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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2019

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

For the transition period from to

Commission file number 001-34737

LEGACYTEXAS FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Maryland		27-2176993	~~27-2176993~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)	~~(I.R.S. Employer Identification No.)~~
5851 Legacy Circle, Plano, Texas			75024
5851 Legacy Circle
(Address of Principal Executive Offices)			(Zip Code)
Plano,	Texas	75024
(Address of Principal Executive Offices)		(Zip Code)

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

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



Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share	LTXB	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has ~~submitted~~filed ~~electronically~~all ~~every~~reports ~~Interactive Data File~~ required to be ~~submitted~~filed ~~pursuant~~by ~~to Rule~~Section ~~405~~13 or 15(d) of ~~Regulation S-T~~the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ~~submit~~file such ~~files~~reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer x		Accelerated filer o
Large accelerated filer	☒		Accelerated filer	☐
Non-accelerated filer o		Smaller reporting company o
Non-accelerated filer	☐		Smaller reporting company	☐
Emerging growth company o
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. o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.				☐

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

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

Class: Common Stock Shares Outstanding as of ~~April~~July 22, 2019: 48,~~704~~836,~~070~~238

LEGACYTEXAS FINANCIAL GROUP, INC.

FORM 10-Q

~~March~~June 3130, 2019

INDEX

PART I -- FINANCIAL INFORMATION	3
Item 1. Financial Statements:	3
Consolidated Balance Sheets at March 31, 2019 (unaudited) and December 31, 2018	3
Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018	3
Consolidated Statements of Income (unaudited) for the three months ended March 31, 2019 and 2018	4
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2019 and 2018	4
Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2019 and 2018	5
Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2019 and 2018	5
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three months ended March 31, 2019 and 2018	6
Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the three and six months ended June 30, 2019 and 2018	6
Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018	7
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2019 and 2018	7
Condensed Notes to Unaudited Consolidated Interim Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	3435
Item 3. Quantitative and Qualitative Disclosures about Market Risk	4954
Item 4. Controls and Procedures	5257
PART II—OTHER INFORMATION	5358
Item 1. Legal Proceedings	5358
Item 1.A. Risk Factors	5358
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	5358
Item 3. Defaults Upon Senior Securities	5358
Item 4. Mine Safety Disclosures	5358
Item 5. Other Information	5358
Item 6. Exhibits	5459
SIGNATURE PAGE	5661

PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

	March 31, 2019			December 31, 2018
	June 30, 2019			December 31, 2018
ASSETS	(unaudited)
Cash and due from financial institutions	$	5556,~~472~~949		$	60,416
Short-term interest-bearing deposits in other financial institutions	~~219~~206,~~051~~894			208,777
Total cash and cash equivalents	~~274~~263,~~523~~843			269,193
Securities available for sale, at fair value	~~479~~459,~~426~~749			471,746
Securities held to maturity (fair value: March 31, 2019 — $135,460; December 31, 2018— $144,791)	135,276			146,046
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	1146,~~380~~571			23,193
Loans held for investment:
Loans held for investment (net of allowance for loan losses of $77,530 at March 31, 2019 and $67,428 at December 31, 2018)	6,878,019			6,733,692
Loans held for investment (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,~~096~~542,~~160~~684			960,404
Total loans held for investment	78,~~974~~542,~~179~~291			7,694,096
Federal Home Loan Bank (“FHLB”) stock and other restricted securities, at cost	5679,~~044~~195			56,226
Bank-owned life insurance	59,~~377~~724			59,036
Premises and equipment, net	~~107~~106,~~684~~313			73,073
Goodwill	178,559			178,559
Other assets	6971,~~624~~853			79,974
Total assets	$	9,~~346~~935,~~072~~934		$	9,051,142
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing demand	$	1,~~752~~847,~~694~~229		$	1,773,762
Interest-bearing demand	~~884~~855,~~494~~026			826,755
Savings and money market	2,~~492~~548,~~226~~966			2,455,787
Time	1,~~948~~804,~~011~~569			1,785,411
Total deposits	7,~~077~~055,~~425~~790			6,841,715
FHLB advances	~~820~~1,~~084~~384,765			825,409
Repurchase agreements	3752,~~277~~414			50,340
Subordinated debt	135,~~135~~257			135,012
Accrued expenses and other liabilities	~~155~~165,~~064~~063			104,299
Total liabilities	8,~~224~~793,~~985~~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 — March 31, 2019 and December 31, 2018	—			—
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; 48,704,070 shares issued — March 31, 2019 and 48,505,261 shares issued — December 31, 2018	487			485
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	~~625~~628,~~405~~730			619,983
Retained earnings	~~508~~523,~~887~~693			491,948
Accumulated other comprehensive income (loss), net	~~(2,433~~860		)	(6,658		)
Unearned Employee Stock Ownership Plan (ESOP) shares; 1,125,902 shares at March 31, 2019 and 1,139,140 shares at December 31, 2018	(11,259		)	(11,391		)
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,~~121~~142,~~087~~645			1,094,367
Total liabilities and shareholders’ equity	$	9,~~346~~935,~~072~~934		$	9,051,142
See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Interest and dividend income
Loans, including fees	$	~~100~~108,~~301~~154		$	9098,~~631~~570		$	208,455		$	189,201
Taxable securities	3,~~602~~460			23,~~911~~132			7,062			6,043
Nontaxable securities	~~343~~410			~~675~~641			753			1,316
Interest-bearing deposits in other financial institutions	1,~~277~~370			~~969~~1,097			2,647			2,066
FHLB and FRB stock and other	~~581~~683			~~480~~551			1,264			1,031
	106,104			95,666
	114,077			103,991			220,181			199,657
Interest expense
Deposits	1820,~~215~~444			1213,~~032~~732			38,659			25,764
FHLB advances	45,~~456~~794			24,~~680~~131			10,250			6,811
Repurchase agreements and other borrowings	2,~~269~~285			2,~~341~~199			4,554			4,540
	24,940			17,053
	28,523			20,062			53,463			37,115
Net interest income	8185,~~164~~554			7883,~~613~~929			166,718			162,542
Provision for credit losses	916,~~800~~100			1517,~~663~~478			25,900			33,141
Net interest income after provision for credit losses	7169,~~364~~454			6266,~~950~~451			140,818			129,401
Non-interest income
Service charges and other fees	79,~~255~~882			78,~~927~~844			17,137			16,771
Net gain on sale of mortgage loans held for sale	12,~~525~~879			1,~~809~~668			4,404			3,477
Bank-owned life insurance income	~~482~~489			~~447~~479			971			926
Net gain (loss) on securities transactions	6—			~~(128~~—		)	6			(128		)
Gain (loss) on sale and disposition of assets	~~(14~~18		)	~~2,213~~(153		)	4			2,060
Other	~~640~~(1,036		)	~~630~~14			(396		)	644
	9,894			12,898
	12,232			10,852			22,126			23,750
Non-interest expense
Salaries and employee benefits	26,~~871~~586			2724,~~076~~313			53,457			51,389
Advertising	903			888
Merger costs	2,362			—			2,362			—
Occupancy and equipment	3,899			3,860
Advertising	982			1,358			1,885			2,246
Outside professional services	1,285			1,250
Occupancy and equipment	3,950			3,980			7,849			7,840
Regulatory assessments	618			1,154
Outside professional services	1,674			1,382			2,959			2,632
Data processing	5,933			4,703
Regulatory assessments	831			731			1,449			1,885
Office operations	2,335			2,300
Data processing	5,739			5,145			11,672			9,848
Other	2,463			2,648
Office operations	2,568			2,224			4,903			4,524
	44,307			43,879
Other	2,834			3,058			5,297			5,706
Income before income tax expense	36,951			31,969
	47,526			42,191			91,833			86,070
Income tax expense	7,871			6,207
Income before income tax expense	34,160			35,112			71,111			67,081
Net income	$	29,080		$	25,762
Income tax expense	7,177			7,275			15,048			13,482
Earnings per share:
Net income	$	26,983		$	27,837		$	56,063		$	53,599
Basic	$	0.61		$	0.55
Earnings per share:
Diluted	$	0.61		$	0.54
Basic	$	0.57		$	0.59		$	1.18		$	1.14
Dividends declared per share	$	0.25		$	0.16
Diluted	$	0.56		$	0.58		$	1.17		$	1.12
See accompanying notes to consolidated financial statements.
Dividends declared per share	$	0.25		$	0.16		$	0.50		$	0.32
See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands)

	Three Months Ended						Six Months Ended
	March 31,
	June 30,						June 30,
	2019			2018			2019			2018
Net income	$	2926,~~080~~983		$	2527,~~762~~837		$	56,063		$	53,599
Change in unrealized gains (losses) on securities available for sale	54,~~353~~169			(41,~~845~~532		)	9,522			(6,377		)
Reclassification of amount realized through securities transactions	(6—		)	~~128~~—			(6		)	128
Tax effect	(~~1,122~~876		)	~~988~~322			(1,998		)	1,310
Reclassification of income tax effects of the Tax Cuts and Jobs Act (see Note 10 for more information)	—			(741		)
Reclassification of income tax effects of the Tax Cuts and Jobs Act	—			—			—			(741		)
Other comprehensive income (loss), net of tax	43,~~225~~293			(41,~~470~~210		)	7,518			(5,680		)
Comprehensive income	$	3330,~~305~~276		$	2126,~~292~~627		$	63,581		$	47,919
See accompanying notes to consolidated financial statements.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

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

	Common Stock		AdditionalPaid-InCapital		RetainedEarnings			AccumulatedOtherComprehensiveIncome (Loss), Net			UnearnedESOP Shares			TotalShareholders’Equity
For the three months ended March 31, 2019
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
For the three months ended March 31, 2018
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 (see Note 10 for more information)	—		—		741			—			—			741
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.

LEGACYTEXAS FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net income	$	2956,~~080~~063		$	2553,~~762~~599
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	925,~~800~~900			1533,~~663~~141
Depreciation and amortization	25,~~760~~678			13,~~738~~401
Deferred tax benefit	(47,~~614~~280		)	~~(460~~2,226		)
Premium amortization and accretion of securities, net	~~980~~1,912			1,~~031~~986
Accretion related to acquired loans	(~~255~~491		)	(~~513~~1,147		)
Net (gain) loss on securities transactions	(6		)	128
ESOP compensation expense	~~517~~1,037			~~578~~1,138
Share-based compensation expense	24,~~550~~565			23,~~055~~453
Excess tax benefit on vesting of stock awards	74140			~~528~~681
Net gain on loans held for sale	(14,~~525~~404		)	(13,~~809~~477		)
Loans originated or purchased for sale	(32108,~~172~~201		)	(49100,~~428~~470		)
Proceeds from sale of loans held for sale	4589,~~510~~227			3687,~~821~~106
FHLB stock dividends	(~~287~~588		)	(~~171~~391		)
Bank-owned life insurance income	(~~482~~971		)	(~~447~~926		)
(Gain) loss on sale and disposition of repossessed assets, premises and equipment	14(31		)	64190
Net change in deferred loan fees/costs	(~~421~~1,354		)	(12,~~250~~744		)
Net change in accrued interest receivable	(45,~~403~~421		)	~~274~~(1,093		)
Net change in other assets	1210,~~406~~972			(23,~~338~~246		)
Net change in other liabilities	1931,~~628~~516			1928,~~979~~904
Net cash provided by operating activities	7998,~~154~~263			48102,~~205~~459
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls	~~320~~343,~~617~~727			~~118~~1,~~661~~087,449
Purchases	(347,545		)	(~~136~~1,~~007~~121,303		)
Proceeds from sale of AFS securities	23,886			—
Held-to-maturity securities:
Maturities, prepayments and calls	1017,~~507~~751			1623,~~385~~236
Originations of Warehouse Purchase Program loans	(3,874,762		)	(4,972,238		)
Purchases	—			(5,388		)
Proceeds from pay-offs of Warehouse Purchase Program loans	3,739,006			5,273,244
Originations of Warehouse Purchase Program loans	(10,460,194		)	(10,980,262		)
Net change in loans held for investment, excluding Warehouse Purchase Program loans	(153,830		)	(97,968		)
Proceeds from pay-offs of Warehouse Purchase Program loans	9,877,914			11,009,979
Redemption of FHLB and Federal Reserve Bank stock and other	469			18,119
Net change in loans held for investment, excluding Warehouse Purchase Program loans	(290,389		)	(227,028		)
Purchases of premises and equipment	(728		)	(2,320		)
Purchase of FHLB and Federal Reserve Bank stock and other	(22,381		)	(880		)
Proceeds from sale of assets	886			356
Purchases of premises and equipment	(2,128		)	(4,454		)
Net cash provided by (used in) investing activities	(281,494		)	218,232
Proceeds from sale of assets	1,146			1,225
Net cash (used in) investing activities	(858,213		)	(217,426		)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)(Dollars in thousands)
	Three Months Ended March 31,
	Six Months Ended June 30,
	2019			2018
Cash flows from financing activities
Net change in deposits	~~235~~214,~~710~~075			~~186~~113,~~724~~665
Proceeds from FHLB advances	~~815~~1,380,000			~~390~~1,055,000
Repayments on FHLB advances	(820,~~325~~644		)	(~~828~~1,~~601~~032,222		)
Repayments of borrowings	(13,063		)	(8,066		)
Proceeds from (repayments of) borrowings	2,074			(43,346		)
Payment of dividends	(1224,~~141~~318		)	(715,~~708~~433		)
Activity in employee stock plans	23,~~489~~413			23,~~662~~758
Net cash provided by (used in) financing activities	207,670			(264,989		)
Net cash provided by financing activities	754,600			81,422
Net change in cash and cash equivalents	(5,~~330~~350		)	1(33,~~448~~545		)
Beginning cash and cash equivalents	269,193			293,456
Ending cash and cash equivalents	$	~~274~~263,~~523~~843		$	~~294~~259,~~904~~911
Supplemental noncash disclosures:
Transfers from loans to other real estate owned	$	286		$	~~122~~25
Leased assets obtained in exchange for new operating lease liabilities	$	36,503		$	—
See accompanying notes to consolidated financial statements.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 1 - Basis of Financial Statement Presentation

The accompanying 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~~unaudited ~~Consolidated~~consolidated ~~Interim~~interim ~~Financial~~financial ~~Statements~~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.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 2 - Revenue Recognition

Revenue recognized from contracts with customers, which is accounted for under Accounting Standards Codification (“ASC”) 606, is entirely included in the Company’s non-interest income. Interest income and certain types of non-interest income are not accounted for under ASC 606 as it is accounted for under other accounting standards. Significant revenue streams recognized by the Company from contracts with customers accounted for under ASC 606 for the three and six months ended ~~March~~June 3130, 2019 and 2018, are below:

		Three Months Ended March 31,
		Three Months Ended June 30,						Six Months Ended June 30,
		2019			2018			2019		2018
Card services income	(a)	$	3,~~012~~583		$	3,~~058~~295		$	6,595	$	6,353
Service charges on deposits	(b)	12,~~972~~058			1,~~773~~957			4,030		3,730
Title income	(c)	~~786~~1,562			1,~~057~~196			2,348		2,253
Losses on the sale of other real estate owned	(d)	(5		)	(40		)
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.

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

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

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

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

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

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

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 3 - Earnings Per Common Share

~~Basic~~Earnings ~~earnings~~ per common share is computed byusing ~~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~~more ~~awards~~fully ~~and~~described ~~options) were exercised or converted to common stock, or resulted~~ in the ~~issuance of common stock that then shared in the~~ Company’s ~~earnings.~~2018 ~~Diluted~~Form ~~earnings per common share is computed by dividing net income by the weighted~~10-~~average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested restricted stock awards~~K. The dilutive effect of the unexercised stock options and unvested restricted stock awards is calculated under the treasury stock method utilizing the average market value of the Company’s stock for the period. A reconciliation of the numerator and denominator of the basic and diluted earnings per common share computation for the three and six months ended ~~March~~June 3130, 2019 and 2018 is as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Basic earnings per share:
Numerator:
Net income	$	2926,~~080~~983		$	2527,~~762~~837		$	56,063		$	53,599
Distributed and undistributed earnings to participating securities	(~~125~~146		)	(7567		)	(273		)	(143		)
Income available to common shareholders	$	2826,~~955~~837		$	2527,~~687~~770		$	55,790		$	53,456
Denominator:
Weighted average common shares outstanding	48,~~585~~762,~~553~~922			48,~~197~~287,~~596~~755			48,674,727			48,242,925
Less: Average unallocated ESOP shares	(1,~~134~~121,~~580~~344		)	(1,~~187~~174,~~533~~297		)	(1,127,926		)	(1,180,879		)
Average unvested restricted stock awards	(~~204~~258,~~691~~264		)	(~~137~~113,~~730~~053		)	(231,625		)	(125,323		)
Average shares for basic earnings per share	47,~~246~~383,~~282~~314			4647,~~872~~000,~~333~~405			47,315,176			46,936,723
Basic earnings per common share	$	0.6157		$	0.5559		$	1.18		$	1.14
Diluted earnings per share:
Numerator:
Income available to common shareholders	$	2826,~~955~~837		$	2527,~~687~~770		$	55,790		$	53,456
Denominator:
Average shares for basic earnings per share	47,~~246~~383,~~282~~314			4647,~~872~~000,~~333~~405			47,315,176			46,936,723
Dilutive effect of share-based compensation plan	~~589~~540,~~411~~077			~~692~~617,~~254~~752			561,917			651,373
Average shares for diluted earnings per share	47,~~835~~923,~~693~~391			47,~~564~~618,~~587~~157			47,877,093			47,588,096
Diluted earnings per common share	$	0.6156		$	0.5458		$	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	~~469~~254,~~208~~171			~~184~~479,~~000~~531			348,630			553,390

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 4 - Securities

The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and the fair value of securities available for sale (“AFS”) were as follows:

March 31, 2019	Amortized Cost		Gross Unrealized Gains		GrossUnrealizedLosses		Fair Value
June 30, 2019	Amortized Cost		Gross Unrealized Gains		GrossUnrealizedLosses		Fair Value
Agency residential mortgage-backed securities 1	$	~~143~~135,~~072~~233	$	~~244~~344	$	~~2,134~~970	$	~~141~~134,~~182~~607
Agency commercial mortgage-backed securities 1	8,~~436~~187		—		8834		8,~~348~~153
Agency residential collateralized mortgage obligations 1	~~308~~292,~~655~~946		12,~~435~~387		~~2,649~~961		~~307~~294,~~441~~372
Municipal bonds	22,~~343~~294		~~166~~330		547		22,~~455~~617
Total securities	$	~~482~~458,~~506~~660	$	13,~~845~~061	$	41,~~925~~972	$	~~479~~459,~~426~~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:

March 31, 2019	Amortized Cost		Gross Unrealized Gains		GrossUnrealizedLosses		Fair Value
June 30, 2019	Amortized Cost		Gross Unrealized Gains		GrossUnrealizedLosses		Fair Value
Agency residential mortgage-backed securities 1	$	5047,~~791~~615	$	~~489~~613	$	~~595~~230	$	5047,~~685~~998
Agency commercial mortgage-backed securities 1	21,~~740~~612		~~177~~343		15—		21,~~902~~955
Agency residential collateralized mortgage obligations 1	1513,~~813~~890		4996		7631		1513,~~786~~955
Municipal bonds	4644,~~932~~719		~~305~~300		~~150~~63		4744,~~087~~956
Total securities	$	~~135~~127,~~276~~836	$	1,~~020~~352	$	~~836~~324	$	~~135~~128,~~460~~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.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The amortized cost (carrying amount) and fair value of ~~held~~HTM ~~to maturity~~ debt securities and the fair value of ~~available~~AFS ~~for sale~~ debt securities at ~~March~~June 3130, 2019 by contractual maturity are set forth in the table below. Securities with contractual payments not due at a single maturity date, including mortgage-backed securities and collateralized mortgage obligations, are shown separately. During the quarter ended March 31, 2019, the Company adopted Accounting Standards Update (“ASU”) 2017-08, Premium Amortization on Purchased Callable Debt, which required certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount was not impacted by this ASU. The adoption of this ASU did not have a significant impact on the Company’s financial statements and disclosures.

	HTM				AFS
	Amortized Cost		Fair Value		Fair Value
Due in one year or less	$	~~966~~967	$	~~973~~972	$	1,~~802~~800
Due after one to five years	1716,~~904~~619		1816,~~046~~725		7,~~093~~129
Due after five to ten years	2726,~~168~~241		2726,~~166~~343		11,~~360~~455
Due after ten years	~~894~~892		~~902~~916		2,~~200~~233
Agency residential mortgage-backed securities	5047,~~791~~615		5047,~~685~~998		~~141~~134,~~182~~607
Agency commercial mortgage-backed securities	21,~~740~~612		21,~~902~~955		8,~~348~~153
Agency residential collateralized mortgage obligations	1513,~~813~~890		1513,~~786~~955		~~307~~294,~~441~~372
Total	$	~~135~~127,~~276~~836	$	~~135~~128,~~460~~864	$	~~479~~459,~~426~~749

Securities with a carrying value of $~~217~~219,~~063~~119 and $211,198 at ~~March~~June 3130, 2019 and December 31, 2018, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

At ~~March~~June 3130, 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 ~~March~~June 3130, 2019 orand 2018 is shown below. All securities sold were classified as ~~available for sale~~AFS, and gains and losses are recorded using the specific-identification method.

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Proceeds	$	~~23,886~~—	$	—	$	23,886	$	—
Gross gains	~~161~~—		—		161		—
Gross losses	~~155~~—		—		155		—
Tax expense of securities gains/losses	1—		—		1		—

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Securities with unrealized losses at ~~March~~June 3130, 2019 and December 31, 2018, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:

AFS	Less than 12 Months				12 Months or More				Total
March 31, 2019	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2019	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Agency residential mortgage-backed securities 1	$	~~1,112~~—	$	6—	$	~~121~~100,~~158~~776	$	~~2,128~~970	$	~~122~~100,~~270~~776	$	~~2,134~~970
Agency commercial mortgage-backed securities 1	—		—		8,~~348~~152		8834		8,~~348~~152		8834
Agency residential collateralized mortgage obligations 1	515,~~456~~025		635		~~165~~104,~~800~~469		~~2,643~~926		~~171~~119,~~256~~494		~~2,649~~961
Municipal bonds	~~988~~1,033		71		81,~~734~~322		476		92,~~722~~355		547
Total temporarily impaired	$	716,~~556~~058	$	1936	$	~~304~~214,~~040~~719	$	41,~~906~~936	$	~~311~~230,~~596~~777	$	41,~~925~~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
March 31, 2019	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2019	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Agency residential mortgage-backed securities 1	$	—	$	—	$	2922,~~206~~801	$	~~595~~230	$	2922,~~206~~801	$	~~595~~230
Agency commercial mortgage-backed securities 1	—		—		11,960		15		11,960		15
Agency residential collateralized mortgage obligations 1	—		—		3,799		31		3,799		31
Agency residential collateralized mortgage obligations 1	—		—		7,088		76		7,088		76
Municipal bonds	1,435		9		8,696		54		10,131		63
Municipal bonds	—		—		15,581		150		15,581		150
Total temporarily impaired	$	1,435	$	9	$	35,296	$	315	$	36,731	$	324
Total temporarily impaired	$	—	$	—	$	63,835	$	836	$	63,835	$	836
December 31, 2018
Agency residential mortgage-backed securities 1	$	5,002	$	15	$	30,180	$	1,136	$	35,182	$	1,151
Agency commercial mortgage-backed securities 1	6,465		41		6,964		126		13,429		167
Agency residential collateralized mortgage obligations 1	3,994		11		6,213		113		10,207		124
Municipal bonds	7,131		17		20,244		452		27,375		469
Total temporarily impaired	$	22,592	$	84	$	63,601	$	1,827	$	86,193	$	1,911


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

Other-than-Temporary Impairment

In determining other-than-temporary impairment for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of ~~March~~June 3130, 2019, ~~243~~171 securities had unrealized losses, ~~238~~163 of which had been in an unrealized loss position for over 12 months ~~at March 31, 2019~~. The Company does not believe these unrealized losses are other-than-temporary and expects full collection of the carrying amount of these securities. At ~~March~~June 3130, 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.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 5 - Loans

Loans consist of the following.

	March 31, 2019			December 31, 2018
	June 30, 2019			December 31, 2018
Loans held for sale, at fair value	$	1146,~~380~~571		$	23,193
Loans held for investment:
Commercial real estate	$	3,~~122~~180,~~726~~582		$	3,026,754
Commercial and industrial	2,~~070~~102,~~715~~917			2,057,791
Construction and land	~~282~~288,~~463~~491			270,629
Consumer real estate	1,~~423~~460,~~095~~417			1,390,378
Other consumer	4547,~~732~~668			45,171
Gross loans held for investment, excluding Warehouse Purchase Program	67,~~944~~080,~~731~~075			6,790,723
Net of:
Deferred costs (fees) and discounts, net	1011,~~818~~751			10,397
Allowance for loan losses	(7792,~~530~~219		)	(67,428		)
Net loans held for investment, excluding Warehouse Purchase Program	6,~~878~~999,~~019~~607			6,733,692
Warehouse Purchase Program	1,~~096~~542,~~160~~684			960,404
Total loans held for investment	$	78,~~974~~542,~~179~~291		$	7,694,096

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

For the three months ended March 31, 2019	Commercial Real Estate		Commercial and Industrial			Construction and Land			Consumer Real Estate			Other Consumer			Total
Allowance for loan losses:
Beginning balance	$	20,045	$	36,398		$	3,910		$	5,843		$	1,232		$	67,428
Charge-offs	—		(92		)	—			(23		)	(244		)	(359		)
Recoveries	—		555			—			20			47			622
Provision expense (benefit)	1,480		7,860			(73		)	232			340			9,839
Ending balance	$	21,525	$	44,721		$	3,837		$	6,072		$	1,375		$	77,530
Allowance ending balance:
Individually evaluated for impairment	$	10	$	19,141		$	—		$	224		$	26		$	19,401
Collectively evaluated for impairment	21,515		25,580			3,837			5,848			1,349			58,129
Loans:
Individually evaluated for impairment	6,623		49,259			—			2,660			5			58,547
Collectively evaluated for impairment	3,115,879		2,021,358			282,463			1,419,744			45,553			6,884,997
PCI loans	224		98			—			691			174			1,187
Ending balance	$	3,122,726	$	2,070,715		$	282,463		$	1,423,095		$	45,732		$	6,944,731

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

For the three months ended March 31, 2018	Commercial Real Estate			Commercial and Industrial			Construction and Land			Consumer Real Estate		Other Consumer			Total
Allowance for loan losses:
Beginning balance	$	21,587		$	39,005		$	4,644		$	4,838	$	1,227		$	71,301
Charge-offs	(3		)	(12,236		)	—			—		(288		)	(12,527		)
Recoveries	—			22			—			11		66			99
Provision expense (benefit)	(46		)	15,973			(706		)	180		234			15,635
Ending balance	$	21,538		$	42,764		$	3,938		$	5,029	$	1,239		$	74,508
Allowance ending balance:
Individually evaluated for impairment	$	56		$	11,250		$	—		$	226	$	30		$	11,562
Collectively evaluated for impairment	21,482			31,514			3,938			4,803		1,209			62,946
Loans:
Individually evaluated for impairment	3,748			40,453			—			2,911		23			47,135
Collectively evaluated for impairment	3,047,695			1,926,847			252,213			1,248,769		43,080			6,518,604
PCI loans	2,307			143			—			753		181			3,384
Ending balance	$	3,053,750		$	1,967,443		$	252,213		$	1,252,433	$	43,284		$	6,569,123

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.

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.



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

The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations, inclusive of estimated loss emergence periods. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which are not yet reflected in the historical loss ratios, and that could impact the Company’s specific loan portfolios. The Allowance for Loan Loss Committee sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. The Allowance for Loan Loss Committee also considers credit quality and trends relating to delinquency, non-performing and adversely rated loans within the Company’s loan portfolio when evaluating qualitative loss factors. Additionally, the Allowance for Loan Loss Committee adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy and capitalization rates and other pertinent economic data specific to our primary market area and lending portfolios.

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

Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. As a result, the Company does

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

not separately identify consumer real estate loans less than $417 or individual consumer non-real estate secured loans for impairment disclosures. The Company considers these loans to be homogeneous in nature due to the smaller dollar amount and the similar underwriting criteria.



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

~~Changes~~The inallowance for loan losses and related provision expense are susceptible to change if the ~~allowance~~credit ~~for~~quality ~~off~~of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-~~balance~~offs ~~sheet~~and non-performing loan trends. Generally, consumer real estate lending has a lower credit ~~losses~~risk onprofile compared to other consumer lending~~-related~~ ~~commitments~~(such as automobile loans). Commercial real estate and ~~guarantees~~commercial onand ~~credit~~industrial ~~card~~lending, ~~debt~~however, ~~included~~can inhave ~~“accrued~~higher ~~expenses~~risk ~~and~~profiles ~~other~~than ~~liabilities”~~consumer onloans ~~the~~due ~~consolidated~~to ~~balance~~these ~~sheets,~~loans ~~are~~being ~~summarized~~larger in ~~the~~amount ~~following~~and ~~table~~non-homogeneous in structure and term. ~~Please~~Changes ~~see~~in ~~Note~~economic 11conditions, -the ~~Commitments~~mix and ~~Contingent~~size ~~Liabilities~~of the loan portfolio, and individual borrower conditions can dramatically impact our level of allowance for ~~more~~loan ~~information.~~losses in relatively short periods of time.

	Three Months Ended March 31,
	2019			2018
Beginning balance	$	729		$	929
Charge-offs on lending-related commitments	—			—
Provision (benefit) for credit losses on lending-related commitments	(39		)	28
Ending balance	$	690		$	957

~~Impaired~~For ~~loans~~the atspecific ~~March 31~~component, ~~2019~~the allowance for loan losses includes loans where management has concerns about the borrower’s ability to repay and ~~December 31~~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, ~~2018~~according to the contractual terms of the loan agreement, ~~were~~is asin ~~follows1:~~doubt. If an impaired loan is collateral-dependent,

March 31, 2019	UnpaidContractual PrincipalBalance		RecordedInvestment With No Allowance		RecordedInvestment With Allowance		Total Recorded Investment		RelatedAllowance
Commercial real estate	$	6,641	$	6,623	$	—	$	6,623	$	—
Commercial and industrial	49,779		1,569		47,690		49,259		19,141
Consumer real estate	3,155		2,656		4		2,660		4
Other consumer	20		—		5		5		4
Total	$	59,595	$	10,848	$	47,699	$	58,547	$	19,149
December 31, 2018
Commercial real estate	$	177	$	159	$	—	$	159	$	—
Commercial and industrial	17,124		1,844		14,864		16,708		4,109
Consumer real estate	2,865		2,370		5		2,375		4
Other consumer	35		—		3		3		3
Total	$	20,201	$	4,373	$	14,872	$	19,245	$	4,116

1 No Warehouse Purchase Program loans were impaired at March 31, 2019 or December 31, 2018. Loans reported do not include PCI loans.

Income on impaired loans for the three months ended March 31, 2019 and 2018, was as follows1:

	Three Months Ended March 31,
	2019				2018
	AverageRecordedInvestment		InterestIncomeRecognized		AverageRecordedInvestment		InterestIncomeRecognized
Commercial real estate	$	1,774	$	2	$	3,879	$	2
Commercial and industrial	24,552		—		63,294		—
Consumer real estate	2,515		10		2,952		8
Other consumer	4		—		29		1
Total	$	28,845	$	12	$	70,154	$	11

1 Loans reported do not include PCI loans.

Past due status is based on the contractual terms of the loan. Loans that are past due 30 days are considered delinquent. Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

~~collection~~the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. ~~Non~~If an impaired loan is not collateral-~~mortgage~~dependent, ~~consumer~~estimated ~~loans~~discounted ~~are~~cash ~~typically~~flows ~~charged~~are ~~off~~used noto ~~later~~determine ~~than~~the ~~120~~amount ~~days~~of ~~past~~impairment, ~~due~~if any. InFor ~~all~~impaired ~~cases~~loans, ~~loans~~the ~~are~~amount ~~placed~~of the impairment can be adjusted, based on ~~nonaccrual~~current ~~status~~data, oruntil ~~charged-off~~such attime anas ~~earlier~~the ~~date~~actual ifbasis ~~collection~~is established by acquisition of ~~principal~~the collateral or ~~interest~~until isthe ~~considered~~basis ~~doubtful~~is collected. ~~Nonaccrual~~Impairment ~~loans~~losses ~~include~~are ~~both~~reflected ~~smaller~~in ~~balance~~the ~~homogeneous~~allowance ~~loans~~for ~~that~~loan losses through a charge to the provision for credit losses. Subsequent recoveries are ~~collectively~~credited ~~evaluated~~to the allowance for ~~impairment~~loan losses. Cash receipts for accruing loans are applied to principal and ~~larger~~interest ~~individually~~under ~~classified~~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.

~~All~~Large ~~interest~~groups ~~accrued~~of ~~but~~smaller-balance ~~not~~homogeneous ~~received for~~ loans ~~placed~~are oncollectively ~~nonaccrual~~evaluated ~~status~~for isimpairment. ~~reversed~~As ~~against~~a ~~interest~~result, ~~income. Subsequent~~the ~~receipts~~Company ondoes ~~non-accrual~~not ~~loans~~separately ~~are~~identify ~~recorded~~consumer asreal aestate ~~reduction~~loans ofless ~~principal,~~than ~~and~~$417 ~~interest~~or ~~income~~individual isconsumer ~~recorded~~non-real ~~only~~estate ~~after~~secured ~~principal~~loans ~~recovery~~for isimpairment ~~reasonably assured~~disclosures. ~~Loans~~The ~~are~~Company ~~returned~~considers tothese ~~accrual~~loans ~~status~~to ~~when~~be ~~all~~homogeneous ~~the~~in ~~principal~~nature ~~and~~due ~~interest~~to ~~amounts~~the ~~contractually~~smaller ~~due~~dollar ~~are~~amount ~~brought current~~ and ~~future~~the ~~payments~~similar ~~are~~underwriting ~~reasonably assured~~criteria.

NoChanges ~~loans~~in ~~past~~the ~~due~~allowance ~~over~~for 90off-balance ~~days~~sheet ~~were~~credit ~~still~~losses ~~accruing~~on ~~interest~~lending-related atcommitments ~~March 31,~~and ~~2019. Loans~~guarantees ~~past~~on ~~due~~credit ~~over~~card 90debt, ~~days~~included ~~that~~in ~~were~~“accrued ~~still~~expenses ~~accruing~~and ~~interest~~other atliabilities” ~~December 31,~~on ~~2018~~the ~~totaled~~consolidated ~~$58,~~balance ~~which consisted entirely of PCI loans. At March 31~~sheets, ~~2019,~~are nosummarized ~~PCI~~in ~~loans~~the ~~were~~following ~~considered non-performing loans~~table. NoPlease ~~Warehouse~~see ~~Purchase~~Note ~~Program~~11 ~~loans were non~~-~~performing~~ atCommitments ~~March 31,~~and ~~2019~~Contingent orLiabilities ~~December 31,~~for ~~2018~~more information. ~~Non-performing~~ ~~(nonaccrual) loans were as follows:~~

	March 31, 2019			December 31, 2018
	Three Months Ended June 30,						Six Months Ended June 30,
Commercial real estate	$	6,623		$	159
	2019			2018			2019			2018
Commercial and industrial	49,261			16,710
Beginning balance	$	690		$	957		$	729		$	929
Consumer real estate	5,123			5,506
Charge-offs on lending-related commitments	—			—			—			—
Other consumer	21			46
Provision (benefit) for credit losses on lending-related commitments	(23		)	(122		)	(62		)	(94		)
Total	$	61,028		$	22,421
Ending balance	$	667		$	835		$	667		$	835

AImpaired ~~loan~~loans ~~that~~at ~~has~~June 30, ~~been~~2019 ~~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)December 31, ~~forgiveness of accrued interest~~2018, ~~forgiveness~~were ofas 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.follows1:

The outstanding balances of TDRs are shown below:



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

	March 31, 2019		December 31, 2018
Nonaccrual TDRs(1)	$	8,479	$	1,160
Performing TDRs (2)	857		926
Total	$	9,336	$	2,086
Outstanding commitments to lend additional funds to borrowers with TDR loans	—		—


¹	No Warehouse Purchase Program loans were impaired at June 30, 2019 or December 31, 2018. Loans reported do not include PCI 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.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

~~The~~Income ~~following~~on ~~tables~~impaired ~~provide the recorded balances of~~ loans ~~modified~~for ~~as a TDR during~~ the three and six months ended ~~March~~June 3130, 2019 and 2018., was as follows1:

Three Months Ended March 31, 2019	Principal Deferrals
	Three Months Ended June 30,
Commercial and industrial	$	7,401
	2019				2018
Other consumer	3
	AverageRecordedInvestment		InterestIncomeRecognized		AverageRecordedInvestment		InterestIncomeRecognized
Total	$	7,404
Commercial real estate	$	7,057	$	2	$	6,025	$	2
Three Months Ended March 31, 2018
Commercial and industrial	48,921		—		32,942		—
Commercial and industrial	$	83
Construction and land	114		—		—		—
Total	$	83
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

No1 ~~loans~~Loans ~~modified~~reported asdo anot ~~TDR~~include ~~during~~PCI ~~the three months ended March 31, 2019 or 2018, experienced a subsequent payment default in the preceding twelve months~~loans. ~~A payment default is defined as a loan that was 90 days or more past due.~~

~~Loans~~Past ~~acquired~~due ~~with~~status ~~evidence~~is based on the contractual terms of ~~credit~~the ~~quality~~loan. Loans ~~deterioration~~that atare ~~acquisition,~~past ~~for~~due ~~which~~30 itdays ~~was~~are ~~probable~~considered ~~that~~delinquent. Interest income on loans is discontinued at the ~~Company~~time ~~would~~the ~~not~~loan beis ~~able~~90 todays ~~collect~~delinquent ~~all~~unless ~~contractual~~the ~~amounts~~loan ~~due,~~is ~~were~~well-secured ~~accounted~~and ~~for~~in asprocess ~~PCI~~of ~~loans~~collection. ~~The~~Non-mortgage ~~carrying~~consumer ~~amount~~loans ofare ~~PCI~~typically ~~loans~~charged ~~included~~off inno ~~the~~later ~~consolidated~~than ~~balance~~120 ~~sheets~~days ~~and~~past ~~the~~due. In ~~related~~all ~~outstanding~~cases, ~~balances~~loans are placed on nonaccrual status or charged-off at ~~March 31,~~an ~~2019~~earlier ~~and~~date ~~December 31,~~if ~~2018~~collection ~~are~~of ~~set~~principal ~~forth~~or ininterest ~~the~~is ~~table~~considered ~~below~~doubtful. ~~The~~Nonaccrual ~~outstanding~~loans ~~balance~~include ~~represents~~both ~~the~~smaller ~~total~~balance ~~amount~~homogeneous ~~owed,~~loans ~~including~~that ~~accrued~~are ~~but~~collectively ~~unpaid~~evaluated ~~interest,~~for impairment and ~~any~~larger ~~amounts~~individually ~~previously~~classified ~~charged~~impaired ~~off~~loans.

	March 31, 2019		December 31, 2018
Carrying amount 1	$	935	$	939
Outstanding balance	1,129		1,170

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.

1No ~~The~~loans ~~carrying~~past ~~amounts~~due ~~are~~over ~~reported~~90 ~~net~~days ofwere ~~allowance~~still ~~for~~accruing ~~loan~~interest ~~losses~~at ofJune 30, ~~$252~~2019. Loans ~~and~~past due over 90 days that were still accruing interest at December 31, 2018 totaled $~~250~~58, aswhich consisted entirely of ~~March~~PCI 31loans. At June 30, 2019, ~~and~~no ~~December~~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:

Changes in the accretable yield for PCI loans for the three months ended March 31, 2019 and 2018 are 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

	Three Months Ended March 31,
	2019			2018
Beginning balance	$	624		$	2,279
Reclassifications from nonaccretable	35			51
Disposals	—			(64		)
Accretion	(50		)	(99		)
Balance at end of period	$	609		$	2,167

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),

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

~~Below~~forgiveness isof anaccrued ~~analysis~~interest, forgiveness of ~~the~~a ~~age~~portion of ~~recorded~~principal, ~~investment~~an extended repayment period or a deed in ~~loans~~lieu ~~that~~of ~~were~~foreclosure ~~past~~or ~~due~~other attransfer ~~March 31,~~of ~~2019~~assets ~~and~~other ~~December 31,~~than ~~2018~~cash to fully or partially satisfy a debt. NoThe ~~Warehouse~~Company’s ~~Purchase~~policy ~~Program~~is ~~loans~~to ~~were~~place ~~delinquent~~all atTDRs ~~March 31,~~on ~~2019~~nonaccrual orfor ~~December 31,~~a ~~2018~~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 ~~therefore~~the ~~are~~collection ~~not~~of ~~included~~principal inand interest under the ~~following~~revised ~~tables~~terms is deemed probable. All TDRs are considered to be impaired loans.

March 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater Past Due		Total Loans Past Due		Current Loans 1		Total Loans
Commercial real estate	$	11,667	$	484	$	—	$	12,151	$	3,110,575	$	3,122,726
Commercial and industrial	10,344		86		37		10,467		2,060,248		2,070,715
Construction and land	558		—		—		558		281,905		282,463
Consumer real estate	25,784		724		802		27,310		1,395,785		1,423,095
Other consumer	295		138		—		433		45,299		45,732
Total	$	48,648	$	1,432	$	839	$	50,919	$	6,893,812	$	6,944,731
December 31, 2018
Commercial real estate	$	6	$	—	$	—	$	6	$	3,026,748	$	3,026,754
Commercial and industrial	289		—		217		506		2,057,285		2,057,791
Construction and land	557		—		—		557		270,072		270,629
Consumer real estate	18,885		4,241		1,632		24,758		1,365,620		1,390,378
Other consumer	271		15		29		315		44,856		45,171
Total	$	20,008	$	4,256	$	1,878	$	26,142	$	6,764,581	$	6,790,723

The outstanding balances of TDRs as of June 30, 2019 and December 31, 2018 are shown below:

1 Includes acquired PCI loans with a total carrying value of $1,130 and $1,120 at March 31, 2019 and December 31, 2018, respectively.



	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.

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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.

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

The recorded investment in loans by credit quality indicators at ~~March~~June 3130, 2019 and December 31, 2018, was as follows:

Real Estate and Commercial and Industrial Credit Exposure

Credit Risk Profile by Internally Assigned Grade

March 31, 2019	Commercial Real Estate		Commercial and Industrial		Construction and Land		Consumer Real Estate
June 30, 2019	Commercial Real Estate		Commercial and Industrial		Construction and Land		Consumer Real Estate
Grade: 1
Pass	$	3,~~094~~153,~~100~~794	$	1,~~917~~928,~~294~~987	$	~~282~~288,~~463~~263	$	1,~~414~~449,~~122~~095
Special Mention	2018,~~561~~074		5753,~~065~~919		—		2,~~714~~668
Substandard	8,~~065~~714		96120,~~354~~010		—228		58,~~927~~333
Doubtful	—		21		—		~~332~~321
Total	$	3,~~122~~180,~~726~~582	$	2,~~070~~102,~~715~~917	$	~~282~~288,~~463~~491	$	1,~~423~~460,~~095~~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 ~~March~~June 3130, 2019 and December 31, 2018.

Other Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
Performing	$	4547,~~711~~644	$	45,125
Non-performing	2124		46
Total	$	4547,~~732~~668	$	45,171

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 6 - Fair Value

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

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

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

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

Assets and Liabilities Measured on a Recurring Basis

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

	Fair Value Measurements Using Level 2
	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
Assets:
Agency residential mortgage-backed securities	$	~~141~~134,~~182~~607	$	149,871
Agency commercial mortgage-backed securities	8,~~348~~153		8,920
Agency residential collateralized mortgage obligations	~~307~~294,~~441~~372		280,639
US government and agency securities	—		1,543
Municipal bonds	22,~~455~~617		30,773
Total securities available for sale	$	~~479~~459,~~426~~749	$	471,746
Loans held for sale 1	$	1146,~~380~~571	$	23,193
Derivative financial instruments:
Interest rate lock commitments	~~699~~968		459
Forward mortgage-backed securities trades	519		—
Loan customer counterparty	14,~~704~~658		578
Financial institution counterparty	~~536~~146		1,118
Liabilities:
Derivative financial instruments:
Interest rate lock commitments	—		—
Forward mortgage-backed securities trades	~~231~~154		163
Loan customer counterparty	~~536~~146		1,118
Financial institution counterparty	14,~~704~~658		578

1 At ~~March~~June 3130, 2019 and December 31, 2018, loans held for sale had an aggregate outstanding principal balance of $1044,~~975~~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 ~~March~~June 3130, 2019 or December 31, 2018.

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

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

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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 ~~March~~June 3130, 2019 or December 31, 2018.

	Fair Value Measurements Using Level 3
	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
Assets:
Impaired loans	$	2822,~~550~~997	$	10,756
Foreclosed assets:
Consumer real estate	~~176~~—		720
Other	~~606~~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 ~~March~~June 3130, 2019, the Company had $~~852~~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~~

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

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 ~~March~~June 3130, 2019 and at December 31, 2018, were as follows:

			Fair Value Measurement Using
March 31, 2019	CarryingAmount		Level 1		Level 2		Level 3
June 30, 2019	CarryingAmount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	~~274~~263,~~523~~843	$	~~274~~263,~~523~~843	$	—	$	—
Securities held to maturity	~~135~~127,~~276~~836		—		~~135~~128,~~460~~864		—
Loans held for investment, net	6,~~878~~999,~~019~~607		—		—		6,~~807~~959,~~813~~130
Loans held for investment - Warehouse Purchase Program	1,~~096~~542,~~160~~684		—		—		1,~~096~~542,~~160~~684
FHLB and other restricted securities, at cost	5679,~~044~~195		—		5679,~~044~~195		—
Accrued interest receivable	3132,~~507~~525		3132,~~507~~525		—		—
Financial liabilities
Deposits	$	7,~~077~~055,~~425~~790	$	—	$	—	$	7,~~074~~059,~~649~~481
FHLB advances	~~820~~1,~~084~~384,765		—		—		~~820~~1,~~161~~384,902
Repurchase agreements	3752,~~277~~414		—		—		3347,~~008~~117
Subordinated debt	135,~~135~~257		—		—		~~137~~136,~~360~~767
Accrued interest payable	64,~~235~~848		64,~~235~~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.

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 7 - Derivative Financial Instruments

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at ~~March~~June 3130, 2019 and December 31, 2018.

	March 31, 2019						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	$	1931,~~674~~993	$	~~699~~968	$	—	$	12,287	$	459	$	—
Forward mortgage-backed securities trades	2857,~~633~~500		519		~~231~~154		24,133		—		163
Commercial loan interest rate swaps and caps:
Loan customer counterparty	$	~~112~~161,~~004~~512	$	14,~~704~~658	$	~~536~~146	$	64,130	$	578	$	1,118
Financial institution counterparty	~~112~~161,~~004~~512		~~536~~146		14,~~704~~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 ~~March~~June 3130, 2019 and December 31, 2018 are presented in the following table.

	Weighted-Average Interest Rate
	March 31, 2019				December 31, 2018
	June 30, 2019				December 31, 2018
	Received		Paid		Received		Paid
Loan customer counterparty	4.0908	%	4.3431	%	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 $14,~~704~~658 at ~~March~~June 3130, 2019 and $578 at December 31, 2018. This credit exposure is partly mitigated as transactions with customers are generally secured by the collateral, if any, securing the underlying transaction being hedged. Our credit exposure, net of collateral pledged, relating to interest rate swaps with upstream financial institution counter-parties was approximately $~~546~~150 at ~~March~~June 3130, 2019. A credit support annex is in place and allows the ~~bank~~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 $36,~~880~~500 at ~~March~~June 3130, 2019 and $2,480 at December 31, 2018, is in excess of our credit exposure.

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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 ~~March~~June 3130, 2019 and 2018 was as follows:

Derivatives not designated as hedging instruments	Three Months Ended ~~March~~June 3130,						Six Months Ended June 30,
	2019			2018			2019			2018
IRLCs	$	~~240~~269		$	87(10	)	$	509		$	77
Forward mortgage-backed securities trades	(~~337~~543		)	~~399~~52			(880		)	451

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 8 - Share-based Compensation

Compensation cost charged to income for share-based compensation, which is reported in non-interest expense as salaries and employee benefits, is presented below.

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Restricted stock	$	1,~~879~~291	$	~~1,064~~578	$	3,170	$	1,642
Stock options	~~671~~724		~~991~~820		1,395		1,811
Income tax benefit	~~536~~423		~~432~~293		959		725

A summary of activity in the Company’s active share-based compensation plans (“Plans”) for the ~~three~~six months ended ~~March~~June 3130, 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-AverageExercise Priceper Share
Beginning balance	191,803		$	38.90	78,958			$	32.09	1,832,887		$	26.97
Granted	43135,~~900~~985		4240.3946		28,600		3	3740.3971		—		—
Additional performance-based shares issued at vesting	—		—		20,100		4	35.13		—		—
Vested/exercised	(17,949	)	42.40		(60,300	)		35.13		(95133,~~619~~992	)	2625.0347
Forfeited/expired	(12,~~010~~300	)	4342.8974		—			—		(3036,917	)	3132.8401
Ending balance	~~216~~307,~~744~~539		$	39.3036	67,358			$	3740.3971	1,~~706~~661,~~351~~978		$	26.9397


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~~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 ~~shares~~actual ~~may~~number beof shares awarded atmay be up to 200% of ~~their~~ target amount, with an additional 20% increase or decrease in the total share award at vesting depending on the Company’s Total Shareholder Return percentage for the determined period.

4 Performance-based restricted stock awards that achieved the maximum performance goals and vested at 150% based on Company return on average assets and return on average equity relative to a specified peer group of financial institutions over a three-year performance period that commenced in January 2016 and ended in December 2018. The 20,100 shares ~~represents~~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 ~~March~~June 3130, 2019, related to the Plans is presented below.

	Unrecognized Compensation Expense		Weighted-Average Period of Expense
Non-vested restricted shares	$	710,~~564~~143	1.89
Non-vested stock options	$	21,~~624~~855	1.0.6

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 9 - Leases

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

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

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

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

Supplemental lease information at or for the ~~three~~six months ended ~~March~~June 3130, 2019 is as follows:

Balance sheet:
Operating lease asset classified as premises and equipment	$	3534,~~480~~441
Operating lease liability classified as other liabilities	3938,~~170~~099
Income statement:
Operating lease cost classified as occupancy and equipment expense	$	12,~~488~~981
Weighted average lease term, in years	9.5236
Weighted average discount rate1	4.8788		%
Operating cash flows	$	13,~~500~~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 ~~March~~June 3130, 2019 was as follows:

	Balance
April 1, 2019 to March 31, 2020	$	6,113
July 1, 2019 to June 30, 2020	$	6,026
April 1, 2020 to March 31, 2021	5,752
July 1, 2020 to June 30, 2021	5,749
April 1, 2021 to March 31, 2022	5,561
July 1, 2021 to June 30, 2022	5,392
April 1, 2022 to March 31, 2023	4,989
July 1, 2022 to June 30, 2023	4,949
April 1, 2023 to March 31, 2024	4,832
July 1, 2023 to June 30, 2024	4,740
Thereafter	2221,~~197~~062
Total lease payments	4947,~~444~~918
Less: Interest	(109,~~274~~819		)
Present value of lease liabilities	$	3938,~~170~~099

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CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 10 - Income Taxes

A summary of the net deferred tax liabilities as of ~~March~~June 3130, 2019 and December 31, 2018, is presented below:

	March 31, 2019			December 31, 2018
	June 30, 2019			December 31, 2018
Net deferred tax liabilities	$	64,~~278~~488		$	9,769
Estimated annual effective tax rate	21		%

The Tax Cuts and Jobs Act (the “Act”,) which was enacted on December 22, 2017, made key changes to the U.S. tax law, including the reduction of the U.S. federal corporate tax rate from 35% to 21%. During the three months ended March 31, 2018, the Company elected early adoption of the provisions of ASU 2018-02, which allowed the Company to reclassify the income tax effects of the Act on items within accumulated other comprehensive income to retained earnings. This reclassification, which reduced other comprehensive income and increased retained earnings by $741, related entirely to unrealized gains and losses on available for sale securities.

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LEGACYTEXAS FINANCIAL GROUP, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

Note 11 - Commitments and Contingent Liabilities

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

The contractual amounts of financial instruments with off‑balance sheet risk at ~~March~~June 3130, 2019 and December 31, 2018, are summarized below. Please see Part I-Item 2-“Off-Balance Sheet Arrangements, Contractual Obligations and Commitments” of this Form 10-Q for information related to commitment maturities.

	March 31, 2019		December 31, 2018
	June 30, 2019		December 31, 2018
Unused commitments to extend credit	$	1,~~797~~785,~~838~~281	$	1,850,351
Unused capacity on Warehouse Purchase Program loans	~~741~~620,~~340~~316		967,096
Standby letters of credit	8061,~~906~~853		46,383
Total unused commitments/capacity	$	2,~~620~~467,~~084~~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 ~~March~~June 3130, 2019 and December 31, 2018, these credit card guarantees totaled $2,~~073~~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 ~~March~~June 3130, 2019 and December 31, 2018, this allowance for credit losses on off-balance sheet lending-related commitments and guarantees on credit card debt, included in “other liabilities” on the Company’s consolidated balance sheets, totaled $~~690~~667 and $729, respectively.

In addition to the commitments above, the Company had overdraft protection available in the amounts of $83,~~947~~507 and $84,504 at ~~March~~June 3130, 2019 and December 31, 2018, respectively.

The Company, at ~~March~~June 3130, 2019 and December 31, 2018, had FHLB letters of credit of $~~941~~889,~~860~~480 and $932,200, respectively, pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

At ~~March~~June 3130, 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.

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(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.

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(Dollars in thousands, except per share data)

Note 13 — Subsequent Events

The Company evaluated events from the date of the consolidated financial statements on ~~March~~June 3130, 2019 through the issuance of those consolidated financial statements included in this Quarterly Report on Form 10-Q dated ~~April~~July 2324, 2019. No additional events were identified requiring recognition in and/or disclosures in the consolidated financial statements.

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

Special Note Regarding Forward-Looking Statements

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

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: the expected cost savings, synergies and other financial benefits from ~~acquisition~~our orproposed ~~disposition~~merger ~~transactions~~with Prosperity Bancshares, Inc. (“Prosperity”) might not be realized within the expected time frames or at all and costs or difficulties relating to integration matters might be greater than expected; ~~changes~~the inrequisite ~~economic~~shareholder ~~conditions;~~and ~~fluctuations~~regulatory inapprovals ~~interest rates; the risks of lending~~ and ~~investing~~other ~~activities,~~closing ~~including~~conditions ~~changes~~for in the ~~level~~proposed ~~and~~merger ~~direction~~ of ~~loan~~the ~~delinquencies~~Company and ~~write-offs~~Prosperity ~~and~~may ~~changes~~be indelayed ~~estimates~~or ofmay ~~the~~not ~~adequacy~~be ofobtained or the ~~allowance~~merger ~~for~~agreement ~~loan~~may ~~losses~~be terminated; ~~our~~business ~~ability~~disruption tomay ~~access~~occur ~~cost-effective~~following ~~funding;~~or ~~fluctuations~~ in ~~real~~connection ~~estate~~with ~~values~~the ~~and~~proposed ~~both~~merger ~~residential~~of ~~and~~the ~~commercial~~Company ~~real estate market conditions; demand for loans~~ and ~~deposits in our market area~~Prosperity; ~~fluctuations in~~ the ~~price~~Company's ofbusinesses ~~oil,~~may ~~natural~~experience ~~gas~~disruptions ~~and~~due ~~other~~to ~~commodities;~~transaction-related ~~competition;~~uncertainty ~~changes~~or inother ~~management’s~~factors ~~business~~making ~~strategies;~~it ~~our~~more ~~ability~~difficult to ~~successfully~~maintain ~~integrate~~relationships ~~any~~with ~~assets~~employees, ~~liabilities,~~ customers, ~~systems~~other ~~and~~business ~~management~~partners ~~personnel we have acquired~~ or ~~may~~governmental ~~acquire~~entities; ~~into~~the ~~our~~diversion ~~operations~~of ~~and~~managements' ~~our~~attention ~~ability~~from toongoing ~~realize~~business ~~related~~operations ~~revenue~~and ~~synergies~~opportunities ~~and~~as ~~cost~~a ~~savings~~result ~~within~~of ~~expected~~the ~~time~~proposed ~~frames~~merger ~~and~~or ~~any~~otherwise; ~~goodwill~~changes ~~charges~~in ~~related~~economic ~~thereto~~conditions; ~~results~~legislative ofchanges; ~~examinations~~changes ofin uspolicies by ~~the~~regulatory ~~Board~~agencies; offluctuations ~~Governors~~in ofinterest ~~the~~rates; ~~Federal Reserve System (“FRB”) and our bank subsidiary by~~ the ~~Texas~~risks ~~Department~~ of ~~Banking~~lending ~~(“TDOB”)~~and orinvesting ~~other regulatory authorities~~activities, including ~~the~~changes ~~possibility~~in ~~that~~the ~~any~~level ~~such~~and ~~regulatory~~direction ~~authority~~of ~~may, among other things, require us to increase our reserve for~~ loan ~~losses,~~delinquencies and write-~~down~~offs ~~assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity~~ and ~~earnings; legislative or regulatory~~ changes ~~that~~in ~~adversely~~estimates ~~affect~~of ~~our~~the ~~business~~adequacy ~~including~~of the ~~revenue~~allowance ~~impact~~for ~~from,~~loan ~~and~~losses; ~~any~~the ~~mitigation~~Company’s ~~actions~~ability ~~taken in response,~~ to ~~the~~access ~~Dodd~~cost-~~Frank~~effective ~~Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)~~funding; ~~changes~~fluctuations in ~~regulatory~~real ~~policies~~estate values and ~~principles,~~both orresidential ~~the~~and ~~interpretation~~commercial ofreal ~~regulatory~~estate ~~capital~~market ~~or other rules~~conditions; ~~changes~~demand infor ~~accounting~~loans ~~policies~~ and ~~practices,~~deposits asin ~~may be adopted by~~ the ~~financial institution regulatory agencies, the Public~~ Company’s ~~Accounting~~market ~~Oversight~~area; ~~Board~~fluctuations orin the ~~Financial~~price ~~Accounting~~of ~~Standards Board; and other economic~~oil, ~~competitive,~~natural ~~governmental,~~gas ~~regulatory,~~ and ~~technological~~other ~~factors~~commodities; ~~affecting~~competition; ~~our~~changes ~~operations,~~in ~~pricing,~~management’s ~~products~~business ~~and services~~strategies; changes in the regulatory and tax environments in which the Company operates, including the impact of the “Tax Cuts and Jobs Act” (the “TCJA”) on the Company’s deferred tax asset, and the anticipated impact of the TCJA on the Company’s future earnings; and ~~the~~ other ~~risks~~factors set forth ~~under~~in ~~Risk Factors under Item 1A. of~~ the Company’s ~~Form~~filings ~~10-K~~with ~~for~~ the ~~year ended December 31, 2018 (“2018 Form 10-K”)~~SEC.

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

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

Overview

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

34The Bank is regulated by the Texas Department of Banking (“TDOB”) and the Federal Reserve Bank (“FRB”) with back-up oversight by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Bank is a Federal Reserve member bank required to have certain reserves and stock set by the FRB and a member of the Federal Home Loan Bank of Dallas, one of the 12 regional banks in the Federal Home Loan Bank System (“FHLB”). The Company is regulated by the FRB.

The Bank is regulated by the TDOB and the FRB with back-up oversight by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Bank is a Federal Reserve member bank required to have certain reserves and stock set by the FRB and a member of the Federal Home Loan Bank of Dallas, one of the 12 regional banks in the Federal Home Loan Bank System (“FHLB”). The Company is regulated by the FRB.35

On June 17, 2019, the Company and Prosperity jointly announced the signing of a definitive merger agreement (the “merger agreement”) pursuant to which the Company will merge with Prosperity. 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 Company 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, Bruce Hunt and George Fisk will join the Board of Directors of Prosperity. 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.

Business Strategies

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

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

Performance Summary

• Net income for the three months ended ~~March~~June 3130, 2019 was $2927.10 million, ana ~~increase~~decrease of $~~3.3 million~~854,000, or 123.91%, from net income of $2527.8 million for the three months ended ~~March~~June 3130, 2018. The ~~increase~~decrease in net income was driven by higher interest ~~income on loans~~ and anon-interest ~~lower provision for credit losses~~expense, which was partially offset by higher interest ~~and~~income on loans, increased non-interest ~~expense,~~income asand ~~well~~a as lower ~~non-interest~~provision ~~income~~for credit losses.

• The net interest margin for the three months ended ~~March~~June 3130, 2019 was 3.8977%, a ~~four~~16 basis point ~~increase~~decrease from the three months ended ~~March~~June 3130, 2018.

• Assets totaled $9.3594 billion at ~~March~~June 3130, 2019, which generated basic earnings per share for the three months ended ~~March~~June 3130, 2019 of $0.6157.

• Gross loans held for investment at ~~March~~June 3130, 2019, excluding Warehouse Purchase Program loans, grew $~~154~~289.04 million, or 4.3%, from December 31, 2018, while Warehouse Purchase Program loans, which totaled $1.1054 billion at ~~March~~June 3130, 2019, increased by $~~135~~582.83 million, or 60.6%, from December 31, 2018.

• Total deposits at ~~March~~June 3130, 2019 grew $~~235~~214.71 million, or 3.1%, from December 31, 2018, which included increases in ~~interest-bearing~~all ~~demand,~~deposit ~~time, and savings and money market deposits, while non-interest-bearing demand deposits decreased by $21~~categories.~~1 million for the same period.~~

• Non-performing loans increased by $3839.6 million, or 176.8%, from December 31, 2018, totaling $6162.01 million at ~~March~~June 3130, 2019.

Critical Accounting Estimates

Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for loan losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8 of our 2018 Form 10-K.

Allowance for Loan Loss. The allowance for loan losses and related provision expense are susceptible to change if the credit quality of our loan portfolio changes, which is evidenced by many factors, including but not limited to charge-offs and non-performing loan trends. Generally, consumer real estate lending has a lower risk profile compared to other consumer lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and more susceptible to fluctuations in industry, market and economic conditions. While management uses available information to recognize losses on loans, changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents coverage of our best estimate of credit losses in the loan portfolio as of June 30, 2019.

lending (such as automobile loans). Commercial real estate and commercial and industrial lending, however, can have higher risk profiles than consumer loans due to these loans being larger in amount and more susceptible to fluctuations in industry, market and economic conditions. While management uses available information to recognize losses on loans, changes in economic conditions, the mix and size of the loan portfolio and individual borrower conditions can dramatically impact our level of allowance for loan losses in relatively short periods of time. Management believes that the allowance for loan losses is maintained at a level that represents coverage of our best estimate of credit losses in the loan portfolio as of March 31, 2019.

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

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

General. Total assets increased by $294.9 million to $9.35 billion at March 31, 2019 from $9.05 billion at December 31, 2018, primarily due to a $154.0 million, or 2.3%, increase in gross loans held for investment, excluding Warehouse Purchase Program loan, as well as a $135.8 million, or 14.1%, increase in Warehouse Purchase Program loans.

Loans. Gross loans held for investment increased by $289.8 million, or 3.7%, to $8.04 billion at March 31, 2019 from $7.75 billion at December 31, 2018, while loans held for sale decreased by $11.8 million, or 50.9%, for the same period.

	March 31, 2019		December 31, 2018		DollarChange			PercentChange
	(Dollars in thousands)
Commercial real estate	$	3,122,726	$	3,026,754	$	95,972		3.2	%
Commercial and industrial	2,070,715		2,057,791		12,924			0.6
Construction and land	282,463		270,629		11,834			4.4
Consumer real estate	1,423,095		1,390,378		32,717			2.4
Other consumer	45,732		45,171		561			1.2
Gross loans held for investment, excluding Warehouse Purchase Program loans	6,944,731		6,790,723		154,008			2.3
Warehouse Purchase Program	1,096,160		960,404		135,756			14.1
Gross loans held for investment	8,040,891		7,751,127		289,764			3.7
Loans held for sale	11,380		23,193		(11,813		)	(50.9	)
Gross loans	$	8,052,271	$	7,774,320	$	277,951		3.6	%

Gross loans held for investment at March 31, 2019, excluding Warehouse Purchase Program loans, grew $154.0 million, or 2.3%, from December 31, 2018, which included growth in all loan portfolios. Commercial real estate and consumer real estate loans at March 31, 2019 increased by $96.0 million and $32.7 million, respectively, from December 31, 2018, while commercial and industrial and construction and land loans increased by $12.9 million and $11.8 million, respectively, for the same period.

Reserve-based energy loans, which are reported as commercial and industrial loans, totaled $499.8 million at March 31, 2019, down $20.6 million from $520.4 million at December 31, 2018. Substantially all of the reserve-based energy loans are secured by deeds of trust on properties containing proven oil and natural gas reserves.

At March 31, 2019, our reserve-based energy portfolio (reported above at $499.8 million) was secured by collateral that consisted of 59% crude oil reserves and 41% natural gas reserves. We encourage, and in some cases even require, borrowers to utilize commodity hedges, in order to stabilize cash flows during volatile commodity price environments. Hedges are used to guard against falling prices, and the goal is that the duration of the hedge will last long enough for prices to come back from any significant decline. Hedges will typically include minimum and maximum allowed percentage of production, a minimum and maximum allowed term, and a minimum price.

In addition to the reserve-based energy loans, the Bank has loans categorized as "Midstream and Other," which are typically related to the transmission of oil and natural gas and would only be indirectly impacted by declining commodity prices. At March 31, 2019, “Midstream and Other” loans had a total outstanding balance of $22.1 million, down $16.0 million from $38.1 million at December 31, 2018.

Warehouse Purchase Program loans increased by $135.8 million, or 14.1%, to $1.10 billion at March 31, 2019 from $960.4 million at December 31, 2018. Although not bound by any legally binding commitment, when a purchase decision is made, the Bank purchases a 100% participation interest in the loans originated by our mortgage banking company customers. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and, once all pertinent documents are received, the participation interest is delivered by the Bank to the investor selected by the originator and approved by us. Warehouse Purchase Program loans funded during the first quarter of 2019 consisted of 44% conforming, 43% government loans and 13% of other loan types, including Jumbo loans.

~~Allowance~~Comparison ~~for Loan Losses. The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate~~ of ~~credit~~Financial ~~losses~~Condition ~~inherent in our loan portfolio~~ at ~~each~~June 30, ~~balance~~2019 ~~sheet date. Our methodology for analyzing the allowance for loan losses consists of general~~ and ~~specific components. For more information about the Company’s calculation of its allowance for loan losses~~December 31, ~~please~~2018 ~~see Item 1 (Financial Statements) - Note 5 - “Loans” under Part 1 of this report.~~

General. Total assets increased by $884.8 million to $9.94 billion at June 30, 2019 from $9.05 billion at December 31, 2018, primarily due to a $582.3 million, or 60.6%, increase in Warehouse Purchase Program loans, as well as a $289.4 million, or 4.3%, increase in gross loans held for investment, excluding Warehouse Purchase Program loans.

Loans. Gross loans held for investment increased by $871.6 million, or 11.2%, to $8.62 billion at June 30, 2019 from $7.75 billion at December 31, 2018, while loans held for sale increased by $23.4 million, or 100.8%, for the same period.



	June 30, 2019		December 31, 2018		Dollar Change		Percent Change
	(Dollars in thousands)
Commercial real estate	$	3,180,582	$	3,026,754	$	153,828	5.1	%
Commercial and industrial	2,102,917		2,057,791		45,126		2.2
Construction and land	288,491		270,629		17,862		6.6
Consumer real estate	1,460,417		1,390,378		70,039		5.0
Other consumer	47,668		45,171		2,497		5.5
Gross loans held for investment, excluding Warehouse Purchase Program loans	7,080,075		6,790,723		289,352		4.3
Warehouse Purchase Program	1,542,684		960,404		582,280		60.6
Gross loans held for investment	8,622,759		7,751,127		871,632		11.2
Loans held for sale	46,571		23,193		23,378		100.8
Gross loans	$	8,669,330	$	7,774,320	$	895,010	11.5	%

Gross loans held for investment at June 30, 2019, excluding Warehouse Purchase Program loans, grew $289.4 million, or 4.3%, from December 31, 2018, which included growth in all loan portfolios. Commercial real estate and consumer real estate loans at June 30, 2019 increased by $153.8 million and $70.0 million, respectively, from December 31, 2018, while commercial and industrial and construction and land loans increased by $45.1 million and $17.9 million, respectively, for the same period.

Reserve-based energy loans, which are reported as commercial and industrial loans, totaled $518.6 million at June 30, 2019, down $1.8 million from $520.4 million at December 31, 2018. Substantially all of the reserve-based energy loans are secured by deeds of trust on properties containing proven oil and natural gas reserves.

At June 30, 2019, our reserve-based energy portfolio (reported above at $518.6 million) was secured by collateral that consisted of 58% crude oil reserves and 42% natural gas reserves. We encourage, and in some cases even require, borrowers to utilize commodity hedges, in order to stabilize cash flows during volatile commodity price environments. Hedges are used to guard against falling prices, and the goal is that the duration of the hedge will last long enough for prices to come back from any significant decline. Hedges will typically include minimum and maximum allowed percentage of production, a minimum and maximum allowed term, and a minimum price.

In addition to the reserve-based energy loans, the Bank has loans categorized as "Midstream and Other," which are typically related to the transmission of oil and natural gas and would only be indirectly impacted by declining commodity prices. At June 30, 2019, “Midstream and Other” loans had a total outstanding balance of $20.6 million, down $17.5 million from $38.1 million at December 31, 2018.

Warehouse Purchase Program loans increased by $582.3 million, or 60.6%, to $1.54 billion at June 30, 2019 from $960.4 million at December 31, 2018. Although not bound by any legally binding commitment, when a purchase decision is made the Bank purchases a 100% participation interest in the loans originated by our mortgage banking company customers. The mortgage banking company closes mortgage loans consistent with underwriting standards established by approved investors and, once all pertinent documents are received, the participation interest is delivered by the Bank to the investor selected by the originator and approved by us. Warehouse Purchase Program loans funded during the second quarter of 2019 consisted of 50% conforming loans, 37% government loans and 13% of other loan types, including jumbo loans.

Allowance for Loan Losses. The allowance for loan losses is maintained to cover incurred losses that are estimated in accordance with US GAAP. It is our estimate of credit losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For more information about the Company’s calculation of its allowance for loan losses, please see Item 1 (Financial Statements) - Note 5 - “Loans” and Note 12 - “Recent Accounting Developments” under Part 1 of this report.

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

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

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

Non-performing loans to total loans held for investment, excluding Warehouse Purchase Program loans, was 0.88% at ~~March~~June 3130, 2019 compared to 0.33% at December 31, 2018. Including Warehouse Purchase Program loans, non-performing loans to total loans held for investment was 0.7672% at ~~March~~June 3130, 2019 compared to 0.29% at December 31, 2018. Non-performing loans increased by $3839.67 million to $6162.01 million at ~~March~~June 3130, 2019 from $22.4 million at December 31, 2018. This increase in non-performing loans was primarily due to ~~a $6.1 million increase in non-performing energy loans and~~ the placement of the Company’s only remaining corporate healthcare finance relationship ~~totaling $19.3 million~~ on non-accrual status during the ~~first quarter of~~ 2019~~. The~~ ~~increase in non-performing loans from December 31~~period, ~~2018~~which ~~also~~totaled ~~included a~~ $719.49 million ~~personal~~at ~~loan~~June 30, ~~to the owner of an energy company that was used to recapitalize the company~~2019. This ~~loan~~healthcare iscompany ~~collateralized by the~~ borrower’s ~~stock~~has inexperienced ~~the~~declining ~~energy~~case ~~company,~~volumes ~~as well as other personal assets,~~ and ~~was~~revenue ~~reported at March 31~~collections, ~~2019~~which ashave astrained ~~non-performing~~liquidity ~~loan~~and inthreatened the ~~commercial~~ongoing ~~and~~viability ~~industrial,~~of ~~excluding energy category~~operations. ~~For~~We ~~more~~are ~~information~~pursuing ~~about~~multiple ~~the~~resolution ~~Company’s~~options; ~~non-performing loans~~however, ~~please see Note 5 of~~ the ~~Condensed~~healthcare ~~Notes~~company toborrower ~~Unaudited~~may ~~Consolidated~~file ~~Interim~~for ~~Financial~~bankruptcy ~~Statements~~if ~~contained~~these inefforts ~~Item~~are 1ultimately ~~of this report~~unsuccessful.

~~Our~~The ~~allowance~~increase ~~for~~in ~~loan~~non-performing ~~losses~~loans ~~was~~from December 31, 2018 also included a $774.52 million atincrease ~~March 31~~in non-performing energy loans, ~~2019~~as ~~compared~~well toas a $677.4 million atpersonal ~~December 31,~~loan ~~2018,~~to orthe ~~0.96%~~owner of ~~total~~an ~~loans~~energy ~~held~~company ~~for~~that ~~investment~~was (used to recapitalize the company. This loan is collateralized by personal assets, including ~~Warehouse~~the ~~Purchase~~borrower’s ~~Program~~stock ~~loans)~~in the energy company, and was reported at ~~March~~June 3130, 2019 ~~compared~~as toa ~~0.87%~~non-performing atloan ~~December 31~~in the commercial and industrial, ~~2018~~excluding energy category. ~~Our~~For ~~allowance~~more ~~for~~information ~~loan~~about ~~losses~~the toCompany’s non-performing loans, ~~was~~please ~~127.04%~~see atNote ~~March 31,~~5 ~~2019~~of ~~compared~~the Condensed Notes to ~~300.74%~~Unaudited atConsolidated ~~December 31,~~Interim ~~2018.~~Financial Statements contained in Item 1 of this report.

Our allowance for loan losses was $92.2 million at June 30, 2019 compared to $67.4 million at December 31, 2018, or 1.07% of total loans held for investment (including Warehouse Purchase Program loans) at June 30, 2019 compared to 0.87% at December 31, 2018. Our allowance for loan losses to non-performing loans was 148.61% at June 30, 2019 compared to 300.74% at December 31, 2018.

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

We regularly review the assets in our portfolio to determine whether any should be considered as classified. Total classified assets represented 1012.01% of our total equity and 1.24% of our total assets at ~~March~~June 3130, 2019 compared to 6.9% of our total equity and 0.8% of our total assets at December 31, 2018. The aggregate amount of classified assets at the dates indicated was as follows:

total equity and 0.8% of our total assets at December 31, 2018. The aggregate amount of classified assets at the dates indicated was as follows:

	March 31, 2019		December 31, 2018
	(Dollars in thousands)
Doubtful	$	335	$	345
Substandard	110,546		74,263
Total classified loans	110,881		74,608
Foreclosed assets	782		1,333
Total classified assets	$	111,663	$	75,941

Substandard loans at March 31, 2019 increased by $36.3 million from December 31, 2018, with substandard non-performing energy loans totaling $21.9 million at March 31, 2019, up $6.1 million from December 31, 2018. The Company continues to take action to improve the risk profile of the criticized energy loans by instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support and/or requiring additional equity injections or asset sales. Additionally, substandard loans at March 31, 2019 included the previously mentioned $19.3 million corporate healthcare finance loan that was placed on nonaccrual status during the first quarter of 2019, which also contributed to the increase from December 31, 2018.

The Company also has potential problem loans, considered “other loans of concern,” that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we might sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and consisted of $48.6 million in loans that were classified as “substandard,” but were still accruing interest and were not considered impaired at March 31, 2019 (excluding PCI loans), compared to $50.9 million at December 31, 2018. Other loans of concern have been considered in management’s analysis of potential loan losses.

Securities. Our securities portfolio decreased by $3.1 million, or 0.5%, to $614.7 million at March 31, 2019 from $617.8 million at December 31, 2018. During the three months ended March 31, 2019, purchases totaling $347.5 million offset paydowns and maturities of securities totaling $331.1 million.

Other Assets. Premises and equipment increased by $34.6 million, or 47.4%, to $107.7 million at March 31, 2019 from $73.1 million at December 31, 2018, primarily due to the adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, which resulted in the Company recognizing a right of use asset of $36.1 million.

Deposits. Total deposits increased by $235.7 million, or 3.4%, to $7.08 billion at March 31, 2019 from $6.84 billion at December 31, 2018, due to growth in time, interest-bearing demand and savings and money market deposits.

	March 31, 2019		December 31, 2018		DollarChange			PercentChange
	(Dollars in thousands)
Non-interest-bearing demand	$	1,752,694	$	1,773,762	$	(21,068	)	(1.2	)%
Interest-bearing demand	884,494		826,755		57,739			7.0
Savings and money market	2,492,226		2,455,787		36,439			1.5
Time	1,948,011		1,785,411		162,600			9.1
Total deposits	$	7,077,425	$	6,841,715	$	235,710		3.4	%

Time and interest-bearing demand deposits increased by $162.6 million and $57.7 million, respectively, compared to December 31, 2018, while savings and money market deposits increased by $36.4 million for the same period. These increases were partially offset by a $21.1 million decline in non-interest-bearing demand deposits compared to December 31, 2018.

Borrowings. FHLB advances decreased by $5.3 million, or 0.6%, to $820.1 million at March 31, 2019 from $825.4 million at December 31, 2018, while overnight repurchase agreements decreased by $13.1 million, or 25.9%, to $37.3 million at

March 31, 2019 from $50.3 million at December 31, 2018. At March 31, 2019, the Company was eligible to borrow an additional $2.14 billion from the FHLB.



	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Doubtful	$	322	$	345
Substandard	137,487		74,263
Total classified loans	137,809		74,608
Foreclosed assets	584		1,333
Total classified assets	$	138,393	$	75,941

Substandard loans at June 30, 2019 increased by $63.2 million from December 31, 2018, with substandard energy loans totaling $90.7 million at June 30, 2019, up $26.7 million from December 31, 2018. The ~~table~~Company ~~below~~continues ~~shows~~to ~~FHLB~~take ~~advances~~action to improve the risk profile of the criticized energy loans by ~~maturity~~instituting monthly commitment reductions, obtaining additional collateral, obtaining additional guarantor support and/or ~~weighted~~requiring ~~average~~additional ~~rate~~equity injections or asset sales. Additionally, substandard loans at ~~March~~June 3130, 2019: included the previously mentioned $19.9 million corporate healthcare finance loan that was placed on nonaccrual status during the 2019 period, which also contributed to the increase from December 31, 2018.

	Balance		Weighted Average Rate
	(Dollars in thousands)
Less than 90 days	$	765,319	2.55	%
90 days to less than one year	51,907		2.61
One to three years	2,065		5.50
After three to five years	372		5.52
After five years	421		5.44
Total	$	820,084	2.57	%

The Company also has potential problem loans, considered “other loans of concern,” that are currently performing and do not meet the criteria for impairment, but where there is the distinct possibility that we might sustain some loss if credit deficiencies are not corrected. These possible credit problems may result in the future inclusion of these loans in the non-performing asset categories and consisted of $75.1 million in loans that were classified as “substandard,” but were still accruing interest and were not considered impaired at June 30, 2019 (excluding PCI loans), compared to $50.9 million at December 31, 2018. Other loans of concern have been considered in management’s analysis of potential loan losses.

~~Additionally,~~Securities. weOur ~~have~~securities 20portfolio ~~available~~decreased ~~federal~~by ~~funds~~$30.2 ~~lines~~million, ofor ~~credit~~4.9%, ~~with~~to ~~financial~~$587.6 ~~institutions~~million ~~and~~at ~~other~~June 30, ~~sources~~2019 ~~totaling~~from $~~554~~617.08 million ~~and~~at ~~were~~December 31, ~~eligible~~2018. During tothe ~~borrow~~six months ended June 30, 2019, purchases totaling $74347.95 million ~~from~~were ~~the~~more ~~Federal~~than ~~Reserve~~offset ~~Bank~~by ~~discount~~paydowns ~~window~~and maturities of securities totaling $361. 5 million.

AtOther ~~March 31,~~Assets. Premises ~~2019,~~and ~~subordinated~~equipment ~~debt~~increased ~~totaled~~by $~~135~~33.12 million, ~~which~~or ~~included $123~~45.05%, ~~million of fixed-~~to~~-floating~~ ~~rate subordinated notes (reported net of~~ $2106.03 million inat ~~debt~~June 30, ~~issuance~~2019 ~~costs.) The~~from $~~135~~73.1 million ofat ~~subordinated~~December 31, ~~debt~~2018, ~~also~~primarily ~~included~~due ~~$12.2~~to ~~million~~the adoption of ~~trust~~ASU ~~preferred~~2016-02, ~~securities~~Leases ~~that~~(Topic ~~were~~842), ~~acquired~~on ~~through~~January ~~the~~1, ~~merger~~2019, ~~with~~which ~~LegacyTexas~~resulted ~~Group,~~in ~~Inc. All~~the ~~subordinated~~Company ~~debt~~recognizing isa ~~reported~~right ~~net~~ of ~~purchase~~use ~~accounting~~asset ~~fair~~of ~~value~~$36.1 ~~adjustments and debt issuance costs~~million.

~~Accrued Expenses and Other Liabilities~~Deposits. ~~Accrued~~ ~~expenses~~Total ~~and~~deposits ~~other liabilities~~ increased by $50214.81 million, or 483.71%, to $~~155~~7.106 ~~million~~billion at ~~March~~June 3130, 2019 from $~~104~~6.384 ~~million~~billion at December 31, 2018~~. This~~, ~~increase was primarily~~ due to ~~the~~growth ~~adoption~~in ofall ~~ASU~~deposit ~~2016-02, Leases (Topic 842), on January 1, 2019, which created an operating lease liability totaling $39~~categories.~~2 million at March 31, 2019. Additionally, other liabilities were higher at March 31, 2019 due to timing of escrow payments.~~

Shareholders’ Equity. Total shareholders’ equity increased by $26.7 million, or 2.4%, to $1.12 billion at March 31, 2019 from $1.09 billion at December 31, 2018.



	June 30, 2019		December 31, 2018		Dollar Change		Percent Change
	(Dollars in thousands)
Non-interest-bearing demand	$	1,847,229	$	1,773,762	$	73,467	4.1	%
Interest-bearing demand	855,026		826,755		28,271		3.4
Savings and money market	2,548,966		2,455,787		93,179		3.8
Time	1,804,569		1,785,411		19,158		1.1
Total deposits	$	7,055,790	$	6,841,715	$	214,075	3.1	%

	March 31, 2019			December 31, 2018			DollarChange		PercentChange
	(Dollars in thousands)
Common stock	$	487		$	485		$	2	0.4	%
Additional paid-in capital	625,405			619,983			5,422		0.9
Retained earnings	508,887			491,948			16,939		3.4
Accumulated other comprehensive loss, net	(2,433		)	(6,658		)	4,225		(63.5	)
Unearned ESOP shares	(11,259		)	(11,391		)	132		(1.2	)
Total shareholders’ equity	$	1,121,087		$	1,094,367		$	26,720	2.4	%

Savings and money market and non-interest-bearing demand deposits increased by $93.2 million and $73.5 million, respectively, compared to December 31, 2018, while interest-bearing demand and time deposits increased by $28.3 million and $19.2 million, respectively, for the same period.

~~The~~Borrowings. ~~increase~~FHLB inadvances ~~shareholders’~~increased ~~equity~~by at$559.4 ~~March 31~~million, ~~2019~~or 67.8%, ~~compared~~ to ~~December 31,~~$1.38 ~~2018,~~billion ~~was~~at ~~primarily~~June 30, ~~due~~2019 tofrom ~~net income of~~ $29825.14 million ~~recognized~~at ~~during the three months ended March~~ December 31, ~~2019~~2018, ~~which~~while ~~was~~overnight ~~partially~~repurchase ~~offset~~agreements increased by ~~the payment of quarterly dividends totaling~~ $02.251 ~~per common share~~million, or ~~$12~~4.1 ~~million~~%, ~~during~~to ~~the~~$52.4 ~~three~~million ~~months~~at ~~ended March 31, 2019.~~

~~Comparison~~June 30, of2019 ~~Results~~from of$50.3 ~~Operations~~million ~~for~~at ~~the~~December 31, ~~Three~~2018. At ~~Months Ended March~~June 3130, 2019, ~~and~~the ~~2018~~Company was eligible to borrow an additional $2.22 billion from the FHLB.

~~General. Net income for the three months ended March 31, 2019 was $29.1 million, an increase of $3.3 million, or 12.9%, from net income of $25.8 million for the three months ended March 31, 2018.~~ The ~~increase~~table inbelow ~~net~~shows ~~income~~FHLB ~~was~~advances ~~driven~~ by amaturity ~~$9.7 million increase in interest income on loans~~ and aweighted ~~$5.9~~average ~~million~~rate ~~decrease~~at ~~in the provision for credit losses~~June 30, which was partially offset by a $7.9 million increase in interest expense, a $3.0 million decrease in non-interest income and a $428,000 increase in non-interest expense. Basic earnings per share for the three months ended March 31, 2019 was $0.61, a $0.06 increase from $0.55 for the three months ended March 31, 2018. Diluted earnings per share for the three months ended March 31, 2019 was $0.61, a $0.07 increase from $0.54 for the three months ended March 31, 2018.:

Interest Income. Interest income increased by $10.4 million, or 10.9%, to $106.1 million for the three months ended March 31, 2019 from $95.7 million for the three months ended March 31, 2018.



	Balance		Weighted Average Rate
	(Dollars in thousands)
Less than 90 days	$	1,380,314	2.40	%
90 days to less than one year	1,828		5.48
One to three years	1,910		5.51
After three to five years	329		5.47
After five years	384		5.44
Total	$	1,384,765	2.41	%

	Three Months Ended March 31,				Dollar Change		Percent Change
	2019		2018
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	100,301	$	90,631	$	9,670	10.7	%
Securities	3,945		3,586		359		10.0
Interest-bearing deposits in other financial institutions	1,277		969		308		31.8
FHLB and Federal Reserve Bank stock and other	581		480		101		21.0
	$	106,104	$	95,666	$	10,438	10.9	%

Additionally, we have 20 available federal funds lines of credit with financial institutions and other sources totaling $614.0 million and were eligible to borrow $76.5 million from the Federal Reserve Bank discount window.

~~The~~At ~~$10.4 million increase in interest income for the three months ended March 31~~June 30, 2019 ~~compared to the three months ended March 31~~, ~~2018~~subordinated ~~was~~debt ~~primarily~~totaled ~~due to a~~ $9135.73 million ~~increase in interest income on loans~~, which ~~was~~included driven by higher yields earned on all loan portfolios, as well as increased volume in all loan portfolios with the exception of Warehouse Purchase Program loans and loans held for sale. The average balance of commercial and industrial loans increased by $~~183~~123.51 million ~~from the first quarter~~ of ~~2018,~~fixed-to-floating ~~while~~rate ~~the~~subordinated ~~average~~notes ~~yield~~(reported ~~earned~~net onof ~~this portfolio increased by 71 basis points for the same period, resulting in a~~ $62.0 million ~~increase~~ in ~~interest~~debt ~~income. The~~issuance average yield earned on the commercial and industrial portfolio for the quarter ended March 31, 2019 was positively impacted by three increases in the Fed Funds rate totaling 75 basis points since March 31, 2018costs.) The ~~average balance of consumer real estate loans increased by~~ $~~176~~135.73 million ~~from the first quarter~~ of ~~2018,~~subordinated ~~while~~debt ~~the~~also ~~average~~included ~~yield earned on this portfolio increased by 25 basis points, which led to a~~ $212.92 million ~~increase~~of intrust ~~interest~~preferred ~~income. A~~securities ~~$55.1~~that ~~million~~were ~~increase~~acquired inthrough the ~~average~~merger ~~balance~~with ofLegacyTexas ~~commercial real estate loans compared to the first quarter of 2018~~Group, ~~as well as a nine basis point increase in the average yield, resulted in a $1~~Inc.4 All ~~million~~subordinated ~~increase~~debt inis ~~interest~~reported ~~income. The~~net ~~average balance~~ of ~~Warehouse~~purchase ~~Purchase~~accounting ~~Program~~fair ~~loans~~value ~~decreased~~adjustments byand ~~$241.3~~debt ~~million~~issuance ~~from the first quarter of 2018, while the average yield earned on this portfolio increased by 68 basis points, resulting in a $1~~costs.~~3 million decrease in interest income compared to the first quarter of 2018.~~

~~Interest~~Accrued ~~income~~Expenses onand ~~loans~~Other ~~for~~Liabilities. Accrued ~~the~~expenses ~~first~~and ~~quarter~~other ofliabilities ~~2019~~increased ~~included~~ $~~255~~60.8 million,~~000~~ inor ~~accretion~~58.3%, ofto ~~purchase~~$165.1 ~~accounting~~million ~~fair~~at ~~value~~June 30, ~~adjustments~~2019 onfrom ~~acquired~~$104.3 ~~loans~~million at December 31, ~~which~~2018. This increase was primarily ~~consisted~~due to the adoption of ~~$73~~ASU 2016-02,~~000~~ Leases on(Topic ~~acquired~~842), ~~commercial~~on ~~real~~January ~~estate~~1, ~~loans~~2019, which created an operating lease liability totaling $4638.1 million at June 30,~~000~~ on2019. ~~acquired~~Additionally, ~~commercial~~other ~~and~~liabilities ~~industrial~~were ~~loans~~higher ~~and~~at ~~$135~~June 30,~~000~~ on2019 ~~acquired~~due ~~consumer~~to ~~loans.~~timing of escrow payments.

~~Interest~~Shareholders’ ~~Expense~~Equity. ~~Interest~~ ~~expense~~Total shareholders’ equity increased by $748.93 million, or 464.24%, to $241.914 ~~million~~billion ~~for~~at ~~the three months ended March 31~~June 30, 2019 from $~~17.~~1.09 ~~million~~billion ~~for~~at ~~the three months ended March~~ December 31, 2018.

	Three Months Ended March 31,						Dollar Change			Percent Change
	June 30, 2019			December 31, 2018			DollarChange			PercentChange
	2019			2018
	(Dollars in thousands)
Interest expense
Common stock	$	488		$	485		$	3		0.6	%
Deposits	$	18,215		$	12,032		$	6,183		51.4	%
Additional paid-in capital	628,730			619,983			8,747			1.4
FHLB advances	4,456			2,680			1,776			66.3
Retained earnings	523,693			491,948			31,745			6.5
Repurchase agreements and other borrowings	2,269			2,341			(72		)	(3.1	)
Accumulated other comprehensive loss, net	860			(6,658		)	7,518			(112.9	)
	$	24,940		$	17,053		$	7,887		46.2	%
Unearned ESOP shares	(11,126		)	(11,391		)	265			(2.3	)
Total shareholders’ equity	$	1,142,645		$	1,094,367		$	48,278		4.4	%

The increase in ~~interest~~shareholders’ ~~expense~~equity ~~for~~at ~~the~~June 30, ~~three~~2019, ~~months~~compared ~~ended~~to ~~March~~ December 31, ~~2019~~2018, ~~compared~~was primarily due to ~~the~~net ~~same~~income ~~period~~of in$56.1 ~~2018~~million ~~was~~recognized ~~primarily~~during ~~due~~the tosix ~~higher~~months ~~average~~ended ~~savings~~June 30, ~~money~~2019, ~~market~~which ~~and~~was ~~time~~partially ~~deposit~~offset ~~and~~by ~~borrowing~~the ~~rates,~~payment asof ~~well~~quarterly asdividends atotaling $~~343~~0.550 per common share, or $24.3 million, during the six months ended June 30, 2019.

~~increase~~Comparison inof ~~the~~Results ~~average balance~~ of ~~time~~Operations ~~deposits. A~~for ~~38 basis point increase in~~ the ~~average~~Three ~~rate~~Months ~~paid~~Ended onJune 30, ~~savings~~2019 and ~~money market deposits compared to the first quarter of~~ 2018 offset a $257.4 million decrease in the average balance of these deposits. A 77 basis point increase in the average rate paid on borrowings compared to the first quarter of 2018, as well as a $4.6 million increase in the average balance, resulted in a $1.7 million year-over-year increase in interest expense on borrowed funds.

General. Net ~~Interest~~income ~~Income. Net~~for ~~interest~~the ~~income~~three ~~increased~~months byended June 30, 2019 was $227.60 million, a decrease of $854,000, or 3.21%, tofrom net income of $8127.28 million for the three months ended ~~March~~June 3130, ~~2019~~2018. The ~~from~~decrease in net income was driven by an $788.65 million ~~for~~increase ~~the~~in ~~three~~interest ~~months~~expense ~~ended~~and ~~March~~a ~~31, 2018~~$5.3 ~~The~~million ~~net~~increase in non-interest ~~margin~~expense, ~~for~~partially ~~the~~offset ~~first~~by ~~quarter~~a of$9.6 ~~2019~~million ~~was~~increase ~~3.89%~~in interest income on loans, a ~~four~~$1.4 ~~basis~~million ~~point~~decrease ~~increase~~in ~~from~~ the ~~first~~provision ~~quarter~~for ofcredit ~~2018~~losses, and a $1.4 ~~The~~million ~~average~~increase ~~yield~~in onnon-interest ~~earning~~income. ~~assets~~Basic earnings per share for the ~~first~~three ~~quarter~~months ofended June 30, 2019 was 5$0.~~09%~~57, a 40$0.02 ~~basis~~decrease ~~point~~from ~~increase~~$0.59 ~~from~~for the ~~first~~three ~~quarter~~months ofended June 30, 2018. ~~The~~ ~~average~~Diluted ~~cost~~earnings ofper ~~interest-bearing~~share ~~liabilities~~ for the ~~first~~three ~~quarter~~months ofended June 30, 2019 was 1$0.~~70%~~56, upa 55$0.02 ~~basis~~decrease ~~points~~ from $0.58 for the ~~first~~three ~~quarter~~months ofended June 30, 2018.

~~Provision~~Interest ~~for Credit Losses~~Income. ~~The~~ Interest ~~Company~~income ~~recorded~~increased aby ~~provision for credit losses of~~ $910.81 million ~~for the quarter ended March 31~~, ~~2019,~~or ~~down $5.~~9 ~~million from $15~~.7 ~~million for the quarter ended March 31~~%, ~~2018. The decrease in provision expense from the three months ended March 31, 2018 was primarily due~~ to ~~decreased net charge-offs during the quarter ended March 31, 2019~~$114. ~~Net~~1 ~~recoveries~~million ~~totaled $263,000~~ for the three months ended ~~March 31~~June 30, 2019, ~~compared~~from ~~to net charge-offs totaling~~ $12104.40 million for the three months ended ~~March~~June 3130, 2018~~, due to energy-related charge-offs recorded in the 2018 period~~. For more information about the Company’s allowance for loan losses, please see “Management’s Discussion and Analysis - Comparison of Financial Condition at March 31, 2019 and December 31, 2018 - Allowance for Loan Losses” contained in Item 2 of this report.

Non-interest Income. Non-interest income decreased by $3.0 million, or 23.3%, to $9.9 million for the three months ended March 31, 2019 from $12.9 million for the three months ended March 31, 2018.



	Three Months Ended June 30,				Dollar Change		Percent Change
	2019		2018		Dollar Change		Percent Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	108,154	$	98,570	$	9,584	9.7	%
Securities	3,870		3,773		97		2.6
Interest-bearing deposits in other financial institutions	1,370		1,097		273		24.9
FHLB and FRB stock and other	683		551		132		24.0
	$	114,077	$	103,991	$	10,086	9.7	%

	Three Months Ended March 31,						Dollar Change			Percent Change
	2019			2018
	(Dollars in thousands)
Non-interest income
Service charges and other fees	$	7,255		$	7,927		$	(672	)	(8.5	)%
Net gain on sale of mortgage loans held for sale	1,525			1,809			(284		)	(15.7	)
Bank-owned life insurance income	482			447			35			7.8
Net gain (loss) on securities transactions	6			(128		)	134			N/M1
Gain (loss) on sale and disposition of assets	(14		)	2,213			(2,227		)	N/M1
Other	640			630			10			1.6
	$	9,894		$	12,898		$	(3,004	)	(23.3	)%

The $10.1 million increase in interest income compared to the three months ended June 30, 2018 was primarily due to a $9.6 million increase in interest income on loans, which was driven by higher yields earned on all loan portfolios, with the exception of the other consumer loan portfolio and loans held for sale, as well as increased volume in all loan portfolios. The average balance of Warehouse Purchase Program loans increased by $178.0 million from the three months ended June 30, 2018, while the average yield earned on this portfolio increased by 25 basis points, resulting in a $2.8 million increase in interest income compared to the three months ended June 30, 2018. The average balance of consumer real estate loans increased by $169.1 million from the three months ended June 30, 2018, while the average yield earned on this portfolio increased by 11 basis points, which led to a $2.4 million increase in interest income. A $64.0 million increase in the average balance of commercial real estate loans compared to the three months ended June 30, 2018, as well as a 12 basis point increase in the average yield, resulted in a $1.8 million increase in interest income. The average balance of commercial and industrial loans increased by $83.3 million from the three months ended June 30, 2018, while the average yield earned on this portfolio increased by ten basis points for the same period, resulting in a $1.7 million increase in interest income.

~~1N/M~~Interest -income ~~not~~on ~~meaningful~~loans for the three months ended June 30, 2019 included $237,000 in accretion of purchase accounting fair value adjustments on acquired loans, which primarily consisted of $61,000 on acquired commercial real estate loans, $43,000 on acquired commercial and industrial loans and $133,000 on acquired consumer loans.

~~The~~Interest $3Expense.0 Interest ~~million~~expense ~~decrease~~increased inby ~~non-interest income from the first quarter of 2018 was primarily due to a~~ $28.25 million ~~decrease in gain (loss) on sale and disposition of assets~~, ~~primarily~~or ~~due to a $2~~42.32%, ~~million insurance settlement received in the first quarter of 2018 related~~ to ~~a misappropriation of approximately~~ $228.5 million infor ~~vault cash from one of~~ the ~~former~~three ~~LegacyTexas~~months ~~Bank~~ended ~~branches~~June ~~it acquired in 2015. Service charges and other fees decreased by $672~~30,~~000~~ from the first quarter of 2018, which was driven by lower commercial loan fee income, as well as decreased title premium income and Warehouse Purchase Program income. Net gains on the sale of mortgage loans held for sale during the first quarter of 2019 ~~decreased~~from by $~~284,000 compared to the same period in 2018, which included gains recognized on $49~~20.1 million ~~of one-to four-family mortgage loans that were sold or committed~~ for ~~sale~~the ~~and~~three ~~fair~~months ~~value~~ended ~~changes~~June ~~on mortgage derivatives and mortgage fees collected during the 2018 period~~30, ~~compared to $32~~2018.~~6 million for the 2019 period.~~



	Three Months Ended June 30,				Dollar Change		Percent Change
	2019		2018		Dollar Change		Percent Change
	(Dollars in thousands)
Interest expense
Deposits	$	20,444	$	13,732	$	6,712	48.9	%
FHLB advances	5,794		4,131		1,663		40.3
Repurchase agreements and other borrowings	2,285		2,199		86		3.9
	$	28,523	$	20,062	$	8,461	42.2	%

The $8.5 million increase in interest expense for the three months ended June 30, 2019 was primarily due to higher average savings and money market, time deposit, and borrowing rates, as well as a $252.5 million increase in the average balance of time deposits. A 17 basis point decrease in the average rate paid on interest-bearing demand deposits compared to

~~Non-interest~~the ~~Expense. Non-interest~~three ~~expense~~months ~~increased~~ended byJune ~~$428~~30,~~000~~ 2018, oras 1well as a $99.0% million decrease in the average balance of these deposits, topartially ~~$44~~offset these year-over-year increases in interest expense.3 A ~~million~~45 ~~for~~basis point increase in the average rate paid on borrowings compared to the three months ended ~~March~~June 3130, ~~2019~~2018, ~~from~~as well as an $4382.96 million ~~for~~increase in the ~~three~~average ~~months~~balance, ~~ended~~resulted ~~March~~in ~~31,~~a ~~2018~~$1.7 million year-over-year increase in interest expense on borrowed funds.

	Three Months Ended March 31,				Dollar Change			Percent Change
	2019		2018
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	26,871	$	27,076	$	(205	)	(0.8	)%
Advertising	903		888		15			1.7
Occupancy and equipment	3,899		3,860		39			1.0
Outside professional services	1,285		1,250		35			2.8
Regulatory assessments	618		1,154		(536		)	(46.4	)
Data processing	5,933		4,703		1,230			26.2
Office operations	2,335		2,300		35			1.5
Other	2,463		2,648		(185		)	(7.0	)
	$	44,307	$	43,879	$	428		1.0	%

Net Interest Income. Net interest income increased by $1.6 million, or 1.9%, to $85.6 million for the three months ended June 30, 2019 from $83.9 million for the three months ended June 30, 2018. The net interest margin for the three months ended June 30, 2019 was 3.77%, a 16 basis point decrease from the three months ended June 30, 2018. The average yield on earning assets for the three months ended June 30, 2019 was 5.03%, a 16 basis point increase from the three months ended June 30, 2018. The average cost of interest-bearing liabilities for the three months ended June 30, 2019 was 1.78%, up 48 basis points from the three months ended June 30, 2018.

~~The~~Provision ~~$428,000~~for ~~increase~~Credit inLosses. The ~~non-interest~~Company ~~expense~~recorded ~~from~~a ~~the~~provision ~~first~~for ~~quarter~~credit losses of ~~2018 was primarily due to a~~ $116.21 million ~~increase~~for inthe ~~data~~three ~~processing~~months ~~expense~~ended ~~due~~June to30, ~~system upgrades~~2019, ~~technology~~down ~~refreshments~~$1.4 ~~and~~million ~~outsourcing~~from ~~certain segments of its data processing~~$17. ~~The~~5 ~~year-over-year~~million ~~increase~~for inthe ~~data~~three ~~processing~~months ~~expense~~ended ~~was~~June ~~partially offset by a $536~~30,~~000~~ ~~decline~~2018. The decrease in ~~regulatory~~provision ~~assessments~~ expense from the ~~first~~three ~~quarter~~months ofended ~~2018~~June 30, ~~due~~2018 towas aprimarily ~~notice~~due ofto ~~preliminary~~decreased ~~assessment~~net ~~credit~~charge-offs ~~received~~during ~~from~~ the ~~FDIC~~three inmonths ~~the~~ended ~~first~~June ~~quarter of 2019~~30, ~~which may reduce future FDIC assessment payments, as well as a lower assessment rate in the~~ 2019 ~~period~~. ~~Additionally,~~Net ~~salaries~~charge-offs ~~and~~totaled ~~employee benefits expense decreased by~~ $~~205,000~~1.4 ~~from~~million for the ~~first~~three ~~quarter~~months ofended ~~2018~~June 30, ~~as the 2018 period included a $1~~2019,~~000~~ ~~bonus~~compared ~~paid~~ to ~~all~~net ~~full~~charge-~~time~~offs ~~employees~~totaling ~~whose salary was under~~ $~~100,000~~27.7 ~~(awarded~~million infor ~~connection with~~ the ~~enactment~~three ofmonths ~~the~~ended ~~Tax~~June ~~Cuts~~30, ~~and Jobs Act)~~2018, ~~which~~due ~~resulted~~to inenergy ~~$679,000~~and ofcorporate ~~additional~~healthcare ~~salary~~finance-related ~~expense~~charge-offs recorded in the ~~first quarter of~~ 2018 period. ~~This~~For ~~year-over-year~~more ~~decrease~~information inabout ~~salaries~~the ~~and~~Company’s ~~employee~~allowance ~~benefits~~for ~~expense~~loan ~~was~~losses, ~~partially~~please ~~offset~~see by“Management’s ~~higher~~Discussion ~~salary~~and ~~costs~~Analysis ~~attributable~~- toComparison ~~merit~~of ~~increases~~Financial ~~granted~~Condition inat ~~the~~June 30, ~~first~~2019 ~~quarter~~and ofDecember ~~2019~~31, as2018 ~~well as higher share~~-~~based~~ ~~compensation~~Allowance ~~expense~~for inLoan ~~the~~Losses” ~~2019~~contained ~~period related to fluctuations~~ in ~~the~~Item ~~Company’s~~2 ~~share~~of ~~price~~this report.

~~Income~~Non-interest ~~Tax Expense~~Income. ~~For~~Non-interest ~~the three months ended March 31, 2019, we recognized~~ income ~~tax~~increased ~~expense~~by of $71.94 million ~~on our pre-tax income~~, ~~which~~or ~~was an effective tax rate of 21~~12.37%, ~~compared~~ to ~~income tax expense of~~ $612.2 million for the three months ended ~~March~~June 3130, ~~2018,~~2019 ~~which~~from ~~was an effective tax rate of 19~~$10.~~4%. The~~9 ~~increase~~million infor the ~~effective~~three ~~tax~~months ~~rate~~ended inJune ~~the~~30, ~~2019 period primarily resulted from permanent differences related to share-based compensation cost~~2018.



	Three Months Ended June 30,						Dollar Change			Percent Change
	2019			2018			Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest income
Service charges and other fees	$	9,882		$	8,844		$	1,038		11.7	%
Net gain on sale of mortgage loans held for sale	2,879			1,668			1,211			72.6
Bank-owned life insurance income	489			479			10			2.1
Gain (loss) on sale and disposition of assets	18			(153		)	171			N/M¹
Other	(1,036		)	14			(1,050		)	N/M¹
	$	12,232		$	10,852		$	1,380		12.7	%

¹N/M - not meaningful

The $1.4 million increase in non-interest income from the three months ended June 30, 2018 was primarily due to a $1.2 million increase in net gains on the sale of mortgage loans held for sale, related to $74.8 million of consumer real estate loans that were sold or committed for sale, fair value changes on mortgage derivatives and mortgage fees collected during the 2019 period, compared to $50.8 million for the 2018 period. Service charges and other fees increased by $1.0 million from the three months ended June 30, 2018, which was driven by higher title premiums and commercial loan fee income (consisting of syndication, arrangement, non-usage and pre-payment fees), as well as increased debit card interchange income. Other non-interest income for the three months ended June 30, 2019 included a $1.2 million net decrease in the value of investments in community development-oriented private equity funds used for Community Reinvestment Act purposes (the “CRA Funds”), down from a $15,000 net decrease in the CRA Funds for the three months ended June 30, 2018.

Non-interest Expense. Non-interest expense increased by $5.3 million, or 12.6%, to $47.5 million for the three months ended June 30, 2019, from $42.2 million for the three months ended June 30, 2018.



	Three Months Ended June 30,				Dollar Change			Percent Change
	2019		2018		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	26,586	$	24,313	$	2,273		9.3	%
Merger costs	2,362		—		2,362			100.0
Advertising	982		1,358		(376		)	(27.7	)
Occupancy and equipment	3,950		3,980		(30		)	(0.8	)
Outside professional services	1,674		1,382		292			21.1
Regulatory assessments	831		731		100			13.7
Data processing	5,739		5,145		594			11.5
Office operations	2,568		2,224		344			15.5
Other	2,834		3,058		(224		)	(7.3	)
	$	47,526	$	42,191	$	5,335		12.6	%

The $5.3 million increase in non-interest expense from the three months ended June 30, 2018 was primarily due to $2.4 million in merger costs with no comparable charges recorded in the three months ended June 30, 2018, related to the proposed merger with Prosperity, which was announced on June 17, 2019, as well as a $2.3 million increase in salaries and employee benefits expense, which was primarily related to higher mortgage commissions paid in the 2019 period attributable to increased mortgage loan production, as well as higher share-based compensation expense in the 2019 period related to fluctuations in the Company’s share price. Additionally, merit increases granted in the 2019 period also contributed to the increased salary expense compared to the three months ended June 30, 2018. Data processing expense increased by $594,000 from the three months ended June 30, 2018 due to system upgrades, technology refreshments and outsourcing certain segments of our data processing. These increases in non-interest expense compared to the 2018 period were partially offset by a $376,000 decrease in advertising expense, primarily due to a lower number of events, media advertisements and sponsorships in the three months ended June 30, 2019.

Income Tax Expense. For the three months ended June 30, 2019, we recognized income tax expense of $7.2 million on our pre-tax income, which was an effective tax rate of 21.0%, compared to income tax expense of $7.3 million for the three months ended June 30, 2018, which was an effective tax rate of 20.7%.

Comparison of Results of Operations for the Six Months Ended June 30, 2019 and 2018

General. Net income for the six months ended June 30, 2019 was $56.1 million, an increase of $2.5 million, or 4.6%, from net income of $53.6 million for the six months ended June 30, 2018. The increase in net income was driven by increased net interest income and decreased provision for credit losses, partially offset by increased non-interest expense and lower non-interest income. Basic earnings per share for the six months ended June 30, 2019 was $1.18, an increase of $0.04 from $1.14 for the six months ended June 30, 2018. Diluted earnings per share for the six months ended June 30, 2019 was $1.17, an increase of $0.05 from $1.12 for the six months ended June 30, 2018.

Interest Income. Interest income increased by $20.5 million, or 10.3%, to $220.2 million for the six months ended June 30, 2019 from $199.7 million for the six months ended June 30, 2018.



	Six Months Ended June 30,				Dollar Change		Percent Change
	2019		2018		Dollar Change		Percent Change
	(Dollars in thousands)
Interest and dividend income
Loans, including fees	$	208,455	$	189,201	$	19,254	10.2	%
Securities	7,815		7,359		456		6.2
Interest-bearing deposits in other financial institutions	2,647		2,066		581		28.1
FHLB and FRB stock and other	1,264		1,031		233		22.6
	$	220,181	$	199,657	$	20,524	10.3	%

The $20.5 million increase in interest income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily due to a $19.3 million, or 10.2%, increase in interest income on loans, which was driven by increased volume in all loan portfolios, with the exception of Warehouse Purchase Program and loans held for sale, as well as higher yields earned on all loan portfolios. The average balance of commercial and industrial loans increased by $133.2 million from the six months ended June 30, 2018, while the average yield earned on this portfolio increased by 40 basis points, resulting in a $7.8 million increase in interest income. The average yield earned on the commercial and industrial portfolio for the six months ended June 30, 2019 was positively impacted by three increases in the Fed Funds rate, totaling 75 basis points since June 1, 2018, as well as the resolution of multiple non-performing relationships over the past year. The average balance of consumer real estate loans increased by $172.9 million from the six months ended June 30, 2018, increasing interest income by $5.3 million. The average balance of commercial real estate loans increased by $59.6 million from the six months ended June 30, 2018, while the average yield earned on this portfolio increased by 11 basis points, resulting in a $3.2 million increase in interest income. Despite a $30.5 million decline in the average balance of Warehouse Purchase Program loans from the six months ended June 30, 2018, the average yield earned on this portfolio increased by 44 basis points, resulting in a $1.5 million increase in interest income.

Interest Expense. Interest expense increased by $16.3 million, or 44.0%, to $53.5 million for the six months ended June 30, 2019 from $37.1 million for the six months ended June 30, 2018.



	Six Months Ended June 30,				Dollar Change		Percent Change
	2019		2018		Dollar Change		Percent Change
	(Dollars in thousands)
Interest expense
Deposits	$	38,659	$	25,764	$	12,895	50.1	%
FHLB advances	10,250		6,811		3,439		50.5
Repurchase agreements and other borrowings	4,554		4,540		14		0.3
	$	53,463	$	37,115	$	16,348	44.0	%

The increase in interest expense for the six months ended June 30, 2019 compared to the same period in 2018, was primarily due to an increase in interest expense on deposits, which was driven by increased rates paid on time, savings and money market deposits during the six months ended June 30, 2019 compared to the same period in 2018, which included a 76 basis point increase in the average rate paid on time deposits and a 41 basis point increase in the average rate paid on savings and money market deposits. Additionally, the average balance of time deposits increased by $297.8 million from the six

months ended June 30, 2018. Interest expense on borrowings for the six months ended June 30, 2019 increased by $3.5 million compared to the six months ended June 30, 2018, due to a 60 basis point increase in the average rate paid on borrowings, as well as a $43.8 million increase in the average balance compared to the same period in 2018.

Net Interest Income. Net interest income increased by $4.2 million, or 2.6%, to $166.7 million for the six months ended June 30, 2019 from $162.5 million for the six months ended June 30, 2018. The net interest margin decreased by six basis point to 3.83% for the six months ended June 30, 2019 from 3.89% for the same period last year. The net interest rate spread decreased by 23 basis points to 3.32% for the six months ended June 30, 2019 from 3.55% for the same period last year. The average yield on earning assets for the six months ended June 30, 2019 was 5.06%, a 28 basis point increase from the six months ended June 30, 2018, while the average cost of interest-bearing liabilities increased by 51 basis points.

Provision for Credit Losses. The provision for credit losses was $25.9 million for the six months ended June 30, 2019, a decrease of $7.2 million from $33.1 million for the six months ended June 30, 2018. Net charge-offs totaled $1.2 million for the six months ended June 30, 2019, down $38.9 million from the six months ended June 30, 2018. For more information about the Company’s allowance for loan losses, please see “Management’s Discussion and Analysis - Comparison of Financial Condition at June 30, 2019 and December 31, 2018 - Allowance for Loan Losses” contained in Item 2 of this report.

Non-interest Income. Non-interest income decreased by $1.6 million, or 6.8%, to $22.1 million for the six months ended June 30, 2019 from $23.8 million for the six months ended June 30, 2018.



	Six Months Ended June 30,						Dollar Change			Percent Change
	2019			2018			Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest income
Service charges and other fees	$	17,137		$	16,771		$	366		2.2	%
Net gain on sale of mortgage loans held for sale	4,404			3,477			927			26.7
Bank-owned life insurance income	971			926			45			4.9
Net gain (loss) on securities transactions	6			(128		)	134			N/M¹
Gain on sale and disposition of assets	4			2,060			(2,056		)	(99.8	)
Other	(396		)	644			(1,040		)	N/M¹
	$	22,126		$	23,750		$	(1,624	)	(6.8	)%

¹N/M - not meaningful

The decrease in non-interest income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 was primarily due to a $2.1 million decrease in gain on sale and disposition of assets, as the 2018 period included $2.3 million in proceeds resulting from an insurance settlement related to a misappropriation of approximately $2.5 million in vault cash from one of the former LegacyTexas Bank branches acquired in 2015, with no similar gains recorded in the 2019 period. Other non-interest income for the six months ended June 30, 2019 included a $1.1 million net decrease in the value of the CRA Funds, compared to an $118,000 net increase in the CRA Funds for the six months ended June 30, 2018. Net gains on the sale of mortgage loans held for sale during the six months ended June 30, 2019 increased by $927,000 compared to the six months ended June 30, 2018, which included gains recognized on $99.9 million of consumer real estate loans that were sold or committed for sale, fair value changes on mortgage derivatives and mortgage fees collected during the 2018 period, compared to $107.4 million for the six months ended June 30, 2019. Service charges and other fees increased by $366,000 compared to the six months ended June 30, 2018, which included increases in commercial account analysis fee income, debit card interchange income and title premiums.

Non-interest Expense. Non-interest expense increased by $5.8 million, or 6.7%, to $91.8 million for the six months ended June 30, 2019 from $86.1 million for the six months ended June 30, 2018.



	Six Months Ended June 30,				Dollar Change			Percent Change
	2019		2018		Dollar Change			Percent Change
	(Dollars in thousands)
Non-interest expense
Salaries and employee benefits	$	53,457	$	51,389	$	2,068		4.0	%
Merger costs	2,362		—		2,362			100.0
Advertising	1,885		2,246		(361		)	(16.1	)
Occupancy and equipment	7,849		7,840		9			0.1
Outside professional services	2,959		2,632		327			12.4
Regulatory assessments	1,449		1,885		(436		)	(23.1	)
Data processing	11,672		9,848		1,824			18.5
Office operations	4,903		4,524		379			8.4
Other	5,297		5,706		(409		)	(7.2	)
	$	91,833	$	86,070	$	5,763		6.7	%

The increase in non-interest expense from the six months ended June 30, 2018 included $2.4 million in merger costs recorded in the 2019 period with no comparable charges recorded in the 2018 period related to the proposed merger with Prosperity, as well as a $2.1 million increase in salaries and employee benefits expense, which was primarily related to merit increases granted in the 2019 period, as well as higher mortgage commissions paid in the 2019 period attributable to increased mortgage loan production. Additionally, share-based compensation expense was higher during the six months ended June 30, 2019 due to fluctuations in the Company’s share price. Data processing expense increased by $1.8 million compared to the six months ended June 30, 2018, as the Company has outsourced certain segments of its data processing operations and invested in system upgrades. These increases in non-interest expense compared to the six months ended June 30, 2018 were partially offset by a $436,000 decrease in regulatory assessments expense due to a notice of preliminary assessment credit received from the FDIC in 2019, which may reduce future FDIC assessment payments, as well as a lower assessment rate used in the 2019 period. Additionally, other non-interest expense declined by $409,000 from the six months ended June 30, 2018, primarily due to lower debit card fraud and lending-related expenses during the 2019 period.

Income Tax Expense. For the six months ended June 30, 2019, we recognized income tax expense of $15.0 million on our pre-tax income, which was an effective tax rate of 21.2%, compared to income tax expense of $13.5 million for the six months ended June 30, 2018, which was an effective tax rate of 20.1%.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

(Dollars in thousands)

2019

2018

Interest-earning assets:

AverageOutstandingBalance

InterestEarned/Paid

Yield/Rate

AverageOutstandingBalance

InterestEarned/Paid

Yield/Rate

Commercial real estate

3,~~048~~119,~~087~~147

3840,~~920~~542

5.1821

23,~~993~~055,~~024~~139

3738,~~537~~762

5.09

Warehouse Purchase Program

~~724~~1,~~070~~253,262

814,~~771~~927

4.9178

~~965~~1,~~320~~075,262

1012,~~071~~137

4.2353

Commercial and industrial

2,~~088~~085,~~056~~820

30,~~791~~218

5.9881

12,~~904~~002,~~515~~490

2428,~~753~~489

5.2771

Construction and land

~~276~~286,~~642~~163

4,~~116~~370

6.0313

~~270~~260,~~899~~560

3,~~456~~478

5.1735

Consumer real estate

1,~~404~~434,~~292~~812

1617,~~876~~110

4.8177

1,~~227~~265,~~556~~751

1314,~~980~~750

4.5666

Other consumer

4547,~~339~~014

~~657~~663

5.8866

4443,~~891~~779

~~622~~626

5.6274

Loans held for sale

1530,~~347~~572

~~170~~324

4.4325

2029,~~988~~378

~~212~~328

4.0446

Less: deferred fees and allowance for loan loss

(5767,~~955~~408

)

—

(6266,~~666~~746

)

—

Loans receivable 1

78,~~543~~189,~~878~~382

~~100~~108,~~301~~154

5.3829

7,~~364~~665,~~527~~613

9098,~~631~~570

45.9816

Agency mortgage-backed securities

~~229~~218,~~227~~162

1,~~400~~283

2.4435

~~274~~258,~~471~~420

1,~~502~~434

2.1922

Agency collateralized mortgage obligations

~~303~~317,~~281~~734

2,~~175~~177

2.8774

~~221~~248,~~157~~150

1,~~392~~640

2.5264

Investment securities

8168,~~946~~300

~~370~~410

12.8040

96101,~~423~~641

~~692~~699

2.8775

FHLB and FRB stock and other restricted securities

5664,~~145~~752

~~581~~683

4.1422

5658,~~483~~972

~~480~~551

3.4073

Interest-earning deposit accounts

~~218~~232,~~608~~862

1,~~277~~370

2.3736

~~239~~233,~~936~~335

~~969~~1,097

1.6489

Total interest-earning assets

89,~~433~~091,~~085~~192

~~106~~114,~~104~~077

5.0903

8,~~252~~566,~~997~~131

95103,~~666~~991

4.6987

Non-interest-earning assets

~~457~~449,~~974~~173

429,~~464~~905

Total assets

89,~~891~~540,~~059~~365

8,~~682~~996,~~461~~036

Interest-bearing liabilities:

Interest-bearing demand

~~800~~855,~~557~~948

1,~~504~~519

0.7671

~~970~~954,~~998~~960

12,~~933~~085

0.8188

Savings and money market

2,~~487~~581,~~833~~816

67,~~928~~885

1.1322

2,~~745~~578,~~192~~205

5,~~044~~057

0.7579

Time

1,~~776~~885,~~829~~190

911,~~783~~040

2.2335

1,~~433~~632,~~307~~697

56,~~055~~590

1.4362

Borrowings

~~882~~1,~~061~~101,559

68,~~725~~079

32.0994

~~877~~1,~~502~~018,945

56,~~021~~330

2.3249

Total interest-bearing liabilities

56,~~947~~424,~~280~~513

2428,~~940~~523

1.7078

6,~~026~~184,~~999~~807

1720,~~053~~062

1.1530

Non-interest-bearing demand

1,~~688~~812,~~937~~042

1,~~576~~694,~~792~~082

Non-interest-bearing liabilities

~~147~~169,~~123~~809

~~105~~122,~~483~~573

Total liabilities

78,~~783~~406,~~340~~364

78,~~709~~001,~~274~~462

Total shareholders’ equity

1,~~107~~134,~~719~~001

~~973~~994,~~187~~574

Total liabilities and shareholders’ equity

89,~~891~~540,~~059~~365

8,~~682~~996,~~461~~036

Net interest income and margin

8185,~~164~~554

3.8977

7883,~~613~~929

3.8593

Net interest income and margin (tax-equivalent basis) 2

8185,~~236~~640

3.9178

7884,~~755~~064

3.8694

Net interest rate spread

3.3925

3.5457

Net earning assets

2,~~485~~666,~~805~~679

2,~~225~~381,~~998~~324

Average interest-earning assets to average interest-bearing liabilities

141.8051

~~136~~138.9350

Calculated net of deferred fees, loan discounts, loans in process and allowance for loan losses.

In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment (a non-GAAP measure) has been computed using a federal income tax rate of 21% for 2019 and 2018. Tax-exempt investments and loans had an average balance of $7768.73 million and $9389.7 million for the three months ended ~~March~~June 3130, 2019 and 2018, respectively.

4448

Filing Compare · LegacyTexas Financial Group, Inc.