||||||||||||||||||||
| Company |
934,964 | 11.19 | 501,200 | 6.00 | 501,200 | 6.00 | ||||||||||||||||||
| Bank |
1,005,651 | 12.04 | 501,211 | 6.00 | 668,282 | 8.00 | ||||||||||||||||||
| Common equity tier 1 risk-based capital |
|
|||||||||||||||||||||||
| Company |
922,850 | 11.05 | 375,900 | 4.50 | n/a | 1 | n/a | 1 | ||||||||||||||||
| Bank |
1,005,651 | 12.04 | 375,908 | 4.50 | 542,979 | 6.50 | ||||||||||||||||||
| Tier 1 leverage |
||||||||||||||||||||||||
| Company |
934,964 | 10.76 | 347,525 | 4.00 | n/a | 1 | n/a | 1 | ||||||||||||||||
| the Bank |
1,005,651 | 11.57 | 347,644 | 4.00 | 434,555 | 5.00 | ||||||||||||||||||
| As of 12/31/2017 |
||||||||||||||||||||||||
| Total risk-based capital |
||||||||||||||||||||||||
| Company |
$ | 991,713 | 11.87 | % | $ | 668,142 | 8.00 | % | $ | 835,178 | 10.00 | % | ||||||||||||
| Bank |
939,655 | 11.25 | 668,096 | 8.00 | 835,120 | 10.00 | ||||||||||||||||||
| Tier 1 risk-based capital |
||||||||||||||||||||||||
| Company |
796,887 | 9.54 | 501,107 | 6.00 | 501,107 | 6.00 | ||||||||||||||||||
| Bank |
867,424 | 10.39 | 501,072 | 6.00 | 668,096 | 8.00 | ||||||||||||||||||
| Common equity tier 1 risk-based capital |
|
|||||||||||||||||||||||
| Company |
784,960 | 9.40 | 375,830 | 4.50 | n/a | 1 | n/a | 1 | ||||||||||||||||
| Bank |
867,424 | 10.39 | 375,804 | 4.50 | 542,828 | 6.50 | ||||||||||||||||||
| Tier 1 leverage |
||||||||||||||||||||||||
| Company |
796,887 | 9.17 | 347,731 | 4.00 | n/a | 1 | n/a | 1 | ||||||||||||||||
| Bank |
867,424 | 9.98 | 347,808 | 4.00 | 434,759 | 5.00 | ||||||||||||||||||
| 1 | Not applicable |
49
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 18—Commitments and Contingent Liabilities
In the normal course of business, the Company enters into various transactions which, in accordance with US GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit which involve, to varying degrees, elements of credit and interest rate risk. Credit losses up to the face amount of these instruments could occur, although material losses are not anticipated. The Company’s credit policies applied to loan originations are also applied to these commitment requests, including obtaining collateral at the exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at December 31, 2018 and 2017, are summarized below. Please see Part II-Item 7- “Off-Balance Sheet Arrangements, Contractual Obligation and Commitments” of this Form 10-K for information related to commitment maturities.
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Unused commitments to extend credit |
$ | 1,850,351 | $ | 1,600,794 | ||||
| Unused capacity on Warehouse Purchase Program loans |
967,096 | 738,412 | ||||||
| Standby letters of credit |
46,383 | 34,091 | ||||||
|
|
|
|
|
|||||
| Total unused commitments/capacity |
$ | 2,863,830 | $ | 2,373,297 | ||||
|
|
|
|
|
|||||
Unused commitments to extend credit—The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Company. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding.
Unused capacity on Warehouse Purchase Program loans—In regard to unused capacity on Warehouse Purchase Program loans, the Company has established maximum purchase facility amounts, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by each customer, for any reason in the Company’s sole and absolute discretion.
Standby letters of credit—Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In addition to the commitments above, the Company guarantees the credit card debt of certain customers to the merchant bank that issues the credit cards. These guarantees are in place for as long as the guaranteed credit card is open. At December 31, 2018 and 2017, these credit card guarantees totaled $1,973 and $5,257, respectively. This amount represents the maximum potential amount of future payments under the guarantee, which the Company is responsible for in the event of customer non-payment.
The Company funds an allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt through a charge to provision for credit losses on the Company’s consolidated statement of income. At December 31, 2018 and 2017, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in “other liabilities” on the Company’s consolidated balance sheets, totaled $729 and $929 respectively.
In addition to the commitments above, the Company had overdraft protection available in the amounts of $84,504 and $84,727 at December 31, 2018 and 2017, respectively.
The Company, at December 31, 2018, had FHLB letters of credit of $932,200 pledged to secure public deposits, repurchase agreements, and for other purposes required or permitted by law.
At December 31, 2018, the Company had $830 of unfunded commitments recorded in other liabilities in its consolidated balance sheet related to investments in community development-oriented private equity funds used for Community Reinvestment Act purposes. The total investment in these equity funds was $13,197, with an average ownership of 6.2%.
50
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Liability for Mortgage Loan Repurchase Losses
Residential mortgage loans are sold in the secondary market with standard representations and warranties regarding certain characteristics such as the quality of the loan, the absence of fraud, the eligibility of the loan for sale and the future servicing associated with the loan. The Company may be required to repurchase these loans at par, or make-whole or indemnify the purchasers for losses incurred when representations and warranties are breached.
The Company maintains a repurchase liability related to residential mortgage loans sold with representations and warranty provisions. This repurchase liability, reported in other liabilities on the consolidated balance sheets, reflects management’s estimate of losses based on historical repurchase and loss trends, as well as other factors that may result in anticipated losses different from historical loss trends. Adjustments to this reserve are recorded in other non-interest expense on the consolidated statements of income. The liability was $117 and $131 at December 31, 2018 and 2017, respectively.
51
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 19—Parent Company Only Condensed Financial Information
Condensed financial information of the Company is as follows:
CONDENSED BALANCE SHEETS
December 31,
| 2018 | 2017 | |||||||
| ASSETS |
||||||||
| Cash on deposit at subsidiary |
$ | 25,756 | $ | 26,692 | ||||
| Investment in banking subsidiary |
1,177,167 | 1,042,338 | ||||||
| Receivable from banking subsidiary |
15,145 | 12,278 | ||||||
| ESOP note receivable and other assets |
12,649 | 13,814 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 1,230,717 | $ | 1,095,122 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Borrowings |
$ | 135,012 | $ | 134,522 | ||||
| Other liabilities |
1,338 | 726 | ||||||
| Shareholders’ equity |
1,094,367 | 959,874 | ||||||
|
|
|
|
|
|||||
| Total liabilities and shareholders’ equity |
$ | 1,230,717 | $ | 1,095,122 | ||||
|
|
|
|
|
|||||
CONDENSED STATEMENTS OF INCOME
December 31,
| 2018 | 2017 | 2016 | ||||||||||
| Cash dividends from subsidiary |
$ | 29,500 | $ | 35,000 | $ | — | ||||||
| Excess of earnings over dividend from subsidiary |
134,256 | 61,341 | 103,572 | |||||||||
| Interest income on ESOP loan |
436 | 449 | 487 | |||||||||
| Interest income on subordinated debt |
18 | 13 | 11 | |||||||||
|
|
|
|
|
|
|
|||||||
| 164,210 | 96,803 | 104,070 | ||||||||||
| Interest expense |
7,968 | 7,819 | 6,040 | |||||||||
| Operating expenses |
3,378 | 3,754 | 3,236 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings before income tax benefit |
152,864 | 85,230 | 94,794 | |||||||||
| Income tax benefit |
1,325 | 4,264 | 3,027 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
|
|
|
|
|
|
|
|||||||
52
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
December 31,
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from operating activities |
||||||||||||
| Net income |
$ | 154,189 | $ | 89,494 | $ | 97,821 | ||||||
| Adjustments to reconcile net income to net cash from operating activities: |
||||||||||||
| Excess of earnings over dividend from subsidiary |
(134,256 | ) | (61,341 | ) | (103,572 | ) | ||||||
| Amortization |
490 | 490 | 530 | |||||||||
| Activity in share-based compensation plans |
4,087 | 5,501 | 3,152 | |||||||||
| Net change in other assets |
757 | (207 | ) | (481 | ) | |||||||
| Net change in other liabilities |
612 | (35 | ) | (38 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) operating activities |
25,879 | 33,902 | (2,588 | ) | ||||||||
| Cash flows from investing activities |
||||||||||||
| Capital contribution (to) subsidiary |
— | — | (49,000 | ) | ||||||||
| Payments received on ESOP notes receivable |
406 | 393 | 981 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) investing activities |
406 | 393 | (48,019 | ) | ||||||||
| Cash flows from financing activities |
||||||||||||
| Proceeds from borrowings |
— | — | 73,439 | |||||||||
| Repayments of borrowings |
— | — | (24,929 | ) | ||||||||
| Net issuance of common stock under employee stock plans |
6,619 | 4,712 | 3,755 | |||||||||
| Payment of dividends |
(33,840 | ) | (29,277 | ) | (27,676 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) financing activities |
(27,221 | ) | (24,565 | ) | 24,589 | |||||||
|
|
|
|
|
|
|
|||||||
| Net change in cash and cash equivalents |
(936 | ) | 9,730 | (26,018 | ) | |||||||
| Beginning cash and cash equivalents |
26,692 | 16,962 | 42,980 | |||||||||
|
|
|
|
|
|
|
|||||||
| Ending cash and cash equivalents |
$ | 25,756 | $ | 26,692 | $ | 16,962 | ||||||
|
|
|
|
|
|
|
|||||||
53
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 20—Quarterly Financial Data (Unaudited)
| Interest Income |
Interest Expense |
Net Interest Income |
Provision for Credit Losses |
Securities Gains and (Losses) |
Net Income | Earnings per Share | ||||||||||||||||||||||||||
| Basic | Diluted | |||||||||||||||||||||||||||||||
| 2018 |
||||||||||||||||||||||||||||||||
| First quarter |
$ | 95,666 | $ | 17,053 | $ | 78,613 | $ | 15,663 | $ | (128 | ) | $ | 25,762 | 0.55 | 0.54 | |||||||||||||||||
| Second quarter |
103,991 | 20,062 | 83,929 | 17,478 | — | 27,837 | 0.59 | 0.58 | ||||||||||||||||||||||||
| Third quarter |
108,147 | 22,480 | 85,667 | 2,656 | (10 | ) | 42,821 | 0.91 | 0.89 | |||||||||||||||||||||||
| Fourth quarter |
107,178 | 22,879 | 84,299 | — | — | 57,769 | 1 | 1.22 | 1.21 | |||||||||||||||||||||||
| 2017 |
||||||||||||||||||||||||||||||||
| First quarter |
$ | 87,536 | $ | 10,988 | $ | 76,548 | $ | 22,301 | $ | (19 | ) | $ | 18,190 | 0.39 | 0.38 | |||||||||||||||||
| Second quarter |
88,747 | 13,027 | 75,720 | 6,255 | — | 27,935 | 0.60 | 0.59 | ||||||||||||||||||||||||
| Third quarter |
94,463 | 15,499 | 78,964 | 7,157 | (20 | ) | 28,709 | 0.61 | 0.61 | |||||||||||||||||||||||
| Fourth quarter |
96,111 | 15,912 | 80,199 | 3,743 | — | 14,660 | 1 | 0.31 | 0.31 | |||||||||||||||||||||||
| 1 | Includes one-time income tax adjustments consisting of a $13,493 expense to adjust the Company’s deferred tax asset (recorded in the fourth quarter of 2017), as well as a $15,289 benefit related to tax rate changes and the favorable outcome of the Company’s change in its tax method of accounting for its IRC Section 475 loans and securities (recorded in the fourth quarter of 2018), all related to the December 22, 2017 enactment of the Tax Cuts and Jobs Act. |
54
LEGACYTEXAS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data) (Continued)
Note 21—Subsequent Events
The Company evaluated events from the date of the consolidated financial statements on December 31, 2018 through the issuance of those consolidated financial statements included in this Annual Report on Form 10-K dated February 7, 2019.
55
Exhibit 99.2
LEGACYTEXAS FINANCIAL GROUP, INC.
FINANCIAL STATEMENTS
June 30, 2019
INDEX
| Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018 |
2 | |||
| Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2019 and 2018 |
3 | |||
| Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2019 and 2018 |
4 | |||
| Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three and six months ended June 30, 2019 and 2018 |
5 | |||
| Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2019 and 2018 |
6 | |||
| Condensed Notes to Unaudited Consolidated Interim Financial Statements |
8 | |||
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
| June 30, 2019 |
December 31, 2018 |
|||||||
| ASSETS |
(unaudited | ) | ||||||
| Cash and due from financial institutions |
$ | 56,949 | $ | 60,416 | ||||
| Short-term interest-bearing deposits in other financial institutions |
206,894 | 208,777 | ||||||
|
|
|
|
|
|||||
| Total cash and cash equivalents |
263,843 | 269,193 | ||||||
| Securities available for sale, at fair value |
459,749 | 471,746 | ||||||
| Securities held to maturity (fair value: June 30, 2019 — $128,864; December 31, 2018— $144,791) |
127,836 | 146,046 | ||||||
| Loans held for sale, at fair value |
46,571 | 23,193 | ||||||
| Loans held for investment: |
||||||||
| Loans held for investment (net of allowance for loan losses of $92,219 at June 30, 2019 and $67,428 at December 31, 2018) |
6,999,607 | 6,733,692 | ||||||
| Loans held for investment—Warehouse Purchase Program |
1,542,684 | 960,404 | ||||||
|
|
|
|
|
|||||
| Total loans held for investment |
8,542,291 | 7,694,096 | ||||||
| Federal Home Loan Bank (“FHLB”) stock and other restricted securities, at cost |
79,195 | 56,226 | ||||||
| Bank-owned life insurance |
59,724 | 59,036 | ||||||
| Premises and equipment, net |
106,313 | 73,073 | ||||||
| Goodwill |
178,559 | 178,559 | ||||||
| Other assets |
71,853 | 79,974 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 9,935,934 | $ | 9,051,142 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Deposits |
||||||||
| Non-interest-bearing demand |
$ | 1,847,229 | $ | 1,773,762 | ||||
| Interest-bearing demand |
855,026 | 826,755 | ||||||
| Savings and money market |
2,548,966 | 2,455,787 | ||||||
| Time |
1,804,569 | 1,785,411 | ||||||
|
|
|
|
|
|||||
| Total deposits |
7,055,790 | 6,841,715 | ||||||
| FHLB advances |
1,384,765 | 825,409 | ||||||
| Repurchase agreements |
52,414 | 50,340 | ||||||
| Subordinated debt |
135,257 | 135,012 | ||||||
| Accrued expenses and other liabilities |
165,063 | 104,299 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
8,793,289 | 7,956,775 | ||||||
|
|
|
|
|
|||||
| Commitments and contingent liabilities (See Note 11) |
||||||||
| Shareholders’ equity |
||||||||
| Preferred stock, $.01 par value; 10,000,000 shares authorized; 0 shares issued — June 30, 2019 and December 31, 2018 |
— | — | ||||||
| Common stock, $.01 par value; 90,000,000 shares authorized; 48,833,238 shares issued — June 30, 2019 and 48,505,261 shares issued — December 31, 2018 |
488 | 485 | ||||||
| Additional paid-in capital |
628,730 | 619,983 | ||||||
| Retained earnings |
523,693 | 491,948 | ||||||
| Accumulated other comprehensive income (loss), net |
860 | (6,658 | ) | |||||
| Unearned Employee Stock Ownership Plan (ESOP) shares; 1,112,664 shares at June 30, 2019 and 1,139,140 shares at December 31, 2018 |
(11,126 | ) | (11,391 | ) | ||||
|
|
|
|
|
|||||
| Total shareholders’ equity |
1,142,645 | 1,094,367 | ||||||
|
|
|
|
|
|||||
| Total liabilities and shareholders’ equity |
$ | 9,935,934 | $ | 9,051,142 | ||||
|
|
|
|
|
|||||
See accompanying notes to consolidated financial statements.
2
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, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Interest and dividend income |
||||||||||||||||
| Loans, including fees |
$ | 108,154 | $ | 98,570 | $ | 208,455 | $ | 189,201 | ||||||||
| Taxable securities |
3,460 | 3,132 | 7,062 | 6,043 | ||||||||||||
| Nontaxable securities |
410 | 641 | 753 | 1,316 | ||||||||||||
| Interest-bearing deposits in other financial institutions |
1,370 | 1,097 | 2,647 | 2,066 | ||||||||||||
| FHLB and FRB stock and other |
683 | 551 | 1,264 | 1,031 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 114,077 | 103,991 | 220,181 | 199,657 | |||||||||||||
| Interest expense |
||||||||||||||||
| Deposits |
20,444 | 13,732 | 38,659 | 25,764 | ||||||||||||
| FHLB advances |
5,794 | 4,131 | 10,250 | 6,811 | ||||||||||||
| Repurchase agreements and other borrowings |
2,285 | 2,199 | 4,554 | 4,540 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 28,523 | 20,062 | 53,463 | 37,115 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest income |
85,554 | 83,929 | 166,718 | 162,542 | ||||||||||||
| Provision for credit losses |
16,100 | 17,478 | 25,900 | 33,141 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net interest income after provision for credit losses |
69,454 | 66,451 | 140,818 | 129,401 | ||||||||||||
| Non-interest income |
||||||||||||||||
| Service charges and other fees |
9,882 | 8,844 | 17,137 | 16,771 | ||||||||||||
| Net gain on sale of mortgage loans held for sale |
2,879 | 1,668 | 4,404 | 3,477 | ||||||||||||
| Bank-owned life insurance income |
489 | 479 | 971 | 926 | ||||||||||||
| Net gain (loss) on securities transactions |
— | — | 6 | (128 | ) | |||||||||||
| Gain (loss) on sale and disposition of assets |
18 | (153 | ) | 4 | 2,060 | |||||||||||
| Other |
(1,036 | ) | 14 | (396 | ) | 644 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 12,232 | 10,852 | 22,126 | 23,750 | |||||||||||||
| Non-interest expense |
||||||||||||||||
| Salaries and employee benefits |
26,586 | 24,313 | 53,457 | 51,389 | ||||||||||||
| Merger costs |
2,362 | — | 2,362 | — | ||||||||||||
| Advertising |
982 | 1,358 | 1,885 | 2,246 | ||||||||||||
| Occupancy and equipment |
3,950 | 3,980 | 7,849 | 7,840 | ||||||||||||
| Outside professional services |
1,674 | 1,382 | 2,959 | 2,632 | ||||||||||||
| Regulatory assessments |
831 | 731 | 1,449 | 1,885 | ||||||||||||
| Data processing |
5,739 | 5,145 | 11,672 | 9,848 | ||||||||||||
| Office operations |
2,568 | 2,224 | 4,903 | 4,524 | ||||||||||||
| Other |
2,834 | 3,058 | 5,297 | 5,706 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 47,526 | 42,191 | 91,833 | 86,070 | |||||||||||||
| Income before income tax expense |
34,160 | 35,112 | 71,111 | 67,081 | ||||||||||||
| Income tax expense |
7,177 | 7,275 | 15,048 | 13,482 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income |
$ | 26,983 | $ | 27,837 | $ | 56,063 | $ | 53,599 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | 0.57 | $ | 0.59 | $ | 1.18 | $ | 1.14 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted |
$ | 0.56 | $ | 0.58 | $ | 1.17 | $ | 1.12 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Dividends declared per share |
$ | 0.25 | $ | 0.16 | $ | 0.50 | $ | 0.32 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to consolidated financial statements.
3
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands)
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Net income |
$ | 26,983 | $ | 27,837 | $ | 56,063 | $ | 53,599 | ||||||||
| Change in unrealized gains (losses) on securities available for sale |
4,169 | (1,532 | ) | 9,522 | (6,377 | ) | ||||||||||
| Reclassification of amount realized through securities transactions |
— | — | (6 | ) | 128 | |||||||||||
| Tax effect |
(876 | ) | 322 | (1,998 | ) | 1,310 | ||||||||||
| Reclassification of income tax effects of the Tax Cuts and Jobs Act |
— | — | — | (741 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income (loss), net of tax |
3,293 | (1,210 | ) | 7,518 | (5,680 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive income |
$ | 30,276 | $ | 26,627 | $ | 63,581 | $ | 47,919 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to consolidated financial statements.
4
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
(Dollars in thousands, except share and per share data)
| Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss), Net |
Unearned ESOP Shares |
Total Shareholders’ Equity |
|||||||||||||||||||
| For the six months ended June 30, 2019 |
| |||||||||||||||||||||||
| Balance at January 1, 2019 |
$ | 485 | $ | 619,983 | $ | 491,948 | $ | (6,658 | ) | $ | (11,391 | ) | $ | 1,094,367 | ||||||||||
| Net income |
— | — | 29,080 | — | — | 29,080 | ||||||||||||||||||
| Other comprehensive income, net of tax |
— | — | — | 4,225 | — | 4,225 | ||||||||||||||||||
| Dividends declared ($0.25 per share) |
— | — | (12,141 | ) | — | — | (12,141 | ) | ||||||||||||||||
| ESOP shares earned (13,238 shares) |
— | 385 | — | — | 132 | 517 | ||||||||||||||||||
| Share-based compensation expense |
— | 2,550 | — | — | — | 2,550 | ||||||||||||||||||
| Activity in employee stock plans (198,809 shares) |
2 | 2,487 | — | — | — | 2,489 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at March 31, 2019 |
$ | 487 | $ | 625,405 | $ | 508,887 | $ | (2,433 | ) | $ | (11,259 | ) | $ | 1,121,087 | ||||||||||
| Net income |
— | — | 26,983 | — | — | 26,983 | ||||||||||||||||||
| Other comprehensive income, net of tax |
— | — | — | 3,293 | — | 3,293 | ||||||||||||||||||
| Dividends declared, ($0.25 per share) |
— | — | (12,177 | ) | — | — | (12,177 | ) | ||||||||||||||||
| ESOP shares earned, (13,238 shares) |
— | 387 | — | — | 133 | 520 | ||||||||||||||||||
| Share-based compensation expense |
— | 2,015 | — | — | — | 2,015 | ||||||||||||||||||
| Activity in employee stock plans, (129,168 shares) |
1 | 923 | — | — | — | 924 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at June 30, 2019 |
$ | 488 | $ | 628,730 | $ | 523,693 | $ | 860 | $ | (11,126 | ) | $ | 1,142,645 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| For the six months ended June 30, 2018 |
| |||||||||||||||||||||||
| Balance at January 1, 2018 |
$ | 481 | $ | 603,884 | $ | 370,858 | $ | (3,429 | ) | $ | (11,920 | ) | $ | 959,874 | ||||||||||
| Net income |
— | — | 25,762 | — | — | 25,762 | ||||||||||||||||||
| Other comprehensive (loss), net of tax |
— | — | — | (4,470 | ) | — | (4,470 | ) | ||||||||||||||||
| Reclassification of income tax effects of the Tax Cuts and Jobs Act |
— | — | 741 | — | — | 741 | ||||||||||||||||||
| Dividends declared ($0.16 per share) |
— | — | (7,708 | ) | — | — | (7,708 | ) | ||||||||||||||||
| ESOP shares earned (13,238 shares) |
— | 447 | — | — | 131 | 578 | ||||||||||||||||||
| Share-based compensation expense |
— | 2,055 | — | — | — | 2,055 | ||||||||||||||||||
| Activity in employee stock plans (147,576 shares) |
2 | 2,660 | — | — | — | 2,662 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at March 31, 2018 |
$ | 483 | $ | 609,046 | $ | 389,653 | $ | (7,899 | ) | $ | (11,789 | ) | $ | 979,494 | ||||||||||
| Net income |
— | — | 27,837 | — | — | 27,837 | ||||||||||||||||||
| Other comprehensive (loss), net of tax |
— | — | — | (1,210 | ) | — | (1,210 | ) | ||||||||||||||||
| Dividends declared, ($.16 per share) |
— | — | (7,725 | ) | — | — | (7,725 | ) | ||||||||||||||||
| ESOP shares earned, (13,238 shares) |
— | 427 | — | — | 133 | 560 | ||||||||||||||||||
| Share-based compensation expense |
— | 1,398 | — | — | — | 1,398 | ||||||||||||||||||
| Activity in employee stock plans, (46,254 shares) |
— | 1,096 | — | — | — | 1,096 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at June 30, 2018 |
$ | 483 | $ | 611,967 | $ | 409,765 | $ | (9,109 | ) | $ | (11,656 | ) | $ | 1,001,450 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to consolidated financial statements.
5
LEGACYTEXAS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities |
||||||||
| Net income |
$ | 56,063 | $ | 53,599 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Provision for credit losses |
25,900 | 33,141 | ||||||
| Depreciation and amortization |
5,678 | 3,401 | ||||||
| Deferred tax benefit |
(7,280 | ) | 2,226 | |||||
| Premium amortization and accretion of securities, net |
1,912 | 1,986 | ||||||
| Accretion related to acquired loans |
(491 | ) | (1,147 | ) | ||||
| Net (gain) loss on securities transactions |
(6 | ) | 128 | |||||
| ESOP compensation expense |
1,037 | 1,138 | ||||||
| Share-based compensation expense |
4,565 | 3,453 | ||||||
| Excess tax benefit on vesting of stock awards |
140 | 681 | ||||||
| Net gain on loans held for sale |
(4,404 | ) | (3,477 | ) | ||||
| Loans originated or purchased for sale |
(108,201 | ) | (100,470 | ) | ||||
| Proceeds from sale of loans held for sale |
89,227 | 87,106 | ||||||
| FHLB stock dividends |
(588 | ) | (391 | ) | ||||
| Bank-owned life insurance income |
(971 | ) | (926 | ) | ||||
| (Gain) loss on sale and disposition of repossessed assets, premises and equipment |
(31 | ) | 190 | |||||
| Net change in deferred loan fees/costs |
(1,354 | ) | (2,744 | ) | ||||
| Net change in accrued interest receivable |
(5,421 | ) | (1,093 | ) | ||||
| Net change in other assets |
10,972 | (3,246 | ) | |||||
| Net change in other liabilities |
31,516 | 28,904 | ||||||
|
|
|
|
|
|||||
| Net cash provided by operating activities |
98,263 | 102,459 | ||||||
| Cash flows from investing activities |
||||||||
| Available-for-sale securities: |
||||||||
| Maturities, prepayments and calls |
343,727 | 1,087,449 | ||||||
| Purchases |
(347,545 | ) | (1,121,303 | ) | ||||
| Proceeds from sale of AFS securities |
23,886 | — | ||||||
| Held-to-maturity securities: |
||||||||
| Maturities, prepayments and calls |
17,751 | 23,236 | ||||||
| Purchases |
— | (5,388 | ) | |||||
| Originations of Warehouse Purchase Program loans |
(10,460,194 | ) | (10,980,262 | ) | ||||
| Proceeds from pay-offs of Warehouse Purchase Program loans |
9,877,914 | 11,009,979 | ||||||
| Net change in loans held for investment, excluding Warehouse Purchase Program loans |
(290,389 | ) | (227,028 | ) | ||||
| Purchase of FHLB and Federal Reserve Bank stock and other |
(22,381 | ) | (880 | ) | ||||
| Purchases of premises and equipment |
(2,128 | ) | (4,454 | ) | ||||
| Proceeds from sale of assets |
1,146 | 1,225 | ||||||
|
|
|
|
|
|||||
| Net cash (used in) investing activities |
(858,213 | ) | (217,426 | ) | ||||
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
| Six Months Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from financing activities |
||||||||
| Net change in deposits |
214,075 | 113,665 | ||||||
| Proceeds from FHLB advances |
1,380,000 | 1,055,000 | ||||||
| Repayments on FHLB advances |
(820,644 | ) | (1,032,222 | ) | ||||
| Proceeds from (repayments of) borrowings |
2,074 | (43,346 | ) | |||||
| Payment of dividends |
(24,318 | ) | (15,433 | ) | ||||
| Activity in employee stock plans |
3,413 | 3,758 | ||||||
|
|
|
|
|
|||||
| Net cash provided by financing activities |
754,600 | 81,422 | ||||||
|
|
|
|
|
|||||
| Net change in cash and cash equivalents |
(5,350 | ) | (33,545 | ) | ||||
| Beginning cash and cash equivalents |
269,193 | 293,456 | ||||||
|
|
|
|
|
|||||
| Ending cash and cash equivalents |
$ | 263,843 | $ | 259,911 | ||||
|
|
|
|
|
|||||
| Supplemental noncash disclosures: |
||||||||
| Transfers from loans to other real estate owned |
$ | 286 | $ | 25 | ||||
| Leased assets obtained in exchange for new operating lease liabilities |
$ | 36,503 | $ | — | ||||
See accompanying notes to consolidated financial statements.
7
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 unaudited consolidated interim financial statements of LegacyTexas Financial Group, Inc. (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and with the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all normal and recurring adjustments which are considered necessary to fairly present the results for the interim periods presented have been included. Certain items in prior periods were reclassified to conform to the current presentation. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). Interim results are not necessarily indicative of results for a full year.
In preparing the financial statements, management is required to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the period. Actual results could differ from those estimates. For further information with respect to significant accounting policies followed by the Company in preparation of its consolidated financial statements, refer to the 2018 Form 10-K.
The accompanying unaudited consolidated interim financial statements include the accounts of the Company, whose business primarily consists of the operations of its wholly owned subsidiary, LegacyTexas Bank (the “Bank”). All significant intercompany transactions and balances are eliminated in consolidation.
On June 17, 2019, the Company and Prosperity Bancshares, Inc.® (“Prosperity”) jointly announced the signing of a definitive merger agreement (the “merger agreement”) pursuant to which the Company will merge with Prosperity, with Prosperity as the surviving entity.
Under the terms of the merger agreement, shareholders of the Company will receive 0.5280 shares of Prosperity common stock and $6.28 cash for each share of common stock, subject to certain conditions. Based on Prosperity’s closing price of $67.24 on June 14, 2019, the total consideration was valued at approximately $2.1 billion, or approximately $41.78 per share.
Kevin Hanigan, the Company’s President and Chief Executive Officer, will join the Prosperity team as the President and Chief Operating Officer of Prosperity and President of Prosperity Bank; and Mays Davenport, the Company’s Chief Financial Officer, will be named Executive Vice President and Director of Corporate Strategy of Prosperity and Prosperity Bank. Scott Almy, Tom Swiley, Chuck Eikenberg and Aaron Shelby will hold senior management positions at Prosperity Bank.
In addition, upon completion of the merger, Kevin Hanigan and two independent directors of the Company will join the Board of Directors of Prosperity, which will be expanded accordingly. Mays Davenport will join the Board of Directors of Prosperity Bank.
The merger has been unanimously approved by the Board of Directors of Prosperity and unanimously approved by the independent directors of LegacyTexas, with Mr. Hanigan abstaining, and is expected to close during the fourth quarter of 2019, although delays could occur. The transaction is subject to certain conditions, including the approval by the Company shareholders and Prosperity shareholders and customary regulatory approvals.
8
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 2—Revenue Recognition
Revenue recognized from contracts with customers, which is accounted for under Accounting Standards Codification (“ASC”) 606, is entirely included in the Company’s non-interest income. Interest income and certain types of non-interest income are not accounted for under ASC 606 as it is accounted for under other accounting standards. Significant revenue streams recognized by the Company from contracts with customers accounted for under ASC 606 for the three and six months ended June 30, 2019 and 2018, are below:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Card services income |
(a | ) | $ | 3,583 | $ | 3,295 | $ | 6,595 | $ | 6,353 | ||||||||||
| Service charges on deposits |
(b | ) | 2,058 | 1,957 | 4,030 | 3,730 | ||||||||||||||
| Title income |
(c | ) | 1,562 | 1,196 | 2,348 | 2,253 | ||||||||||||||
| Gains (losses) on the sale of other real estate owned |
(d | ) | 45 | 9 | 40 | (31 | ) | |||||||||||||
(a) Card services income -
Card services income includes interchange income, which is income earned by the Company for each transaction a cardholder performs at a merchant. This performance obligation is settled on a daily basis as transactions are processed. Card services income also includes revenue earned from companies who provide our customers with debit cards and/or provide card processing services in exchange for the Company’s promotion of their card programs to the Company’s depositors. These payments are remitted based on contractual terms that dictate how much payment is remitted based on volume expectations. This performance obligation settles on a daily basis as our customers use cards and card processing services at merchants.
(b) Service charges on deposits -
The Company receives non-interest income for providing services related to deposit accounts, including fee income generated from non-sufficient funds transactions, wire transfers, ATM activity and treasury management services. This income is recorded when incurred in the case of deposit account service charges or when collected in the case of miscellaneous one-time fees, like wire transfer fees. Since most deposit agreements have a day-to-day term, the performance obligation between the Company and the depositor is satisfied on a daily basis, or as incurred.
(c) Title income -
Title services offered by the Company through its wholly-owned subsidiary, LegacyTexas Title, consists of referring title insurance policies to other title companies and performing real estate closing duties for a set fee. The performance obligation (referring title policies to other title insurance agencies and handling customary closing services) settles daily at each real estate closing.
(d) Gains/losses on the sale of other real estate owned -
The performance obligation in the sale of other real estate owned typically will be delivery of control over the property to the buyer. If the Company is not providing financing, the transaction price is typically identified in the purchase and sale agreement. However, if the Company provides seller financing, the Company must determine a transaction price, depending on if the sale contract is at market terms and taking into account the credit risk inherent in the sales arrangement.
The performance obligations described in (b), (c), and (d) above are typically related to contracts that have an original expected duration of less than one year.
In regards to card services income, because the Company has a right to consideration from card service providers in the form of transaction-based and support income, and from cardholders in the form of interchange income in an amount that corresponds directly with the value to the card service provider and cardholder of the Company’s performance completed to date, the Company recognizes revenue as incurred when transactions with merchants settle on a daily basis.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.
9
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The Company has applied ASC 606 using the modified retrospective approach effective on January 1, 2018 to all existing contracts with customers covered under the scope of the standard. The Company did not have an aggregate effect of modification resulting from adoption of ASC 606, and no financial statement line items were affected by this change in accounting standard.
10
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
Earnings per common share is computed using the two-class method as more fully described in the Company’s 2018 Form 10-K. 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, 2019 and 2018 is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Basic earnings per share: |
||||||||||||||||
| Numerator: |
||||||||||||||||
| Net income |
$ | 26,983 | $ | 27,837 | $ | 56,063 | $ | 53,599 | ||||||||
| Distributed and undistributed earnings to participating securities |
(146 | ) | (67 | ) | (273 | ) | (143 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Income available to common shareholders |
$ | 26,837 | $ | 27,770 | $ | 55,790 | $ | 53,456 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Denominator: |
||||||||||||||||
| Weighted average common shares outstanding |
48,762,922 | 48,287,755 | 48,674,727 | 48,242,925 | ||||||||||||
| Less: Average unallocated ESOP shares |
(1,121,344 | ) | (1,174,297 | ) | (1,127,926 | ) | (1,180,879 | ) | ||||||||
| Average unvested restricted stock awards |
(258,264 | ) | (113,053 | ) | (231,625 | ) | (125,323 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Average shares for basic earnings per share |
47,383,314 | 47,000,405 | 47,315,176 | 46,936,723 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Basic earnings per common share |
$ | 0.57 | $ | 0.59 | $ | 1.18 | $ | 1.14 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted earnings per share: |
||||||||||||||||
| Numerator: |
||||||||||||||||
| Income available to common shareholders |
$ | 26,837 | $ | 27,770 | $ | 55,790 | $ | 53,456 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Denominator: |
||||||||||||||||
| Average shares for basic earnings per share |
47,383,314 | 47,000,405 | 47,315,176 | 46,936,723 | ||||||||||||
| Dilutive effect of share-based compensation plan |
540,077 | 617,752 | 561,917 | 651,373 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Average shares for diluted earnings per share |
47,923,391 | 47,618,157 | 47,877,093 | 47,588,096 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted earnings per common share |
$ | 0.56 | $ | 0.58 | $ | 1.17 | $ | 1.12 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 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 |
254,171 | 479,531 | 348,630 | 553,390 | ||||||||||||
11
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 4—Securities
The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the fair value of securities available for sale (“AFS”) were as follows:
| June 30, 2019 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 135,233 | $ | 344 | $ | 970 | $ | 134,607 | ||||||||
| Agency commercial mortgage-backed securities 1 |
8,187 | — | 34 | 8,153 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
292,946 | 2,387 | 961 | 294,372 | ||||||||||||
| Municipal bonds |
22,294 | 330 | 7 | 22,617 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 458,660 | $ | 3,061 | $ | 1,972 | $ | 459,749 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2018 |
||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 153,671 | $ | 283 | $ | 4,083 | $ | 149,871 | ||||||||
| Agency commercial mortgage-backed securities 1 |
9,063 | — | 143 | 8,920 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
284,886 | 603 | 4,850 | 280,639 | ||||||||||||
| US government and agency securities |
1,500 | 43 | — | 1,543 | ||||||||||||
| Municipal bonds |
31,053 | 87 | 367 | 30,773 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 480,173 | $ | 1,016 | $ | 9,443 | $ | 471,746 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
The amortized cost (carrying amount), related gross unrealized gains and losses and fair value of securities held to maturity (“HTM”) were as follows:
| June 30, 2019 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 47,615 | $ | 613 | $ | 230 | $ | 47,998 | ||||||||
| Agency commercial mortgage-backed securities 1 |
21,612 | 343 | — | 21,955 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
13,890 | 96 | 31 | 13,955 | ||||||||||||
| Municipal bonds |
44,719 | 300 | 63 | 44,956 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 127,836 | $ | 1,352 | $ | 324 | $ | 128,864 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2018 |
||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 53,377 | $ | 266 | $ | 1,151 | $ | 52,492 | ||||||||
| Agency commercial mortgage-backed securities 1 |
21,872 | 60 | 167 | 21,765 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
17,645 | 25 | 124 | 17,546 | ||||||||||||
| Municipal bonds |
53,152 | 305 | 469 | 52,988 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total securities |
$ | 146,046 | $ | 656 | $ | 1,911 | $ | 144,791 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
12
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The amortized cost (carrying amount) and fair value of HTM debt securities and the fair value of AFS debt securities at June 30, 2019 by contractual maturity are set forth in the table below. Securities with contractual payments not due at a single maturity date, including mortgage-backed securities and collateralized mortgage obligations, are shown separately. During the quarter ended March 31, 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-08, Premium Amortization on Purchased Callable Debt, which required certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount was not impacted by this ASU. The adoption of this ASU did not have a significant impact on the Company’s financial statements and disclosures.
| HTM | AFS | |||||||||||
| Amortized Cost | Fair Value | Fair Value | ||||||||||
| Due in one year or less |
$ | 967 | $ | 972 | $ | 1,800 | ||||||
| Due after one to five years |
16,619 | 16,725 | 7,129 | |||||||||
| Due after five to ten years |
26,241 | 26,343 | 11,455 | |||||||||
| Due after ten years |
892 | 916 | 2,233 | |||||||||
| Agency residential mortgage-backed securities |
47,615 | 47,998 | 134,607 | |||||||||
| Agency commercial mortgage-backed securities |
21,612 | 21,955 | 8,153 | |||||||||
| Agency residential collateralized mortgage obligations |
13,890 | 13,955 | 294,372 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 127,836 | $ | 128,864 | $ | 459,749 | ||||||
|
|
|
|
|
|
|
|||||||
Securities with a carrying value of $219,119 and $211,198 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At June 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies of U.S. Government Sponsored Enterprises, in an amount greater than 10% of shareholders’ equity.
Securities sales activity during the three and six months ended June 30, 2019 and 2018 is shown below. All securities sold were classified as AFS, and gains and losses are recorded using the specific-identification method.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Proceeds |
$ | — | $ | — | $ | 23,886 | $ | — | ||||||||
| Gross gains |
— | — | 161 | — | ||||||||||||
| Gross losses |
— | — | 155 | — | ||||||||||||
| Tax expense of securities gains/losses |
— | — | 1 | — | ||||||||||||
13
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, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:
| AFS |
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| June 30, 2019 |
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | — | $ | — | $ | 100,776 | $ | 970 | $ | 100,776 | $ | 970 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
— | — | 8,152 | 34 | 8,152 | 34 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
15,025 | 35 | 104,469 | 926 | 119,494 | 961 | ||||||||||||||||||
| Municipal bonds |
1,033 | 1 | 1,322 | 6 | 2,355 | 7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 16,058 | $ | 36 | $ | 214,719 | $ | 1,936 | $ | 230,777 | $ | 1,972 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2018 |
||||||||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 4,770 | $ | 27 | $ | 123,413 | $ | 4,056 | $ | 128,183 | $ | 4,083 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
— | — | 8,921 | 143 | 8,921 | 143 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
32,668 | 195 | 153,131 | 4,655 | 185,799 | 4,850 | ||||||||||||||||||
| Municipal bonds |
6,326 | 59 | 16,260 | 308 | 22,586 | 367 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 43,764 | $ | 281 | $ | 301,725 | $ | 9,162 | $ | 345,489 | $ | 9,443 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| HTM |
Less than 12 Months | 12 Months or More | Total | |||||||||||||||||||||
| June 30, 2019 |
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | — | $ | — | $ | 22,801 | $ | 230 | $ | 22,801 | $ | 230 | ||||||||||||
| Agency residential collateralized mortgage obligations 1 |
— | — | 3,799 | 31 | 3,799 | 31 | ||||||||||||||||||
| Municipal bonds |
1,435 | 9 | 8,696 | 54 | 10,131 | 63 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 1,435 | $ | 9 | $ | 35,296 | $ | 315 | $ | 36,731 | $ | 324 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2018 |
||||||||||||||||||||||||
| Agency residential mortgage-backed securities 1 |
$ | 5,002 | $ | 15 | $ | 30,180 | $ | 1,136 | $ | 35,182 | $ | 1,151 | ||||||||||||
| Agency commercial mortgage-backed securities 1 |
6,465 | 41 | 6,964 | 126 | 13,429 | 167 | ||||||||||||||||||
| Agency residential collateralized mortgage obligations 1 |
3,994 | 11 | 6,213 | 113 | 10,207 | 124 | ||||||||||||||||||
| Municipal bonds |
7,131 | 17 | 20,244 | 452 | 27,375 | 469 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total temporarily impaired |
$ | 22,592 | $ | 84 | $ | 63,601 | $ | 1,827 | $ | 86,193 | $ | 1,911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1 | Mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises. |
Other-than-Temporary Impairment
In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of June 30, 2019, 171 securities had unrealized losses, 163 of which had been in an unrealized loss position for over 12 months. The Company does not believe these unrealized losses are other-than-temporary and expects full collection of the carrying amount of these securities. At June 30, 2019, the Company does not intend to sell the securities in an unrealized loss position, and it is not more-likely-than-not that the Company will be required to sell the securities prior to recovery of amortized cost. All principal and interest payments are being received on time and in full.
14
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, 2019 |
December 31, 2018 |
|||||||
| Loans held for sale, at fair value |
$ | 46,571 | $ | 23,193 | ||||
|
|
|
|
|
|||||
| Loans held for investment: |
||||||||
| Commercial real estate |
$ | 3,180,582 | $ | 3,026,754 | ||||
| Commercial and industrial |
2,102,917 | 2,057,791 | ||||||
| Construction and land |
288,491 | 270,629 | ||||||
| Consumer real estate |
1,460,417 | 1,390,378 | ||||||
| Other consumer |
47,668 | 45,171 | ||||||
|
|
|
|
|
|||||
| Gross loans held for investment, excluding Warehouse Purchase Program |
7,080,075 | 6,790,723 | ||||||
| Net of: |
||||||||
| Deferred costs (fees) and discounts, net |
11,751 | 10,397 | ||||||
| Allowance for loan losses |
(92,219 | ) | (67,428 | ) | ||||
|
|
|
|
|
|||||
| Net loans held for investment, excluding Warehouse Purchase Program |
6,999,607 | 6,733,692 | ||||||
| Warehouse Purchase Program |
1,542,684 | 960,404 | ||||||
|
|
|
|
|
|||||
| Total loans held for investment |
$ | 8,542,291 | $ | 7,694,096 | ||||
|
|
|
|
|
|||||
15
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 during the three and six months ended June 30, 2019 and 2018, segregated by portfolio segment and evaluation for impairment, is set forth below. The below activity does not include Warehouse Purchase Program loans, which are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. To date, the Company has not experienced a loss on its Warehouse Purchase Program loans and no allowance for loan losses has been allocated to them. At June 30, 2019 and 2018, the allowance for loan losses related to purchased credit impaired (“PCI”) loans totaled $163 and $310, respectively.
|
For the three months ended June 30, 2019 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land |
Consumer Real Estate |
Other Consumer |
Total | ||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 21,525 | $ | 44,721 | $ | 3,837 | $ | 6,072 | $ | 1,375 | $ | 77,530 | ||||||||||||
| Charge-offs |
— | (1,348 | ) | — | — | (276 | ) | (1,624 | ) | |||||||||||||||
| Recoveries |
— | 112 | — | 4 | 74 | 190 | ||||||||||||||||||
| Provision expense (benefit) |
3,279 | 12,119 | 713 | (170 | ) | 182 | 16,123 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 24,804 | $ | 55,604 | $ | 4,550 | $ | 5,906 | $ | 1,355 | $ | 92,219 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| For the six months ended June 30, 2019 |
||||||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 20,045 | $ | 36,398 | $ | 3,910 | $ | 5,843 | $ | 1,232 | $ | 67,428 | ||||||||||||
| Charge-offs |
— | (1,440 | ) | — | (23 | ) | (520 | ) | (1,983 | ) | ||||||||||||||
| Recoveries |
— | 667 | — | 24 | 121 | 812 | ||||||||||||||||||
| Provision expense |
4,759 | 19,979 | 640 | 62 | 522 | 25,962 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 24,804 | $ | 55,604 | $ | 4,550 | $ | 5,906 | $ | 1,355 | $ | 92,219 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Allowance ending balance: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | 2,092 | $ | 29,116 | $ | — | $ | 72 | $ | 83 | $ | 31,363 | ||||||||||||
| Collectively evaluated for impairment |
22,712 | 26,488 | 4,550 | 5,834 | 1,272 | 60,856 | ||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
7,292 | 48,366 | 228 | 3,403 | 5 | 59,294 | ||||||||||||||||||
| Collectively evaluated for impairment |
3,173,069 | 2,054,472 | 288,263 | 1,456,850 | 47,488 | 7,020,142 | ||||||||||||||||||
| PCI loans |
221 | 79 | — | 164 | 175 | 639 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 3,180,582 | $ | 2,102,917 | $ | 288,491 | $ | 1,460,417 | $ | 47,668 | $ | 7,080,075 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
16
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
| For the three months ended June 30, 2018 |
Commercial Real Estate |
Commercial and Industrial |
Construction and Land |
Consumer Real Estate |
Other Consumer |
Total | ||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 21,538 | $ | 42,764 | $ | 3,938 | $ | 5,029 | $ | 1,239 | $ | 74,508 | ||||||||||||
| Charge-offs |
(236 | ) | (27,289 | ) | — | — | (212 | ) | (27,737 | ) | ||||||||||||||
| Recoveries |
— | 28 | — | 9 | 37 | 74 | ||||||||||||||||||
| Provision expense (benefit) |
374 | 17,369 | (264 | ) | (41 | ) | 162 | 17,600 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 21,676 | $ | 32,872 | $ | 3,674 | $ | 4,997 | $ | 1,226 | $ | 64,445 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| For the six months ended June 30, 2018 |
||||||||||||||||||||||||
| Allowance for loan losses: |
||||||||||||||||||||||||
| Beginning balance |
$ | 21,587 | $ | 39,005 | $ | 4,644 | $ | 4,838 | $ | 1,227 | $ | 71,301 | ||||||||||||
| Charge-offs |
(239 | ) | (39,525 | ) | — | — | (500 | ) | (40,264 | ) | ||||||||||||||
| Recoveries |
— | 50 | — | 20 | 103 | 173 | ||||||||||||||||||
| Provision expense (benefit) |
328 | 33,342 | (970 | ) | 139 | 396 | 33,235 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 21,676 | $ | 32,872 | $ | 3,674 | $ | 4,997 | $ | 1,226 | $ | 64,445 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Allowance ending balance: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
$ | 69 | $ | 1,749 | $ | — | $ | 225 | $ | 28 | $ | 2,071 | ||||||||||||
| Collectively evaluated for impairment |
21,607 | 31,123 | 3,674 | 4,772 | 1,198 | 62,374 | ||||||||||||||||||
| Loans: |
||||||||||||||||||||||||
| Individually evaluated for impairment |
3,656 | 10,222 | — | 2,784 | 16 | 16,678 | ||||||||||||||||||
| Collectively evaluated for impairment |
3,015,188 | 2,041,619 | 265,745 | 1,284,168 | 44,402 | 6,651,122 | ||||||||||||||||||
| PCI loans |
2,304 | 114 | — | 751 | 170 | 3,339 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ending balance |
$ | 3,021,148 | $ | 2,051,955 | $ | 265,745 | $ | 1,287,703 | $ | 44,588 | $ | 6,671,139 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower credit risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and non-homogeneous in structure and term. Changes in economic conditions, the mix and size of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time.
The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations, inclusive of estimated loss emergence periods. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which are not yet reflected in the historical loss ratios, and that could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and adversely rated loans within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy and capitalization rates and other pertinent economic data specific to our primary market area and lending portfolios.
For the specific component, the allowance for loan losses includes loans where management has concerns about the borrower’s ability to repay and on individually analyzed loans found to be impaired. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent,
17
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, estimated discounted cash flows are used to determine the amount of impairment, if any. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.
Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.
Changes in the allowance for off-balance sheet credit losses on lending-related commitments and guarantees on credit card debt, included in “accrued expenses and other liabilities” on the consolidated balance sheets, are summarized in the following table. Please see Note 11—Commitments and Contingent Liabilities for more information.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Beginning balance |
$ | 690 | $ | 957 | $ | 729 | $ | 929 | ||||||||
| Charge-offs on lending-related commitments |
— | — | — | — | ||||||||||||
| Provision (benefit) for credit losses on lending-related commitments |
(23 | ) | (122 | ) | (62 | ) | (94 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance |
$ | 667 | $ | 835 | $ | 667 | $ | 835 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Impaired loans at June 30, 2019 and December 31, 2018, were as follows1:
| June 30, 2019 |
Unpaid Contractual Principal Balance |
Recorded Investment With No Allowance |
Recorded Investment With Allowance |
Total Recorded Investment |
Related Allowance |
|||||||||||||||
| Commercial real estate |
$ | 7,312 | $ | 628 | $ | 6,664 | $ | 7,292 | $ | 2,082 | ||||||||||
| Commercial and industrial |
48,821 | 837 | 47,529 | 48,366 | 29,116 | |||||||||||||||
| Construction and land |
228 | 228 | — | 228 | — | |||||||||||||||
| Consumer real estate |
3,905 | 3,403 | — | 3,403 | — | |||||||||||||||
| Other consumer |
8 | 1 | 4 | 5 | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 60,274 | $ | 5,097 | $ | 54,197 | $ | 59,294 | $ | 31,200 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| December 31, 2018 |
||||||||||||||||||||
| Commercial real estate |
$ | 177 | $ | 159 | $ | — | $ | 159 | $ | — | ||||||||||
| Commercial and industrial |
17,124 | 1,844 | 14,864 | 16,708 | 4,109 | |||||||||||||||
| Consumer real estate |
2,865 | 2,370 | 5 | 2,375 | 4 | |||||||||||||||
| Other consumer |
35 | — | 3 | 3 | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 20,201 | $ | 4,373 | $ | 14,872 | $ | 19,245 | $ | 4,116 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 1 | No Warehouse Purchase Program loans were impaired at June 30, 2019 or December 31, 2018. Loans reported do not include PCI loans. |
18
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Income on impaired loans for the three and six months ended June 30, 2019 and 2018, was as follows1:
| Three Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
|||||||||||||
| Commercial real estate |
$ | 7,057 | $ | 2 | $ | 6,025 | $ | 2 | ||||||||
| Commercial and industrial |
48,921 | — | 32,942 | — | ||||||||||||
| Construction and land |
114 | — | — | — | ||||||||||||
| Consumer real estate |
2,980 | 10 | 2,846 | 8 | ||||||||||||
| Other consumer |
5 | — | 19 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 59,077 | $ | 12 | $ | 41,832 | $ | 11 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Six Months Ended June 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| Commercial real estate |
$ | 4,100 | $ | 4 | $ | 5,124 | $ | 4 | ||||||||
| Commercial and industrial |
34,947 | — | 49,213 | — | ||||||||||||
| Construction and land |
65 | — | — | — | ||||||||||||
| Consumer real estate |
2,760 | 20 | 2,897 | 16 | ||||||||||||
| Other consumer |
5 | — | 25 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 41,877 | $ | 24 | $ | 57,259 | $ | 22 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | Loans reported do not include PCI loans. |
Past due status is based on the contractual terms of the loan. Loans that are past due 30 days are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Non-mortgage consumer loans are typically charged off no later than 120 days past due. In all cases, loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and larger individually classified impaired loans.
All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Subsequent receipts on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
No loans past due over 90 days were still accruing interest at June 30, 2019. Loans past due over 90 days that were still accruing interest at December 31, 2018 totaled $58, which consisted entirely of PCI loans. At June 30, 2019, no PCI loans were considered non-performing loans. No Warehouse Purchase Program loans were non-performing at June 30, 2019 or December 31, 2018. Non-performing (nonaccrual) loans were as follows:
| June 30, 2019 | December 31, 2018 | |||||||
| Commercial real estate |
$ | 7,293 | $ | 159 | ||||
| Commercial and industrial |
48,367 | 16,710 | ||||||
| Construction and land |
228 | — | ||||||
| Consumer real estate |
6,144 | 5,506 | ||||||
| Other consumer |
24 | 46 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 62,056 | $ | 22,421 | ||||
|
|
|
|
|
|||||
A loan that has been modified is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower’s benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. Modifications to loan terms may include a modification of the contractual interest rate to a below-market rate (even if the modified rate is higher than the original rate),
19
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
forgiveness of accrued interest, forgiveness of a portion of principal, an extended repayment period or a deed in lieu of foreclosure or other transfer of assets other than cash to fully or partially satisfy a debt. The Company’s policy is to place all TDRs on nonaccrual for a minimum period of six months. Loans qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement for a minimum of six months and the collection of principal and interest under the revised terms is deemed probable. All TDRs are considered to be impaired loans.
The outstanding balances of TDRs as of June 30, 2019 and December 31, 2018 are shown below:
| June 30, 2019 | December 31, 2018 | |||||||
| Nonaccrual TDRs(1) |
$ | 8,938 | $ | 1,160 | ||||
| Performing TDRs (2) |
837 | 926 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 9,775 | $ | 2,086 | ||||
|
|
|
|
|
|||||
| Outstanding commitments to lend additional funds to borrowers with TDR loans |
— | — | ||||||
| 1 | Nonaccrual TDR loans are included in the nonaccrual loan totals. |
| 2 | Performing TDR loans are loans that have been performing under the restructured terms for at least six months and the Company is accruing interest on these loans. |
The following tables provide the recorded balances of loans modified as a TDR during the three and six months ended June 30, 2019 and 2018.
| Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | |||||||||||||||||||
| Combination of Rate Reduction and Principal Deferral |
Total | Principal Deferrals |
Combination of Rate Reduction and Principal Deferral |
Total | ||||||||||||||||
| Commercial and industrial |
$ | — | $ | — | $ | 7,401 | $ | — | $ | 7,401 | ||||||||||
| Consumer real estate |
600 | 600 | — | 600 | 600 | |||||||||||||||
| Other consumer |
— | — | 3 | — | 3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 600 | $ | 600 | $ | 7,404 | $ | 600 | $ | 8,004 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||
| Commercial and industrial |
$ | — | $ | — | $ | 83 | $ | — | $ | 83 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | — | $ | — | $ | 83 | $ | — | $ | 83 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
No loans modified as a TDR during the three and six months ended June 30, 2019 or 2018, experienced a subsequent payment default in the preceding twelve months. A payment default is defined as a loan that was 90 days or more past due.
Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company would not be able to collect all contractual amounts due, were accounted for as PCI loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related outstanding balances at June 30, 2019 and December 31, 2018 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
| June 30, 2019 | December 31, 2018 | |||||||
| Carrying amount 1 |
$ | 476 | $ | 939 | ||||
| Outstanding balance |
585 | 1,170 | ||||||
| 1 | The carrying amounts are reported net of allowance for loan losses of $163 and $250 as of June 30, 2019 and December 31, 2018, respectively. |
20
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Changes in the accretable yield for PCI loans for the three and six months ended June 30, 2019 and 2018 were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Beginning balance |
$ | 609 | $ | 2,167 | $ | 624 | $ | 2,279 | ||||||||
| Reclassifications (to) from nonaccretable |
(467 | ) | 10 | (432 | ) | 61 | ||||||||||
| Disposals |
287 | 17 | 287 | (47 | ) | |||||||||||
| Accretion |
(37 | ) | (96 | ) | (87 | ) | (195 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at end of period |
$ | 392 | $ | 2,098 | $ | 392 | $ | 2,098 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Below is an analysis of the age of recorded investment in loans that were past due at June 30, 2019 and December 31, 2018. No Warehouse Purchase Program loans were delinquent at June 30, 2019 or December 31, 2018 and therefore these loans are not included in the following tables.
| June 30, 2019 |
30-59 Days Past Due |
60-89 Days Past Due |
90 Days and Greater Past Due |
Total Loans Past Due |
Current Loans | Total Loans | ||||||||||||||||||
| Commercial real estate |
$ | 2,746 | $ | 5 | $ | 7,264 | $ | 10,015 | $ | 3,170,567 | $ | 3,180,582 | ||||||||||||
| Commercial and industrial |
4,519 | 1,340 | 26,450 | 32,309 | 2,070,608 | 2,102,917 | ||||||||||||||||||
| Construction and land |
1,345 | — | 228 | 1,573 | 286,918 | 288,491 | ||||||||||||||||||
| Consumer real estate |
1,912 | 6,073 | 1,836 | 9,821 | 1,450,596 | 1,460,417 | ||||||||||||||||||
| Other consumer |
256 | 61 | — | 317 | 47,351 | 47,668 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 10,778 | $ | 7,479 | $ | 35,778 | $ | 54,035 | $ | 7,026,040 | $ | 7,080,075 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2018 |
||||||||||||||||||||||||
| Commercial real estate |
$ | 6 | $ | — | $ | — | $ | 6 | $ | 3,026,748 | $ | 3,026,754 | ||||||||||||
| Commercial and industrial |
289 | — | 217 | 506 | 2,057,285 | 2,057,791 | ||||||||||||||||||
| Construction and land |
557 | — | — | 557 | 270,072 | 270,629 | ||||||||||||||||||
| Consumer real estate |
18,885 | 4,241 | 1,632 | 24,758 | 1,365,620 | 1,390,378 | ||||||||||||||||||
| Other consumer |
271 | 15 | 29 | 315 | 44,856 | 45,171 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 20,008 | $ | 4,256 | $ | 1,878 | $ | 26,142 | $ | 6,764,581 | $ | 6,790,723 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
For loans collateralized by real property and commercial and industrial loans, credit exposure is monitored by internally assigned grades used for classification of loans. A loan is considered “special mention” when management has determined that there is a potential weakness that deserves management’s close attention. Loans rated as “special mention” are not adversely classified according to regulatory classifications and do not expose the Company to sufficient risk to warrant adverse classification. A loan is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. “Substandard” loans include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected, and the loan may or may not meet the criteria for impairment. Loans classified as “doubtful” have all of the weaknesses of those classified as “substandard” with the added characteristic that the weaknesses present makes “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” All other loans that do not fall into the above mentioned categories are considered “pass” loans. Updates to internally assigned grades are made monthly and/or upon significant developments.
For other consumer loans (non-real estate), credit exposure is monitored by payment history of the loans. Non-performing other consumer loans are on nonaccrual status and are generally greater than 90 days past due.
21
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The recorded investment in loans by credit quality indicators at June 30, 2019 and December 31, 2018, was as follows:
Real Estate and Commercial and Industrial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
| June 30, 2019 |
Commercial Real Estate | Commercial and Industrial |
Construction and Land | Consumer Real Estate | ||||||||||||
| Grade: 1 |
||||||||||||||||
| Pass |
$ | 3,153,794 | $ | 1,928,987 | $ | 288,263 | $ | 1,449,095 | ||||||||
| Special Mention |
18,074 | 53,919 | — | 2,668 | ||||||||||||
| Substandard |
8,714 | 120,010 | 228 | 8,333 | ||||||||||||
| Doubtful |
— | 1 | — | 321 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 3,180,582 | $ | 2,102,917 | $ | 288,491 | $ | 1,460,417 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2018 |
||||||||||||||||
| Grade: 1 |
||||||||||||||||
| Pass |
$ | 3,007,810 | $ | 1,935,786 | $ | 270,629 | $ | 1,382,388 | ||||||||
| Special Mention |
17,322 | 56,016 | — | 1,218 | ||||||||||||
| Substandard |
1,622 | 65,987 | — | 6,429 | ||||||||||||
| Doubtful |
— | 2 | — | 343 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 3,026,754 | $ | 2,057,791 | $ | 270,629 | $ | 1,390,378 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | PCI loans are included in the substandard or doubtful categories. These categories are consistent with the “substandard” and “doubtful” categories as defined by regulatory authorities. |
Warehouse Purchase Program Credit Exposure
All Warehouse Purchase Program loans were graded pass as of June 30, 2019 and December 31, 2018.
Other Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
| June 30, 2019 | December 31, 2018 | |||||||
| Performing |
$ | 47,644 | $ | 45,125 | ||||
| Non-performing |
24 | 46 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 47,668 | $ | 45,171 | ||||
|
|
|
|
|
|||||
22
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 6—Fair Value
ASC 820, “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Prices or valuation techniques that require inputs that are both significant and unobservable in the market. These instruments are valued using the best information available, some of which is internally developed, and reflects a reporting entity’s own assumptions about the risk premiums that market participants would generally require and the assumptions they would use.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below.
| Fair Value Measurements Using Level 2 | ||||||||
| June 30, 2019 | December 31, 2018 | |||||||
| Assets: |
||||||||
| Agency residential mortgage-backed securities |
$ | 134,607 | $ | 149,871 | ||||
| Agency commercial mortgage-backed securities |
8,153 | 8,920 | ||||||
| Agency residential collateralized mortgage obligations |
294,372 | 280,639 | ||||||
| US government and agency securities |
— | 1,543 | ||||||
| Municipal bonds |
22,617 | 30,773 | ||||||
|
|
|
|
|
|||||
| Total securities available for sale |
$ | 459,749 | $ | 471,746 | ||||
|
|
|
|
|
|||||
| Loans held for sale 1 |
$ | 46,571 | $ | 23,193 | ||||
| Derivative financial instruments: |
||||||||
| Interest rate lock commitments |
968 | 459 | ||||||
| Forward mortgage-backed securities trades |
19 | — | ||||||
| Loan customer counterparty |
4,658 | 578 | ||||||
| Financial institution counterparty |
146 | 1,118 | ||||||
| Liabilities: |
||||||||
| Derivative financial instruments: |
||||||||
| Interest rate lock commitments |
— | — | ||||||
| Forward mortgage-backed securities trades |
154 | 163 | ||||||
| Loan customer counterparty |
146 | 1,118 | ||||||
| Financial institution counterparty |
4,658 | 578 | ||||||
| 1 | At June 30, 2019 and December 31, 2018, loans held for sale had an aggregate outstanding principal balance of $44,921 and $22,402, respectively. There were no mortgage loans held for sale that were 90 days or greater past due or on non-accrual at June 30, 2019 or December 31, 2018. |
The following methodologies were used to measure the fair value of financial assets and liabilities valued on a recurring basis:
Securities available for sale—The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
23
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Residential mortgage loans held for sale—Mortgage loans held for sale, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted to credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. Interest income on mortgage loans held for sale is recognized based on the contractual rates and reflected in interest income on loans held for sale in the consolidated income statement. The Company has no continuing involvement in any residential mortgage loans sold.
Derivative instruments:
Interest rate lock commitments (“IRLCs”)—The estimated fair values of IRLCs utilize current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding. The fair value of IRLCs is subject to change primarily due to changes in interest rates. These commitments are classified as Level 2 in the fair value disclosures, as the assumptions used that have the most significant impact on valuations are based on observable market inputs.
Forward mortgage-backed securities trades—These forward mortgage-backed securities trades are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract; therefore these contracts are classified as Level 2. The estimated fair values are subject to change primarily due to changes in interest rates.
Loan customer counterparty and financial institution counterparty—The Company also enters into certain interest rate derivative positions that are not designated as hedging instruments. The estimated fair value of these commercial loan interest rate swaps are obtained from a pricing service that provides the swaps’ unwind value (Level 2 inputs). Please see Note 7—Derivative Financial Instruments for more information.
Assets and Liabilities Measured on a Non-Recurring Basis
Assets measured at fair value on a non-recurring basis are summarized below. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2019 or December 31, 2018.
| Fair Value Measurements Using Level 3 | ||||||||
| June 30, 2019 | December 31, 2018 | |||||||
| Assets: |
||||||||
| Impaired loans |
$ | 22,997 | $ | 10,756 | ||||
| Foreclosed assets: |
||||||||
| Consumer real estate |
— | 720 | ||||||
| Other |
584 | 613 | ||||||
Methodologies used to measure the fair value of financial assets and liabilities valued on a non-recurring basis are shown below:
Impaired loans—Impaired loans that are collateral dependent are measured for impairment using the fair value of the collateral adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Impaired loans secured by real estate, receivables or inventory had discounts determined by management on an individual loan basis. Impaired loans that are not collateral dependent are measured for impairment by a discounted cash flow analysis using a net present value calculation that utilizes data from the loan file before and after the modification.
Foreclosed assets—These loans are measured at the lower of book or fair value less costs to sell using third party appraisals, listing agreements or sale contracts, which may be adjusted by additional Level 3 inputs, such as discounts of market value, estimated marketing costs and estimated legal expenses. Management may also consider additional adjustments on specific properties due to the age of the appraisal, expected holding period, lack of comparable sales, or if the other real estate owned is a special use property. At June 30, 2019, the Company had $983 in residential mortgage loans in the process of foreclosure.
The Credit Risk Management department evaluates the valuations on impaired loans and foreclosed assets at least quarterly. The valuations on impaired loans are reviewed at least quarterly by the Allowance for Loan Loss Committee and are considered in the calculation of the allowance for loan losses. Unobservable inputs, such as discounts to collateral, are monitored and 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)
Fair value of financial instruments not recorded at fair value
The carrying amount and fair value information of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s consolidated balance sheets at June 30, 2019 and at December 31, 2018, were as follows:
| Fair Value Measurement Using | ||||||||||||||||
| June 30, 2019 |
Carrying Amount |
Level 1 | Level 2 | Level 3 | ||||||||||||
| Financial assets |
||||||||||||||||
| Cash and cash equivalents |
$ | 263,843 | $ | 263,843 | $ | — | $ | — | ||||||||
| Securities held to maturity |
127,836 | — | 128,864 | — | ||||||||||||
| Loans held for investment, net |
6,999,607 | — | — | 6,959,130 | ||||||||||||
| Loans held for investment—Warehouse Purchase Program |
1,542,684 | — | — | 1,542,684 | ||||||||||||
| FHLB and other restricted securities, at cost |
79,195 | — | 79,195 | — | ||||||||||||
| Accrued interest receivable |
32,525 | 32,525 | — | — | ||||||||||||
| Financial liabilities |
||||||||||||||||
| Deposits |
$ | 7,055,790 | $ | — | $ | — | $ | 7,059,481 | ||||||||
| FHLB advances |
1,384,765 | — | — | 1,384,902 | ||||||||||||
| Repurchase agreements |
52,414 | — | — | 47,117 | ||||||||||||
| Subordinated debt |
135,257 | — | — | 136,767 | ||||||||||||
| Accrued interest payable |
4,848 | 4,848 | — | — | ||||||||||||
| December 31, 2018 |
||||||||||||||||
| Financial assets |
||||||||||||||||
| Cash and cash equivalents |
$ | 269,193 | $ | 269,193 | $ | — | $ | — | ||||||||
| Securities held to maturity |
146,046 | — | 144,791 | — | ||||||||||||
| Loans held for investment, net |
6,733,692 | — | — | 6,664,703 | ||||||||||||
| Loans held for investment—Warehouse Purchase Program |
960,404 | — | — | 960,404 | ||||||||||||
| FHLB and other restricted securities, at cost |
56,226 | — | 56,226 | — | ||||||||||||
| Accrued interest receivable |
27,104 | 27,104 | — | — | ||||||||||||
| Financial liabilities |
||||||||||||||||
| Deposits 1 |
$ | 6,841,715 | $ | — | $ | — | $ | 6,834,351 | ||||||||
| FHLB advances |
825,409 | — | — | 825,496 | ||||||||||||
| Repurchase agreement |
50,340 | — | — | 44,214 | ||||||||||||
| Subordinated debt |
135,012 | — | — | 138,524 | ||||||||||||
| Accrued interest payable |
4,428 | 4,428 | — | — | ||||||||||||
| 1 | The fair value of non-maturity deposits at December 31, 2018 was adjusted to report these deposits at their carrying value. |
25
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 7—Derivative Financial Instruments
The following table provides the outstanding notional balances and fair values of outstanding derivative positions at June 30, 2019 and December 31, 2018.
| June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Outstanding Notional Balance |
Asset Derivative Fair Value |
Liability Derivative Fair Value |
Outstanding Notional Balance |
Asset Derivative Fair Value |
Liability Derivative Fair Value |
|||||||||||||||||||
| IRLCs |
$ | 31,993 | $ | 968 | $ | — | $ | 12,287 | $ | 459 | $ | — | ||||||||||||
| Forward mortgage-backed securities trades |
57,500 | 19 | 154 | 24,133 | — | 163 | ||||||||||||||||||
| Commercial loan interest rate swaps and caps: |
| |||||||||||||||||||||||
| Loan customer counterparty |
$ | 161,512 | $ | 4,658 | $ | 146 | $ | 64,130 | $ | 578 | $ | 1,118 | ||||||||||||
| Financial institution counterparty |
161,512 | 146 | 4,658 | 64,130 | 1,118 | 578 | ||||||||||||||||||
These financial instruments are not designated as hedging instruments and are used for asset and liability management and commercial customers’ financing needs. All derivatives are carried at fair value in either other assets or other liabilities.
IRLCs—In the normal course of business, the Company enters into IRLCs with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
Forward mortgage-backed securities trades—The Company manages the changes in fair value associated with changes in interest rates related to IRLCs by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the IRLC is made.
Interest rate swaps and caps—These derivative positions relate to transactions in which we enter into an interest rate swap or cap with a customer, while at the same time entering into an offsetting interest rate swap or cap with another financial institution. An interest rate swap transaction allows our customer to effectively convert a variable rate loan to a fixed rate. In connection with each swap, we agree to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. In connection with each interest rate cap, we sell a cap to the customer and agree to pay interest if the underlying index exceeds the strike price defined in the cap agreement. Simultaneously we purchase a cap with matching terms from another financial institution which agrees to pay us if the underlying index exceeds the strike price.
The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding at June 30, 2019 and December 31, 2018 are presented in the following table.
| Weighted-Average Interest Rate | ||||||||||||||||
| June 30, 2019 | December 31, 2018 | |||||||||||||||
| Received | Paid | Received | Paid | |||||||||||||
| Loan customer counterparty |
4.08 | % | 4.31 | % | 4.21 | % | 4.29 | % | ||||||||
Our credit exposure on interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $4,658 at June 30, 2019 and $578 at December 31, 2018. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was approximately $150 at June 30, 2019. A credit support annex is in place and allows the Company to call collateral from upstream financial institution counter-parties. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. Our cash collateral pledged for interest rate swaps and included in our interest-bearing deposits, which totaled $6,500 at June 30, 2019 and $2,480 at December 31, 2018, is in excess of our credit exposure.
26
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
The initial and subsequent changes in the fair value of IRLCs and the forward sales of mortgage-back securities are recorded in net gain on sale of mortgage loans. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps and caps, because we act as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on our results of operations. Income (loss) for the three and six months ended June 30, 2019 and 2018 was as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Derivatives not designated as hedging instruments |
2019 | 2018 | 2019 | 2018 | ||||||||||||
| IRLCs |
$ | 269 | $ | (10 | ) | $ | 509 | $ | 77 | |||||||
| Forward mortgage-backed securities trades |
(543 | ) | 52 | (880 | ) | 451 | ||||||||||
27
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 8—Share-based Compensation
Compensation cost charged to income for share-based compensation, which is reported in non-interest expense as salaries and employee benefits, is presented below.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Restricted stock |
$ | 1,291 | $ | 578 | $ | 3,170 | $ | 1,642 | ||||||||
| Stock options |
724 | 820 | 1,395 | 1,811 | ||||||||||||
| Income tax benefit |
423 | 293 | 959 | 725 | ||||||||||||
A summary of activity in the Company’s active share-based compensation plans (“Plans”) for the six months ended June 30, 2019 is presented below.
| Time-Vested Restricted Shares Outstanding |
Performance-Based Restricted Shares Outstanding |
Stock Options Outstanding | ||||||||||||||||||||||
| Number of Shares |
Weighted-Average Grant Date Fair Value per Share 1 |
Number of Shares |
Weighted-Average Grant Date Fair Value per Share 2 |
Number of Shares |
Weighted- Average Exercise Price per Share |
|||||||||||||||||||
| Beginning balance |
191,803 | $ | 38.90 | 78,958 | $ | 32.09 | 1,832,887 | $ | 26.97 | |||||||||||||||
| Granted |
135,985 | 40.46 | 28,600 | 3 | 40.71 | — | — | |||||||||||||||||
| Additional performance-based shares issued at vesting |
— | — | 20,100 | 4 | 35.13 | — | — | |||||||||||||||||
| Vested/exercised |
(17,949 | ) | 42.40 | (60,300 | ) | 35.13 | (133,992 | ) | 25.47 | |||||||||||||||
| Forfeited/expired |
(2,300 | ) | 42.74 | — | — | (36,917 | ) | 32.01 | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| Ending balance |
307,539 | $ | 39.36 | 67,358 | $ | 40.71 | 1,661,978 | $ | 26.97 | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||
| 1 | For restricted stock awards with time-based vesting conditions, the grant date fair value is based upon the closing stock price as quoted on the Nasdaq Stock Market on the grant date. |
| 2 | For restricted stock awards with performance-based vesting conditions, the value of the award is based upon the closing stock price as quoted on the Nasdaq Stock Market on the date of vesting. Until the final value is determined on the vesting date, the Company estimates the fair value based upon the closing stock price as quoted on the Nasdaq Stock Market on the last business day of each month. |
| 3 | The 28,600 performance-based shares granted are represented at target; however, if certain performance metrics are met at vesting, the actual number of shares awarded may be up to 200% of target amount, with an additional 20% increase or decrease in the total share award at vesting depending on the Company’s Total Shareholder Return percentage for the determined period. |
| 4 | Performance-based restricted stock awards that achieved the maximum performance goals and vested at 150% based on Company return on average assets and return on average equity relative to a specified peer group of financial institutions over a three-year performance period that commenced in January 2016 and ended in December 2018. The 20,100 shares reflected in the table represent the additional shares issued to bring the vesting share amount from target (100%) to maximum (150%.) |
The total unrecognized compensation expense as of June 30, 2019, related to the Plans is presented below.
| Unrecognized Compensation Expense |
Weighted-Average Period of Expense |
|||||||
| Non-vested restricted shares |
$ | 10,143 | 1.9 | |||||
| Non-vested stock options |
$ | 1,855 | 0.6 | |||||
28
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 9—Leases
The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the alternative transition method whereby comparative periods were not restated. No cumulative effect adjustment to the opening balance of retained earnings was required. The Company also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things allowed the Company to carry forward the historical lease classifications. Additionally, the Company elected the hindsight practical expedient to determine the lease term for existing leases. In the application of hindsight, the Company evaluated the performance of the leased branches and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
The Company leases certain branch locations, office space and equipment. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term. Two leases include rental payments that are adjusted periodically for inflation.
Adoption of this standard resulted in the Company recognizing a right of use asset of $36,140 and a corresponding lease liability of $39,843 on January 1, 2019.
Supplemental lease information at or for the six months ended June 30, 2019 is as follows:
| Balance sheet: |
||||
| Operating lease asset classified as premises and equipment |
$ | 34,441 | ||
| Operating lease liability classified as other liabilities |
38,099 | |||
| Income statement: |
||||
| Operating lease cost classified as occupancy and equipment expense |
$ | 2,981 | ||
| Weighted average lease term, in years |
9.36 | |||
| Weighted average discount rate1 |
4.88 | % | ||
| Operating cash flows |
$ | 3,027 |
| 1. | The discount rate was developed by using the US Financials A+, A, A- BVAL curve (base curve), which represents the unsecured borrowing cost of banks with similar credit ratings as the Company. A liquidity premium was derived from recent market transactions and applied to the base curve to determine final discount rates. |
A maturity analysis of the Company’s lease liabilities at June 30, 2019 was as follows:
| Balance | ||||
| July 1, 2019 to June 30, 2020 |
$ | 6,026 | ||
| July 1, 2020 to June 30, 2021 |
5,749 | |||
| July 1, 2021 to June 30, 2022 |
5,392 | |||
| July 1, 2022 to June 30, 2023 |
4,949 | |||
| July 1, 2023 to June 30, 2024 |
4,740 | |||
| Thereafter |
21,062 | |||
|
|
|
|||
| Total lease payments |
47,918 | |||
| Less: Interest |
(9,819 | ) | ||
|
|
|
|||
| Present value of lease liabilities |
$ | 38,099 | ||
|
|
|
|||
29
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 10—Income Taxes
A summary of the net deferred tax liabilities as of June 30, 2019 and December 31, 2018, is presented below:
| June 30, 2019 | December 31, 2018 | |||||||
| Net deferred tax liabilities |
$ | 4,488 | $ | 9,769 | ||||
| Estimated annual effective tax rate |
21 | % | ||||||
30
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 11—Commitments and Contingent Liabilities
In the normal course of business, the Company enters into various transactions which, in accordance with US GAAP, are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit which involve, to varying degrees, elements of credit and interest rate risk. Credit losses up to the face amount of these instruments could occur, although material losses are not anticipated. The Company’s credit policies applied to loan originations are also applied to these commitment requests, including obtaining collateral at the exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at June 30, 2019 and December 31, 2018, are summarized below. Please see Part I-Item 2-“Off-Balance Sheet Arrangements, Contractual Obligations and Commitments” of this Form 10-Q for information related to commitment maturities.
| June 30, 2019 | December 31, 2018 | |||||||
| Unused commitments to extend credit |
$ | 1,785,281 | $ | 1,850,351 | ||||
| Unused capacity on Warehouse Purchase Program loans |
620,316 | 967,096 | ||||||
| Standby letters of credit |
61,853 | 46,383 | ||||||
|
|
|
|
|
|||||
| Total unused commitments/capacity |
$ | 2,467,450 | $ | 2,863,830 | ||||
|
|
|
|
|
|||||
Unused commitments to extend credit—The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Since many commitments expire without being drawn upon, the total contractual amount of commitments does not necessarily represent future cash requirements of the Company. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding.
Unused capacity on Warehouse Purchase Program loans—In regard to unused capacity on Warehouse Purchase Program loans, the Company has established maximum purchase facility amounts, but reserves the right, at any time, to refuse to buy any mortgage loans offered for sale by each customer, for any reason in the Company’s sole and absolute discretion.
Standby letters of credit—Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
In addition to the commitments above, the Company guarantees the credit card debt of certain customers to the merchant bank that issues the credit cards. These guarantees are in place for as long as the guaranteed credit card is open. At June 30, 2019 and December 31, 2018, these credit card guarantees totaled $2,223 and $1,973, respectively. This amount represents the maximum potential amount of future payments under the guarantee, which the Company is responsible for in the event of customer non-payment.
The Company funds an allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt through a charge to provision for credit losses on the Company’s consolidated statement of income. At June 30, 2019 and December 31, 2018, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in “other liabilities” on the Company’s consolidated balance sheets, totaled $667 and $729, respectively.
In addition to the commitments above, the Company had overdraft protection available in the amounts of $83,507 and $84,504 at June 30, 2019 and December 31, 2018, respectively.
The Company, at June 30, 2019 and December 31, 2018, had FHLB letters of credit of $889,480 and $932,200, respectively, pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.
At June 30, 2019 and December 31, 2018, the Company had $730 and $830, respectively, of unfunded commitments recorded in other liabilities in its consolidated balance sheet related to investments in community development-oriented private equity funds used for Community Reinvestment Act purposes.
31
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 12—Recent Accounting Developments
Effect of Newly Issued But Not Yet Effective Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This ASU removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current US GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. This revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for lifetime expected credit losses. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 also amends the credit loss measurement guidance for available for sale debt securities. For public business entities, this ASU is effective for financial statements issued for fiscal years and for interim periods within those fiscal years beginning after December 15, 2019. The Company is currently running its financial models to calculate lifetime expected credit losses in parallel with its current incurred loss methodology and is continuing to document the allowance for loan loss policy and procedures under the revised accounting method, validate and refine key model assumptions, and analyze new disclosure requirements.
32
LEGACYTEXAS FINANCIAL GROUP, INC.
CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 13—Subsequent Events
The Company evaluated events from the date of the consolidated financial statements on June 30, 2019 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated July 24, 2019. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.
33
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION RELATING TO
THE MERGER WITH LEGACYTEXAS FINANCIAL GROUP, INC.
On November 1, 2019, pursuant to the Agreement and Plan of Reorganization, dated as of June 16, 2019 (the “Merger Agreement”), by and between LegacyTexas Financial Group, Inc., a Maryland corporation (“LegacyTexas”), and Prosperity Bancshares, Inc., a Texas corporation (“Prosperity”), LegacyTexas merged with and into Prosperity (the “Merger”), with Prosperity as the surviving entity in the Merger. Immediately after the Merger, LegacyTexas’ wholly owned bank subsidiary, LegacyTexas Bank, merged with and into Prosperity’s wholly owned bank subsidiary, Prosperity Bank (the “Bank Merger”), with Prosperity Bank as the surviving entity in the Bank Merger.
Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of LegacyTexas (“Legacy Common Stock”) (subject to certain customary exceptions, which were cancelled in the Merger) was converted into the right to receive (i) 0.5280 (the “Exchange Ratio”) shares of common stock, par value $1.00 per share, of Prosperity (“Prosperity Common Stock”); and (ii) $6.28 in cash, without interest (“Per Share Cash Consideration”) (the consideration described in the foregoing clauses (i) and (ii), the “Merger Consideration”). No fractional shares of Prosperity Common Stock were issued in the Merger, and LegacyTexas stockholders became entitled to receive cash in lieu of fractional shares.
At the Effective Time, subject to the terms and conditions of the Merger Agreement, each option granted by LegacyTexas to purchase shares of Legacy Common Stock under the LegacyTexas equity compensation plans fully vested and was cancelled and converted into the right to receive the Merger Consideration with respect to a number of shares of Legacy Common Stock (rounded down to the nearest whole share) equal to the quotient of (x) the product of (A) the number of shares of Legacy Common Stock subject to such option multiplied by (B) the excess, if any, of (i) the sum of the Per Share Stock Consideration (as defined in the Merger Agreement) and the Per Share Cash Consideration over (ii) the exercise price per share of Legacy Common Stock under the option, divided by (y) the sum of the Per Share Stock Consideration and the Per Share Cash Consideration. At the Effective Time, subject to the terms and conditions of the Merger Agreement, each LegacyTexas restricted stock award and performance share award was converted into the right to receive the Merger Consideration (with any performance-based vesting conditions applicable to such awards immediately prior to the Effective Time deemed satisfied at target performance levels) with respect to the number of shares of Legacy Common Stock subject to such restricted stock award or performance share award.
Prosperity has prepared the unaudited pro forma condensed combined statements of income appearing below to present on a pro forma basis the consolidated statements of income of Prosperity assuming that the Merger was consummated on January 1, 2018, and to provide information with respect to the pro forma consolidated results of operations that Prosperity would have had for the year ended December 31, 2018, and the six months ended June 30, 2019. Prosperity has prepared the unaudited pro forma condensed combined balance sheet appearing below to present on a pro forma basis the consolidated financial position of Prosperity assuming that the Merger was consummated on June 30, 2019.
1
The unaudited pro forma condensed combined financial statements contain information derived from, and should be read together with:
| • | the accompanying notes to the unaudited pro forma condensed combined financial statements; |
| • | Prosperity’s separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2018, included in Prosperity’s Annual Report on Form 10-K for the year ended December 31, 2018; |
| • | Prosperity’s separate unaudited historical consolidated financial statements and accompanying notes as of and for the six months ended June 30, 2019, included in Prosperity’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019; |
| • | LegacyTexas’ separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2018, included as Exhibit 99.1 to the Current Report on Form 8-K/A on which this Exhibit 99.3 is filed; and |
| • | LegacyTexas’ separate unaudited historical consolidated financial statements and accompanying notes as of and for the six months ended June 30, 2019, included as Exhibit 99.2 to the Current Report on Form 8-K/A on which this Exhibit 99.3 is filed. |
The Merger and Bank Merger are being accounted for as acquisitions of LegacyTexas and LegacyTexas Bank by Prosperity and Prosperity Bank, respectively, under the acquisition method of accounting in accordance with the Financial Accounting Standard Board’s Accounting Standard Codification Topic 805, Business Combinations (“ASC 805”). The unaudited pro forma condensed combined financial statements of Prosperity and the other pro forma combined financial information appearing below have been prepared using the acquisition method of accounting.
The unaudited pro forma condensed combined statements of income for the year ended December 31, 2018 and for the six months ended June 30, 2019 present the consolidated results of operations giving pro forma effect to the following as if they had occurred as of January 1, 2018:
| • | the full-period impact of LegacyTexas’ statements of income, including pro forma amortization and accretion of purchase accounting adjustments on securities, loans and intangible assets; and |
| • | the issuance of the aggregate Per Share Stock Consideration of 26.3 million shares of Prosperity Common Stock, and the payment of the aggregate Per Share Cash Consideration of $313.0 million. |
The unaudited pro forma condensed combined balance sheet as of June 30, 2019 presents the consolidated financial position giving pro forma effect to the following as if they had occurred as of June 30, 2019:
| • | the completion of the Merger, including the issuance of 26.3 million shares of Prosperity Common Stock and the payment of $313.0 million; and |
| • | $40.4 million in estimated direct transaction costs related to the Merger. |
The preparation of the unaudited pro forma condensed combined financial statements and related adjustments required Prosperity’s management to make certain assumptions and estimates, which it believes are reasonable under the circumstances. Prosperity has not had sufficient time to completely evaluate the significant identifiable long-lived tangible and identifiable intangible assets of LegacyTexas. Accordingly, the unaudited pro forma adjustments, including the allocations of the purchase price, are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Certain reclassifications have been made to the historical financial statements of LegacyTexas to conform to the presentation in Prosperity’s financial statements. Accordingly, the unaudited pro forma condensed combined financial statements and other unaudited pro forma condensed combined financial information are presented for illustrative purposes only and are not necessarily indicative of the results that might have occurred had the Merger taken place on January 1, 2018, for
2
statement of income purposes, and on June 30, 2019, for balance sheet purposes. Historical results for any prior period are not necessarily indicative of results to be expected in any future period, and historical results for the six months ended June 30, 2019, are not necessarily indicative of results to be expected for all of 2019. A final determination of the fair values of LegacyTexas’ assets and liabilities will be based on the actual net tangible and intangible assets of LegacyTexas that existed as of the date of completion of the Merger. Consequently, amounts preliminarily allocated to goodwill and identifiable intangibles could change significantly from those allocations used in the unaudited pro forma condensed combined financial statements presented below and could result in a material change in amortization of acquired intangible assets.
In connection with the integration of the operations of Prosperity and LegacyTexas following the Effective Time, Prosperity anticipates that nonrecurring charges, such as costs associated with systems implementation, severance, and other costs related to exit or disposal activities, could be incurred. Prosperity is not yet able to fully determine the timing, nature and amount of these charges. However, these charges could affect the results of operations of the combined company in the period in which they are recorded. The unaudited pro forma condensed combined financial statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the transaction, as they are nonrecurring in nature and not factually supportable at the time that the unaudited pro forma condensed combined financial statements were prepared. Additionally, the unaudited pro forma adjustments do not give effect to any nonrecurring or unusual restructuring charges that have been or may be incurred as a result of the integration of the two companies or any dispositions of assets resulting from such integration. Direct merger-related expenses estimated at $40.4 million are not included in the unaudited pro forma condensed combined statements of income.
3
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2019
(in thousands)
| Prosperity (as reported) |
Legacy (as reported) |
Adjustments | Pro Forma Combined |
|||||||||||||||
| Assets |
||||||||||||||||||
| Cash and due from banks |
$ | 302,069 | $ | 56,949 | $ | (353,375 | ) | (a) | $ | 5,643 | ||||||||
| Federal funds sold & other interest earning assets |
555 | 206,894 | 207,449 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total cash and cash equivalents |
302,624 | 263,843 | (353,375 | ) | 213,092 | |||||||||||||
| Available for sale securities, at fair value |
306,777 | 459,749 | 766,526 | |||||||||||||||
| Held to maturity securities, at cost |
8,645,163 | 127,836 | 239 | (b) | 8,773,238 | |||||||||||||
| Total loans |
10,587,375 | 8,681,081 | (175,000 | ) | (c) | 19,093,456 | ||||||||||||
| Less allowance for credit losses |
(87,006 | ) | (92,219 | ) | 92,219 | (c) | (87,006 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Loans, net |
10,500,369 | 8,588,862 | (82,781 | ) | 19,006,450 | |||||||||||||
| Bank premises and equipment, net |
262,479 | 106,313 | (34,441 | ) | (d) | 334,351 | ||||||||||||
| Accrued interest receivable |
57,382 | 32,525 | 89,907 | |||||||||||||||
| Goodwill |
1,900,845 | 178,559 | 965,775 | (e) | 3,045,179 | |||||||||||||
| Core deposit intangibles |
30,299 | 193 | 102,407 | (f) | 132,899 | |||||||||||||
| Other real estate owned |
2,005 | 584 | 2,589 | |||||||||||||||
| Bank Owned Life Insurance (BOLI), net |
261,372 | 59,724 | 321,096 | |||||||||||||||
| Other assets |
105,906 | 117,746 | 34,441 | (d) | 258,093 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total assets |
$ | 22,375,221 | $ | 9,935,934 | $ | 632,265 | $ | 32,943,420 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||
| Deposits |
||||||||||||||||||
| Noninterest-bearing |
$ | 5,691,236 | $ | 1,847,229 | $ | 7,538,465 | ||||||||||||
| Interest-bearing |
11,196,393 | 5,208,561 | 16,404,954 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total deposits |
16,887,629 | 7,055,790 | 23,943,419 | |||||||||||||||
| Other borrowings |
940,874 | 1,384,765 | 2,325,639 | |||||||||||||||
| Securities sold under repurchase agreements |
313,825 | 52,414 | 366,239 | |||||||||||||||
| Other liabilities |
104,998 | 165,063 | 270,061 | |||||||||||||||
| Subordinated debentures |
— | 135,257 | 135,257 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities |
18,247,326 | 8,793,289 | 27,040,615 | |||||||||||||||
| Shareholders’ equity: |
||||||||||||||||||
| Total Prosperity equity |
4,127,895 | 1,774,910 | (g) | 5,902,805 | ||||||||||||||
| Total Legacy equity |
1,142,645 | (1,142,645 | ) | (g) | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total shareholders’ equity |
4,127,895 | 1,142,645 | 632,265 | (g) | 5,902,805 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities and shareholders’ equity |
$ | 22,375,221 | $ | 9,935,934 | $ | 632,265 | $ | 32,943,420 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. Amounts may not add due to rounding.
4
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2019
(in thousands, except per share data)
| Prosperity (as reported) |
Legacy (as reported) |
Adjustments | Pro Forma Combined |
|||||||||||||||
| Interest income: |
||||||||||||||||||
| Loans, including fees |
$ | 263,590 | $ | 208,455 | $ | (491 | ) | (h) | $ | 471,554 | ||||||||
| Securities |
109,592 | 7,815 | 117,407 | |||||||||||||||
| Federal funds sold and other temporary investments |
720 | 3,911 | 4,631 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total interest income |
373,902 | 220,181 | (491 | ) | 593,592 | |||||||||||||
| Interest expense: |
||||||||||||||||||
| Deposits |
51,690 | 38,659 | (21 | ) | (i) | 90,328 | ||||||||||||
| Federal funds purchased, other borrowings and securities sold under repurchase agreements |
12,463 | 10,782 | — | 23,245 | ||||||||||||||
| Subordinated debentures |
— | 4,022 | — | 4,022 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total interest expense |
64,153 | 53,463 | (21 | ) | 117,595 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income |
309,749 | 166,718 | (470 | ) | 475,997 | |||||||||||||
| Provision for credit losses |
1,500 | 25,900 | 27,400 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income after provision for credit losses |
308,249 | 140,818 | (470 | ) | 448,597 | |||||||||||||
| Noninterest income: |
— | |||||||||||||||||
| Customer service fees |
38,227 | 17,137 | (280 | ) | (j) | 55,084 | ||||||||||||
| Trust income |
5,153 | — | 5,153 | |||||||||||||||
| Mortgage income |
1,712 | 4,404 | 6,116 | |||||||||||||||
| Brokerage income |
1,214 | — | 1,214 | |||||||||||||||
| Net gain on sale of assets |
60 | 4 | (40 | ) | (k) | 24 | ||||||||||||
| Gain on sale of securities |
— | 6 | — | 6 | ||||||||||||||
| Other |
11,736 | 575 | 280 | (j) | 12,591 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest income |
58,102 | 22,126 | (40 | ) | 80,188 | |||||||||||||
| Noninterest expense: |
||||||||||||||||||
| Salaries and employee benefits |
104,014 | 53,457 | — | 157,471 | ||||||||||||||
| Net occupancy and equipment |
17,173 | 7,849 | 1,145 | (l) | 26,167 | |||||||||||||
| Core deposit intangibles amortization |
2,584 | 52 | 5,078 | (m) | 7,714 | |||||||||||||
| Other |
35,621 | 30,475 | (1,185 | ) | (k)(l) | 64,911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest expense |
159,392 | 91,833 | 5,038 | 256,263 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before federal income taxes |
206,959 | 71,111 | (5,548 | ) | 272,522 | |||||||||||||
| Provision for federal income taxes |
42,299 | 15,048 | (1,165 | ) | (n) | 56,182 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 164,660 | $ | 56,063 | $ | (4,383 | ) | $ | 216,340 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic earnings per share: |
||||||||||||||||||
| Earnings per share |
$ | 2.36 | $ | 1.18 | $ | 2.25 | ||||||||||||
| Weighted average shares outstanding |
69,832 | 47,315 | 95,946 | |||||||||||||||
| Diluted earnings per share: |
||||||||||||||||||
| Earnings per share |
$ | 2.36 | $ | 1.17 | $ | 2.25 | ||||||||||||
| Weighted average shares outstanding |
69,832 | 47,877 | 95,946 | |||||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. Amounts may not add due to rounding.
5
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2018
(in thousands, except per share data)
| Prosperity (as reported) |
Legacy (as reported) |
Adjustments | Pro Forma Combined |
|||||||||||||||
| Interest income: |
||||||||||||||||||
| Loans, including fees |
$ | 503,963 | $ | 392,499 | $ | (1,836 | ) | (h) | $ | 894,626 | ||||||||
| Securities |
221,909 | 15,285 | 237,194 | |||||||||||||||
| Federal funds sold and other temporary investments |
1,337 | 7,198 | 8,535 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total interest income |
727,209 | 414,982 | (1,836 | ) | 1,140,355 | |||||||||||||
| Interest expense: |
||||||||||||||||||
| Deposits |
71,384 | 57,475 | (118 | ) | (i) | 128,741 | ||||||||||||
| Federal funds purchased, other borrowings and securities sold under repurchase agreements |
26,232 | 17,031 | — | 43,263 | ||||||||||||||
| Subordinated debentures |
— | 7,968 | — | 7,968 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total interest expense |
97,616 | 82,474 | (118 | ) | 179,972 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income |
629,593 | 332,508 | (1,718 | ) | 960,383 | |||||||||||||
| Provision for credit losses |
16,350 | 35,797 | 52,147 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interest income after provision for credit losses |
613,243 | 296,711 | (1,718 | ) | 908,236 | |||||||||||||
| Noninterest income: |
||||||||||||||||||
| Customer service fees |
78,861 | 35,320 | (566 | ) | (j) | 113,615 | ||||||||||||
| Trust income |
10,178 | — | 10,178 | |||||||||||||||
| Mortgage income |
3,355 | 6,573 | 9,928 | |||||||||||||||
| Brokerage income |
2,617 | 2,617 | ||||||||||||||||
| Net (loss) gain on sale of assets |
(755 | ) | 2,981 | (1,232 | ) | (k) | 994 | |||||||||||
| Net loss on sale of securities |
(13 | ) | (138 | ) | (151 | ) | ||||||||||||
| Other |
21,769 | 4,505 | 566 | (j) | 26,840 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest income |
116,012 | 49,241 | (1,232 | ) | 164,021 | |||||||||||||
| Noninterest expense: |
||||||||||||||||||
| Salaries and employee benefits |
207,517 | 100,170 | 307,687 | |||||||||||||||
| Net occupancy and equipment |
35,125 | 15,643 | 2,233 | (l) | 53,001 | |||||||||||||
| Core deposit intangibles amortization |
5,959 | 157 | 10,103 | (m) | 16,219 | |||||||||||||
| Other |
77,619 | 55,160 | (3,465 | ) | (k)(l) | 129,314 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total noninterest expense |
326,220 | 171,130 | 8,871 | 506,221 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income before federal income taxes |
403,035 | 174,822 | (11,821 | ) | 566,036 | |||||||||||||
| Provision for federal income taxes |
81,223 | 20,633 | (2,482 | ) | (n) | 99,374 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income |
$ | 321,812 | $ | 154,189 | $ | (9,339 | ) | $ | 466,662 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Basic earnings per share: |
||||||||||||||||||
| Earnings per share |
$ | 4.61 | $ | 3.27 | $ | 4.86 | ||||||||||||
| Weighted average shares outstanding |
69,821 | 47,035 | 95,935 | |||||||||||||||
| Diluted earnings per share: |
||||||||||||||||||
| Earnings per share |
$ | 4.61 | $ | 3.23 | $ | 4.86 | ||||||||||||
| Weighted average shares outstanding |
69,821 | 47,654 | 95,935 | |||||||||||||||
The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements. Amounts may not add due to rounding.
6
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
Note 1. Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined financial statements and related notes were prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined statement of income for the six months ended June 30, 2019 and for the year ended December 31, 2018 combine the historical consolidated statements of income of Prosperity and LegacyTexas giving effect to the merger as if it had been completed on January 1, 2018. The unaudited pro forma condensed combined balance sheet as of June 30, 2019 combines the historical consolidated balance sheets of Prosperity and LegacyTexas giving effect to the merger as if it had been completed on June 30, 2019.
Prosperity’s and LegacyTexas’ historical financial statements were prepared in accordance with U.S. GAAP and presented in U.S. dollars. As discussed in Note 4 and Note 5, certain reclassifications were made to align Prosperity’s and LegacyTexas’ financial statement presentation. Prosperity has not identified all adjustments necessary to conform LegacyTexas’ accounting policies to Prosperity’s accounting policies. Prosperity is in the process of performing a more detailed review of Legacy’s accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the combined company’s financial information.
The accompanying unaudited pro forma condensed combined financial statements and related notes were prepared using the acquisition method of accounting under the provisions of ASC 805, with Prosperity considered the acquirer of LegacyTexas. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined balance sheet, the merger consideration has been allocated to the assets acquired and liabilities assumed of LegacyTexas based upon management’s preliminary estimate of their fair values as of June 30, 2019. Prosperity has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair market value of the LegacyTexas’ assets to be acquired or liabilities assumed, other than a preliminary estimate for intangible assets and held-to-maturity securities. Accordingly, apart from the aforementioned, certain LegacyTexas assets and liabilities are presented at their respective carrying amounts and should be treated as preliminary values. Any differences between the fair value of the merger consideration and the fair value of the assets acquired and liabilities assumed will be recorded as goodwill. Accordingly, the purchase price allocation and related adjustments reflected in these unaudited pro forma condensed combined financial statements are preliminary and subject to revision based on a final determination of fair value.
All dollar amounts and share amounts (except per share data) presented within these Notes to Unaudited Pro Forma Condensed Combined Financial Statements are in thousands.
Note 2. Estimated Operational Cost Savings
Prosperity anticipates operational cost savings in connection with the acquisition of LegacyTexas. Prosperity anticipates that these savings will occur through the combination of back office operations and elimination of duplicate general operations, administrative and salary and benefits expense. Estimated cost savings are not presented as part of the pro forma adjustments and there can be no assurance they will be achieved in the amount or manner currently contemplated.
Note 3. Anticipated Reduction in Fee Income
Prosperity anticipates loss of income related to reduced debit and ATM card income. The combined company will be subject to the Durbin Act which imposes limits on debit and ATM card income. Previously, LegacyTexas was not subject to the Durbin Amendment. Such amounts are not presented as part of the pro forma adjustments.
7
Note 4. Preliminary Purchase Price Allocation
The following table summarizes the purchase price allocation to the estimated fair value of assets and liabilities assumed in the merger (in thousands, except per share data):
| Total merger shares issued at Oct. 31, 2019 closing price (i) |
26,228 | |||
| Per share purchase price—represents Oct. 31, 2019 closing price |
$ | 69.02 | ||
| Total shares issued @ five-day average price (employee stock) |
69 | |||
| Per share purchase price—Stock @ five-day average price (employee stock) (ii) |
$ | 72.90 | ||
|
|
|
|||
| Total purchase price—Stock |
$ | 1,815,327 | ||
| Total purchase price—Cash (i) |
$ | 312,958 | ||
|
|
|
|||
| Total purchase price |
$ | 2,128,285 | ||
|
|
|
| (i) | Under the terms of the merger agreement, holders of Legacy common stock, options and performance share awards received 0.5280 shares of Prosperity common stock and $6.28 cash for each share of Legacy common stock (or its equivalent), subject to certain conditions. |
| (ii) | Under the terms of the merger agreement, based upon the average Prosperity closing price for the five trading days immediately prior to October 31, 2019, which was $72.90. |
The merger consideration as shown in the table above is allocated to the tangible and intangible assets acquired and liabilities assumed of LegacyTexas based on their preliminary estimated fair values. As mentioned above in Note 1, Prosperity has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair market value of the LegacyTexas assets to be acquired or liabilities assumed, other than a preliminary estimate for intangible assets and held-to-maturity securities. Accordingly, apart from the aforementioned, certain assets acquired and liabilities assumed are presented at their respective carrying amounts and should be treated as preliminary values. The fair value assessments are preliminary and are based upon available information and certain assumptions, which Prosperity believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the unaudited pro forma condensed combined financial statements.
8
The following table sets forth a preliminary allocation of the merger consideration to the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed of LegacyTexas using LegacyTexas’ unaudited consolidated balance sheet as of June 30, 2019:
| Total merger consideration |
$ | 2,128,285 | ||||||
| Assets Acquired: |
||||||||
| Total cash and cash equivalents |
$ | 263,843 | ||||||
| Available for sale securities, at fair value |
459,749 | |||||||
| Held to maturity securities, at fair value |
128,075 | |||||||
| Loans held for sale |
46,571 | |||||||
| Loans held for investment |
8,459,510 | |||||||
| Bank premises and equipment, net |
106,313 | |||||||
| Accrued interest receivable |
32,525 | |||||||
| Core deposit intangibles |
102,600 | |||||||
| Other real estate owned |
584 | |||||||
| Bank Owned Life Insurance (BOLI), net |
59,724 | |||||||
| Other assets |
117,746 | |||||||
|
|
|
|||||||
| Total Assets Acquired |
$ | 9,777,240 | ||||||
| Liabilities Assumed: |
||||||||
| Deposits |
$ | 7,055,790 | ||||||
| Other borrowings |
1,384,765 | |||||||
| Securities sold under repurchase agreements |
52,414 | |||||||
| Other liabilities |
165,063 | |||||||
| Subordinated debentures |
135,257 | |||||||
|
|
|
|||||||
| Total Liabilities Assumed |
$ | 8,793,289 | ||||||
|
|
|
|||||||
| Net Assets Acquired |
$ | 983,951 | ||||||
|
|
|
|||||||
| Preliminary pro forma goodwill |
$ | 1,144,334 | ||||||
|
|
|
Note 5. Pro forma Adjustments and Assumptions
The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current assumptions and valuations, which are subject to change.
(a) This adjustment represents the cash consideration for LegacyTexas and estimated direct transaction costs calculated as follows:
| Total cash consideration ($6.28/share) |
$ | 312,958 | ||
|
|
|
|||
| Estimated cash paid for direct transaction costs (pre-tax) |
$ | 40,417 | ||
|
|
|
|||
| Pro forma net adjustment to cash and due from bank |
$ | 353,375 | ||
|
|
|
(b) Estimated fair market value adjustment on securities held to maturity.
(c) Adjustment to total loans of $175 million to reflect preliminary estimated fair value adjustments to acquired loans of $175 million for credit quality. Also, adjustment to eliminate historical allowance for loan losses of $92.2 million to reflect acquired loans and leases at fair value.
(d) Adjustment to reflect the reclassification of LegacyTexas’ right-of-use asset from bank premises to other assets to conform with Prosperity’s financial statement presentation.
(e) Adjustment to goodwill based on the preliminary purchase price allocation as follows:
| Fair value of merger consideration transferred in excess of the preliminary fair value of net assets acquired (from Note 4 above) |
$ | 1,144,334 | ||
| Removal of LegacyTexas’ historical goodwill |
(178,559 | ) | ||
|
|
|
|||
| Pro forma net adjustment to goodwill |
$ | 965,775 | ||
|
|
|
9
(f) Adjustment to core deposit intangible (“CDI”) based on the preliminary purchase price allocation as follows:
| Estimated CDI (2% of non-time deposits) |
$ | 102,600 | ||
| Removal of LegacyTexas’ historical CDI |
(193 | ) | ||
|
|
|
|||
| Pro forma net adjustment to CDI |
$ | 102,407 | ||
|
|
|
(g) Adjustment to Prosperity and LegacyTexas shareholders’ equity based upon the following:
| Fair value of equity consideration issued to LegacyTexas stockholders (from Note 4 above) |
$ | 1,815,327 | ||
| Removal of LegacyTexas’ historical shareholders’ equity |
(1,142,645 | ) | ||
| Estimated cash paid for direct transaction costs [(pre-tax)] |
(40,417 | ) | ||
|
|
|
|||
| Pro forma net adjustment to shareholders’ equity |
$ | 632,265 | ||
|
|
|
(h) Adjustment to interest income for accretion on LegacyTexas’ previously acquired loans.
(i) Adjustment to interest expense for amortization on LegacyTexas’ previously acquired time deposits.
(j) Adjustment to reflect the reclassification of safe deposit box income from customer service fees to other noninterest income to conform with Prosperity’s financial statement presentation.
(k) Adjustment to reflect the reclassification of LegacyTexas’ gain/loss on sale of ORE from noninterest income to noninterest expense to conform with Prosperity’s financial statement presentation.
(l) Adjustment to reflect the reclassification of LegacyTexas’ equipment and depreciation expense (on FF&E and data processing equipment) from other noninterest expense to net occupancy and equipment expense to conform with Prosperity’s financial statement presentation.
(m) Estimated core deposit intangible at 2.0% of the acquired non-time deposits based upon 10 year life using straight line amortization method, net of LegacyTexas’ historical CDI.
(n) Adjustment to reflect the net federal income tax effect of the pro forma adjustments using Prosperity’s statutory tax rate of 21.0%.
10