cbtx_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10‑Q

 

 

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

 

For the quarterly period ended September 30, 2017

OR

 

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: 001-38280

 

 

 

CBTX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Texas

 

20‑8339782

 

 

 

(State or other jurisdiction of

 

(I.R.S. employer

 

 

 

incorporation or organization)

 

identification no.)

 

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices)

 

 

(713) 210‑7600

(Registrant’s telephone number, including area code)

 

 

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 ☐  No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company 

 

 

 

(Do not check if a smaller reporting company)

 

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.

 

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

 

As of November 30, 2017, there were 25,045,812 shares of the registrant’s common stock, par value $0.01 per share outstanding.

 

 

 

 


 

Table of Contents

CBTX, INC.

 

 

Page

PART I — FINANCIAL INFORMATION 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

1

Item 1. 

Financial Statements – (Unaudited)

3

 

Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

3

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016

4

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016

5

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017 and 2016

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016

7

 

Notes to Condensed Consolidated Financial Statements

8

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

69

Item 4. 

Controls and Procedures

69

 

 

 

PART II — OTHER INFORMATION 

Item 1. 

Legal Proceedings

69

Item 1A. 

Risk Factors

70

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

96

Item 3. 

Defaults Upon Senior Securities

96

Item 4. 

Mine Safety Disclosures

97

Item 5. 

Other Information

97

Item 6. 

Exhibits

98

SIGNATURES 

   99

 

 

 


 

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward‑looking statements. These forward‑looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward‑looking nature. These forward‑looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward‑looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward‑looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward‑looking statements. These risks and uncertainties include, but are not limited to, those described below under “Part II – Other Information – Item 1A. – Risk Factors” and the following:

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward‑looking statements, including, but not limited to, the following:

·

the effect of Hurricane Harvey on our markets and business;

·

natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, and other matters beyond our control;

·

the geographic concentration of our markets in Beaumont and Houston, Texas;

·

our ability to prudently manage our growth and execute our strategy;

·

risks associated with our acquisition and de novo branching strategy;

·

changes in management personnel;

·

the amount of nonperforming and classified assets that we hold;

·

time and effort necessary to resolve nonperforming assets;

·

deterioration of our asset quality;

·

interest rate risk associated with our business;

·

business and economic conditions generally and in the financial services industry, nationally and within our primary markets;

·

volatility and direction of oil prices and the strength of the energy industry, generally and within Texas;

·

the composition of our loan portfolio, including the identity of our borrowers and the concentration of loans in specialized industries;

·

changes in the value of collateral securing our loans;

·

our ability to maintain important deposit customer relationships and our reputation;

·

our ability to maintain effective internal control over financial reporting;

·

operational risks associated with our business;

·

increased competition in the financial services industry, particularly from regional and national institutions;

·

volatility and direction of market interest rates;

·

liquidity risks associated with our business;

·

systems failures or interruptions involving our information technology and telecommunications systems or third‑party servicers;

·

environmental liability associated with our lending activities;

1


 

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·

the institution and outcome of litigation and other legal proceedings against us or to which we may become subject;

·

changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;

·

further government intervention in the U.S. financial system; and

·

other factors that are discussed in the section to this Quarterly Report on Form 10-Q entitled “Risk Factors”.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward‑looking statements. Any forward‑looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward‑looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward‑looking statements.

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CBTX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(DOLLARS IN THOUSANDS, EXCEPT FOR PAR VALUE AND PER SHARE AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

(Unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

54,117

 

$

53,000

Interest-bearing deposits at other financial institutions

 

 

294,461

 

 

329,103

Total Cash and Cash Equivalents

 

 

348,578

 

 

382,103

Time deposits in other banks

 

 

600

 

 

600

Securities

 

 

217,660

 

 

205,978

Other investments

 

 

12,091

 

 

12,063

Loans held for sale

 

 

466

 

 

613

Loans, net of allowance for loan loss of $23,757 and $25,006 at September 30, 2017 and December 31, 2016, respectively

 

 

2,175,721

 

 

2,129,879

Premises and equipment, net

 

 

54,129

 

 

57,514

Goodwill

 

 

80,950

 

 

80,950

Other intangible assets, net of accumulated amortization of $13,667 and $12,851 at September 30, 2017 and December 31, 2016, respectively

 

 

7,031

 

 

7,791

Cash value of life insurance

 

 

67,550

 

 

51,430

Deferred tax asset, net

 

 

7,901

 

 

9,031

Repossessed real estate and other assets

 

 

1,136

 

 

1,861

Other assets

 

 

16,025

 

 

11,709

Total Assets

 

$

2,989,838

 

$

2,951,522

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Noninterest-bearing deposits

 

$

1,051,755

 

$

1,025,425

Interest-bearing deposits

 

 

1,502,872

 

 

1,515,335

Total Deposits

 

 

2,554,627

 

 

2,540,760

Repurchase agreements

 

 

2,239

 

 

2,343

Junior subordinated debt

 

 

6,726

 

 

6,726

Note payable

 

 

24,357

 

 

27,679

Other liabilities

 

 

20,768

 

 

16,377

Total Liabilities

 

 

2,608,717

 

 

2,593,885

Commitments and Contingencies (Note 10)

 

 

  

 

 

  

Shareholders’ Equity

 

 

  

 

 

  

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued

 

 

 —

 

 

 —

Common stock, $0.01 par value; 90,000,000 shares authorized, 22,971,504 shares issued at September 30, 2017 and December 31, 2016, 22,063,072 shares outstanding at September 30, 2017 and 22,062,072 shares outstanding at December 31, 2016

 

 

230

 

 

230

Additional paid-in capital

 

 

278,557

 

 

278,501

Retained earnings

 

 

117,579

 

 

95,274

Treasury stock, at cost (908,432 shares held at September 30, 2017 and 909,432 held at December 31, 2016)

 

 

(15,429)

 

 

(15,446)

Accumulated other comprehensive income/(loss)

 

 

184

 

 

(922)

Total Shareholders’ Equity

 

 

381,121

 

 

357,637

Total Liabilities and Shareholders’ Equity

 

$

2,989,838

 

$

2,951,522

 

See accompanying notes to condensed consolidated financial statements.

 

 

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CBTX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

INTEREST INCOME

 

 

  

 

 

  

 

 

  

 

 

  

Interest and fees on loans

 

$

27,129

 

$

26,121

 

$

79,642

 

$

77,425

Securities

 

 

1,334

 

 

973

 

 

3,990

 

 

2,746

Federal Funds and interest-bearing deposits

 

 

1,106

 

 

601

 

 

2,661

 

 

1,769

Total Interest Income

 

 

29,569

 

 

27,695

 

 

86,293

 

 

81,940

INTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

1,964

 

 

1,851

 

 

5,659

 

 

5,159

Repurchase agreements

 

 

 2

 

 

 —

 

 

 5

 

 

 3

Note payable

 

 

269

 

 

260

 

 

784

 

 

805

Junior subordinated debt

 

 

83

 

 

67

 

 

236

 

 

194

Total Interest Expense

 

 

2,318

 

 

2,178

 

 

6,684

 

 

6,161

NET INTEREST INCOME

 

 

27,251

 

 

25,517

 

 

79,609

 

 

75,779

PROVISION (RECAPTURE) FOR LOAN LOSS

 

 

(1,654)

 

 

1,225

 

 

(1,388)

 

 

3,925

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS

 

 

28,905

 

 

24,292

 

 

80,997

 

 

71,854

NONINTEREST INCOME

 

 

  

 

 

  

 

 

  

 

 

  

Deposit account service charges

 

 

1,395

 

 

1,695

 

 

4,412

 

 

4,947

Net gain on sale of assets

 

 

828

 

 

107

 

 

1,531

 

 

640

Card interchange fees

 

 

803

 

 

837

 

 

2,512

 

 

2,522

Earnings on bank-owned life insurance

 

 

459

 

 

339

 

 

1,120

 

 

1,016

Other

 

 

601

 

 

573

 

 

1,485

 

 

2,224

Total Noninterest Income

 

 

4,086

 

 

3,551

 

 

11,060

 

 

11,349

NONINTEREST EXPENSE

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and employee benefits

 

 

11,829

 

 

10,997

 

 

34,552

 

 

33,058

Net occupancy expense

 

 

2,221

 

 

2,322

 

 

6,805

 

 

7,652

Regulatory fees

 

 

458

 

 

546

 

 

1,689

 

 

1,694

Data processing

 

 

662

 

 

621

 

 

1,955

 

 

1,861

Printing, stationery and office

 

 

348

 

 

395

 

 

1,065

 

 

1,094

Amortization of intangibles

 

 

267

 

 

290

 

 

816

 

 

884

Professional and director fees

 

 

606

 

 

615

 

 

1,937

 

 

1,801

Correspondent bank and customer related transaction expenses

 

 

67

 

 

82

 

 

219

 

 

243

Loan processing costs

 

 

115

 

 

77

 

 

320

 

 

317

Advertising, marketing and business development

 

 

266

 

 

173

 

 

953

 

 

570

Repossessed real estate and other asset expense

 

 

340

 

 

98

 

 

543

 

 

219

Security and protection expense

 

 

331

 

 

473

 

 

1,055

 

 

1,355

Other expenses

 

 

1,507

 

 

1,341

 

 

4,394

 

 

4,116

Total Noninterest Expense

 

 

19,017

 

 

18,030

 

 

56,303

 

 

54,864

NET INCOME BEFORE INCOME TAX EXPENSE

 

 

13,974

 

 

9,813

 

 

35,754

 

 

28,339

INCOME TAX EXPENSE

 

 

3,927

 

 

3,032

 

 

10,140

 

 

8,688

NET INCOME

 

$

10,047

 

$

6,781

 

$

25,614

 

$

19,651

EARNINGS PER COMMON SHARE

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 

$

0.46

 

$

0.31

 

$

1.16

 

$

0.89

Diluted

 

$

0.45

 

$

0.31

 

$

1.16

 

$

0.88

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(DOLLARS IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

Net income

 

$

10,047

    

$

6,781

    

$

25,614

    

$

19,651

Unrealized gains (losses) on securities available for sale arising during the period, net

 

 

253

 

 

(777)

 

 

1,673

 

 

1,345

Reclassification adjustment for net realized gains included in net income

 

 

13

 

 

 —

 

 

27

 

 

28

Change in related deferred income tax

 

 

(93)

 

 

273

 

 

(594)

 

 

(480)

Other comprehensive income (loss), net of tax

 

 

173

 

 

(504)

 

 

1,106

 

 

893

Total comprehensive income

 

$

10,220

 

$

6,277

 

$

26,720

 

$

20,544

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury Stock

 

Comprehensive

 

 

 

 

    

Shares

    

Amount

    

Capital

    

Earnings

    

Shares

    

Amount

    

Income (Loss)

    

Total

Balance, January 1, 2016

 

22,971,504

 

$

230

 

$

281,163

 

$

72,462

 

(668,030)

 

$

(10,955)

 

$

1,414

 

$

344,314

Purchase of Shares of Treasury Stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(635,100)

 

 

(11,079)

 

 

 —

 

 

(11,079)

Issuance of Shares of Treasury Stock by Exercise of Stock Options

 

 —

 

 

 —

 

 

(1,336)

 

 

 —

 

202,044

 

 

3,333

 

 

 —

 

 

1,997

Stock-based Compensation Expense

 

 —

 

 

 —

 

 

35

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

35

Dividends on Common Stock, $0.15 per share

 

 —

 

 

 —

 

 

 —

 

 

(3,293)

 

 —

 

 

 —

 

 

 —

 

 

(3,293)

Net Income

 

 —

 

 

 —

 

 

 —

 

 

19,651

 

 —

 

 

 —

 

 

 —

 

 

19,651

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

893

 

 

893

Balance, September 30, 2016

 

22,971,504

 

$

230

 

$

279,862

 

$

88,820

 

(1,101,086)

 

$

(18,701)

 

$

2,307

 

$

352,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

22,971,504

 

$

230

 

$

278,501

 

$

95,274

 

(909,432)

 

$

(15,446)

 

$

(922)

 

$

357,637

Issuance of Shares of Treasury Stock by Exercise of Stock Options

 

 —

 

 

 —

 

 

 —

 

 

 —

 

1,000

 

 

17

 

 

 —

 

 

17

Stock-based Compensation Expense

 

 —

 

 

 —

 

 

56

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

56

Dividends on Common Stock, $0.15 per share

 

 —

 

 

 —

 

 

 —

 

 

(3,309)

 

 —

 

 

 —

 

 

 —

 

 

(3,309)

Net Income

 

 —

 

 

 —

 

 

 —

 

 

25,614

 

 —

 

 

 —

 

 

 —

 

 

25,614

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,106

 

 

1,106

Balance, September 30, 2017

 

22,971,504

 

$

230

 

$

278,557

 

$

117,579

 

(908,432)

 

$

(15,429)

 

$

184

 

$

381,121

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

 

    

2017

    

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

  

 

 

 

Net income

 

$

25,614

 

$

19,651

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

 

 

  

 

 

  

Provision (recapture) for loan losses

 

 

(1,388)

 

 

3,925

Depreciation

 

 

2,538

 

 

2,444

Deferred income tax provision

 

 

535

 

 

659

Amortization of intangibles

 

 

816

 

 

884

Valuation write downs on repossessed real estate and other assets

 

 

341

 

 

 —

Net realized gain on securities

 

 

(27)

 

 

(28)

Net realized gain on other securities

 

 

(17)

 

 

(17)

(Gain) loss on sale of repossessed real estate and other assets

 

 

(271)

 

 

35

Gain on sale of loans held for sale

 

 

(369)

 

 

(350)

Gain on sale of loans

 

 

(149)

 

 

(315)

Gain on sale of premises and equipment

 

 

(742)

 

 

(10)

Net income on bank-owned life insurance

 

 

(1,120)

 

 

(1,016)

Amortization of premiums on investment securities, net

 

 

965

 

 

925

Stock-based compensation expense

 

 

56

 

 

35

Change in operating assets and liabilities:

 

 

  

 

 

  

Net decrease in loans held for sale

 

 

516

 

 

1,185

Other assets

 

 

(4,372)

 

 

(1,208)

Other liabilities

 

 

4,088

 

 

2,414

Total adjustments

 

 

1,400

 

 

9,562

Net cash provided by operating activities

 

 

27,014

 

 

29,213

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

 

 

  

Activity in available for sale securities:

 

 

  

 

 

  

Purchases

 

 

(267,970)

 

 

(287,586)

Proceeds from sales, calls, and maturities

 

 

240,802

 

 

241,865

Principal repayments

 

 

15,207

 

 

12,559

Activity in held to maturity securities:

 

 

  

 

 

  

Principal repayments

 

 

 1

 

 

 1

Redemption of other investments

 

 

130

 

 

223

Purchase of other investments

 

 

(158)

 

 

(279)

Net increase in time deposits in other banks

 

 

 —

 

 

(200)

Increase in loans, net

 

 

(73,796)

 

 

(88,361)

Loan participation sales

 

 

30,826

 

 

3,637

Loan participations purchased

 

 

(4,091)

 

 

 —

Sale of U.S. Small Business Administration loans

 

 

2,173

 

 

3,490

Redemption of bank-owned life insurance

 

 

 —

 

 

367

Purchase of bank-owned life insurance

 

 

(15,000)

 

 

 —

Proceeds from sale of repossessed other assets

 

 

958

 

 

170

Proceeds from sale of repossessed real estate

 

 

952

 

 

464

Purchases of premises and equipment

 

 

(699)

 

 

(1,929)

Sales of premises and equipment

 

 

2,977

 

 

 9

Net cash used in investing activities

 

 

(67,688)

 

 

(115,570)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

 

 

  

Net increase (decrease) in noninterest-bearing deposits

 

 

26,330

 

 

(28,528)

Net increase (decrease) in interest-bearing deposits

 

 

(12,463)

 

 

74,393

Net decrease in securities sold under agreements to repurchase

 

 

(104)

 

 

(507)

Purchase of treasury stock

 

 

 —

 

 

(11,079)

Proceeds from issuance of treasury stock for exercise of stock options

 

 

17

 

 

1,997

Repayment of note payable

 

 

(3,322)

 

 

(2,214)

Dividends paid on common stock

 

 

(3,309)

 

 

(3,314)

Net cash used in financing activities

 

 

7,149

 

 

30,748

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(33,525)

 

 

(55,609)

CASH AND CASH EQUIVALENTS, BEGINNING

 

 

382,103

 

 

434,901

CASH AND CASH EQUIVALENTS, ENDING

 

$

348,578

 

$

379,292

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

NOTE 1: BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations—CBTX, Inc. (the Company or CBTX) was formed on January 26, 2007, and through its subsidiary, CommunityBank of Texas, N.A. (the Bank), operates 37 locations throughout Southeast Texas in Chambers, Fort Bend, Hardin, Harris, Jasper, Jefferson, Newton, Orange, Tyler, and Wharton counties. The Company’s primary source of revenue is from investing funds received from depositors and from providing loan and other financial services to its customers. The Bank operates under a national charter and therefore is subject to regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). The Company is subject to regulation by the Federal Reserve Board.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank, a wholly owned subsidiary of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), but do not include all of the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated financial position at September 30, 2017 and December 31, 2016, consolidated results of operations for the three and nine months ended September 30, 2017 and 2016, consolidated shareholders’ equity for the nine months ended September 30, 2017 and 2016 and consolidated cash flows for the nine months ended September 30, 2017 and 2016.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the years ended December 31, 2016 and 2015 included within our Form S‑1 registration statement filed with the Securities and Exchange Commission (SEC) on October 13, 2017 (as subsequently amended) and declared effective on November 7, 2017.

Par Value Change and Stock Split Dividend—On September 19, 2017, the Company amended and restated the Company’s certificate of formation to, among other things, change the Company’s name to CBTX, Inc., to increase the number of authorized preferred and common shares which the Company has the authority to issue and to reduce the par value of these shares to $0.01. The par value per share and the authorized number of shares of each class of stock changed resulting from this amendment to the certificate of formation is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Authorized

 

 

 

 

Par Value

 

Par Value

 

Number of

 

Authorized

 

 

per Share

 

per Share

 

Shares

 

Number of

 

 

Prior to

 

Post

 

Prior to

 

Shares Post

Line Item

    

Amendment

    

Amendment

    

Amendment

    

Amendment

Preferred Stock

 

$

10.00

 

$

0.01

 

1,000,000

 

10,000,000

Common Stock

 

$

10.00

 

$

0.01

 

15,000,000

 

90,000,000

 

Also, on September 20, 2017, the board of directors of the Company approved a 2‑for‑1 stock split, whereby each shareholder of the Company’s common stock received one additional share of common stock for each share owned at the record date of September 30, 2017 in the form of a stock dividend that was distributed on October 13, 2017.

The effects of the change in par value of the Company’s shares and the stock split on outstanding shares and per share figures have been retroactively applied to all periods presented as if the transaction had occurred as of the beginning

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of the earliest period presented. In addition, the number of shares of common stock underlying the Company’s stock options were proportionately increased and the exercise price of each stock option was proportionately decreased retroactively for all periods presented.

Segment Reporting—The Company has one reportable segment. The Company’s activities are interrelated and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit. The Company’s chief operating decision‑maker, the CEO, uses the consolidated results to make operating and strategic decisions.

Use of Estimates—In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate primarily to the determination of the allowance for loan losses, the fair value of the Company’s investment securities, repossessed assets, deferred tax assets, financial instruments and intangible assets.

Summary of Significant Accounting and Reporting Policies—The accounting and reporting policies of the Company and the Bank conform to U.S. GAAP and to prevailing practices within the banking industry. The Company’s significant accounting and reporting policies have not changed materially from those disclosed in the December 31, 2016 audited financials included in our registration statement.

New Accounting Standards and Disclosure Requirements—The Jumpstart Our Business Startups (JOBS) Act permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, the Company has decided not to take advantage of this provision. As a result, the Company will comply with new or revised accounting standards to the same extent that compliance is required for non‑emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014‑09, Revenue from Contracts with Customers (Topic 606) (ASU 2014‑09), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. ASU 2014‑09 requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014‑09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015‑14, Revenue from Contracts with Customers (Topic 606) (ASU 2015‑14), which defers the effective date of ASU 2014‑09 by one year to January 1, 2018.

The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014‑09, and non‑interest income. Management continues to assess the potential impact of ASU 2014‑09 on the non‑interest income components, but it is not expected to have a significant impact on our financial statements. The Company will adopt ASU 2014-09 in the first quarter of 2018 using the modified retrospective application with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

ASU 2016‑01, Financial Instruments‑Overall (Subtopic 825‑10)Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016‑01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the

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instrument‑specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available‑for‑sale investments. This update will be effective for the Company on January 1, 2018. The Company is currently evaluating this update and does not expect it to have a significant impact to the Company’s consolidated financial statements.

ASU 2016‑02, Leases (Topic 842). ASU 2016‑02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right‑of‑use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016‑02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016‑02 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the potential impact of ASU 2016‑02 on the consolidated financial statements.

ASU 2016‑05, Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. ASU 2016‑05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require redesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016‑05 was effective on January 1, 2017 and it did not have a significant impact on the consolidated financial statements.

ASU 2016‑07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. ASU 2016‑07 simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. ASU 2016‑07 became effective on January 1, 2017 and did not have a significant impact on the consolidated financial statements.

ASU 2016‑09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share‑Based Payment Accounting. ASU 2016‑09 simplifies several aspects of the accounting for employee share‑based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Per ASU 2016‑09: (1) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, rather than in additional paid‑in capital under current guidance; (2) excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows, rather than as a separate cash inflow from financing activities and cash outflow from operating activities under current guidance; (3) cash paid by an employer when directly withholding shares for tax‑withholding purposes should be classified as a financing activity; and (4) an entity can make an entity‑wide accounting policy election to either estimate the number of awards that are expected to vest, as under current guidance, or account for forfeitures when they occur.

Effective January 1, 2017, the Company adopted ASU 2016‑09. There was no material impact for the nine months ended September 30, 2017, and the Company does not expect a material impact in future periods. The Company prospectively applied the guidance for the presentation of excess tax benefits as an operating cash flow with no impact for the nine months ended September 30, 2017. Finally, the Company elected to account for forfeitures as they occur.

ASU 2016‑13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016‑13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016‑13 amends the accounting for credit losses on available‑for‑sale debt securities and purchased financial assets with credit deterioration. ASU 2016‑13 will be effective on January 1, 2020. The Company is currently evaluating the potential impact of ASU 2016‑13 on the consolidated financial statements.

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ASU 2016‑15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments. ASU 2016‑15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016‑15 will be effective on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016‑16, Income Taxes (Topic 740)—Intra‑Entity Transfers of Assets Other Than Inventory. ASU 2016‑16 provides guidance stating that an entity should recognize the income tax consequences of an intra‑entity transfer of an asset other than inventory when the transfer occurs. ASU 2016‑16 will be effective on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2016‑18, Statement of Cash Flows (Topic 230)—Restricted Cash. ASU 2016‑18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning‑of‑period and end‑of‑period total amounts shown on the statement of cash flows. ASU 2016‑18 will be effective on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2017‑01, Business Combinations (Topic 805)—Clarifying the Definition of a Business. ASU 2017‑01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017‑01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017‑01 will be effective on January 1, 2018 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2017‑04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment eliminates Step 2 from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, ASU 2017‑04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of this pronouncement.

ASU 2017‑09, Compensation—Stock Compensation provides guidance about which changes in terms or conditions of a share‑based award require application of modification accounting. ASU 2017‑09 will be effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and is not expected to have a significant impact on the Company’s consolidated financial statements.

Cash Flow Reporting—Cash and cash equivalents include cash, interest‑bearing and noninterest‑bearing transaction accounts with other banks, and federal funds sold. Generally, federal funds are sold for one‑day periods. Cash flows are reported net for loans, deposits, and short term borrowings.

Supplemental disclosures of cash flow information are as follows for the nine months ended September 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2017

    

2016

Cash flow information:

 

 

  

 

 

  

Cash paid for taxes

 

$

9,515

 

$

8,593

Cash paid for interest on deposits and repurchase agreements

 

$

5,718

 

$

5,163

Cash paid for interest on notes payable

 

$

780

 

$

804

Cash paid for interest on junior subordinated debt

 

$

230

 

$

189

Non-cash flow information:

 

 

  

 

 

  

Real estate acquired through foreclosure

 

$

583

 

$

2,296

 

 

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NOTE 2: SECURITIES

The amortized cost and fair values of investments in securities at September 30, 2017 and December 31, 2016, are summarized in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

    

Cost

    

Gains

    

Losses

    

Fair Value

September 30, 2017