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 March 31, 2018

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 April 30, 2018, there were 25,946,584 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 215,080 shares of unvested restricted stock.

 

 

 

 

 


 

Table of Contents

CBTX, INC.

 

 

Page

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements – (Unaudited)

1

 

Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017

3

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2. 

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

35

 

Cautionary Note Regarding Forward-looking Statements

35

 

Overview

36

 

Results of Operations

37

 

Financial Condition

41

 

Liquidity and Capital Resources

50

 

Interest Rate Sensitivity and Market Risk

54

 

Impact of Inflation

55

 

Non-GAAP Financial Measures

55

 

Critical Accounting Policies

56

 

Recently Issued Accounting Pronouncements

58

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

58

Item 4. 

Controls and Procedures

58

 

 

 

PART II — OTHER INFORMATION 

Item 1. 

Legal Proceedings

58

Item 1A. 

Risk Factors

59

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3. 

Defaults Upon Senior Securities

59

Item 4. 

Mine Safety Disclosures

59

Item 5. 

Other Information

59

Item 6. 

Exhibits

60

 

SIGNATURES

61

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2018

    

2017

 

 

(Unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

41,513

 

$

59,255

Interest-bearing deposits at other financial institutions

 

 

238,402

 

 

266,944

Total cash and cash equivalents

 

 

279,915

 

 

326,199

Time deposits in other banks

 

 

600

 

 

600

Debt securities

 

 

221,183

 

 

223,208

Equity investments

 

 

12,675

 

 

12,226

Loans held for sale

 

 

113

 

 

1,460

Loans, net of allowance for loan loss of $25,349 and $24,778 at March 31, 2018 and December 31, 2017, respectively

 

 

2,330,704

 

 

2,286,766

Premises and equipment, net

 

 

53,135

 

 

53,607

Goodwill

 

 

80,950

 

 

80,950

Other intangible assets, net of accumulated amortization of $14,185 and $13,930 at March 31, 2018 and December 31, 2017, respectively

 

 

6,521

 

 

6,770

Bank-owned life insurance

 

 

70,161

 

 

68,010

Deferred tax asset, net

 

 

6,050

 

 

5,780

Repossessed real estate and other assets

 

 

295

 

 

705

Other assets

 

 

12,488

 

 

14,802

Total assets

 

$

3,074,790

 

$

3,081,083

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Noninterest-bearing deposits

 

$

1,120,521

 

$

1,109,789

Interest-bearing deposits

 

 

1,479,181

 

 

1,493,183

Total deposits

 

 

2,599,702

 

 

2,602,972

Repurchase agreements

 

 

861

 

 

1,525

Junior subordinated debt

 

 

6,726

 

 

6,726

Other liabilities

 

 

15,930

 

 

23,646

Total liabilities

 

 

2,623,219

 

 

2,634,869

Commitments and contingencies (Note 13)

 

 

  

 

 

  

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, 25,731,504 shares issued at March 31, 2018 and December 31, 2017, 24,833,232 shares outstanding at March 31, 2018 and  December 31, 2017

 

 

257

 

 

257

Additional paid-in capital

 

 

343,641

 

 

343,249

Retained earnings

 

 

126,213

 

 

118,353

Treasury stock, at cost (898,272 shares held at March 31, 2018 and December 31, 2017)

 

 

(15,256)

 

 

(15,256)

Accumulated other comprehensive loss, net of tax of $874 and $104 at March 31, 2017 and December 31, 2017, respectively.

 

 

(3,284)

 

 

(389)

Total shareholders’ equity

 

 

451,571

 

 

446,214

Total liabilities and shareholders’ equity

 

$

3,074,790

 

$

3,081,083

 

See accompanying notes to condensed consolidated financial statements.

 

 

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

    

2018

    

2017

Interest income

 

 

  

 

 

  

Interest and fees on loans

 

$

28,462

 

$

25,953

Debt securities

 

 

1,436

 

 

1,303

Federal Funds and interest-bearing deposits

 

 

1,187

 

 

742

Total interest income

 

 

31,085

 

 

27,998

Interest expense

 

 

  

 

 

  

Deposits

 

 

1,948

 

 

1,838

Repurchase agreements

 

 

 1

 

 

 2

Note payable

 

 

 4

 

 

251

Junior subordinated debt

 

 

93

 

 

74

Total interest expense

 

 

2,046

 

 

2,165

Net interest income

 

 

29,039

 

 

25,833

Provision for loan losses

 

 

865

 

 

960

Net interest income after provision for loan losses

 

 

28,174

 

 

24,873

Noninterest income

 

 

  

 

 

  

Deposit account service charges

 

 

1,478

 

 

1,500

Net gain on sale of assets

 

 

130

 

 

364

Card interchange fees

 

 

927

 

 

832

Earnings on bank-owned life insurance

 

 

451

 

 

326

Other

 

 

375

 

 

426

Total noninterest Income

 

 

3,361

 

 

3,448

Noninterest expense

 

 

  

 

 

  

Salaries and employee benefits

 

 

12,695

 

 

11,424

Net occupancy expense

 

 

2,265

 

 

2,233

Regulatory fees

 

 

545

 

 

610

Data processing

 

 

683

 

 

642

Printing, stationery and office

 

 

411

 

 

347

Amortization of intangibles

 

 

255

 

 

278

Professional and director fees

 

 

919

 

 

625

Correspondent bank and customer related transaction expenses

 

 

67

 

 

74

Loan processing costs

 

 

118

 

 

72

Advertising, marketing and business development

 

 

506

 

 

179

Repossessed real estate and other asset expense

 

 

57

 

 

118

Security and protection expense

 

 

302

 

 

372

Telephone and communications

 

 

386

 

 

354

Other expenses

 

 

1,075

 

 

1,099

Total noninterest Expense

 

 

20,284

 

 

18,427

Net income before income tax expense

 

 

11,251

 

 

9,894

Income tax expense

 

 

2,139

 

 

3,032

Net income

 

$

9,112

 

$

6,862

Earnings per common share

 

 

  

 

 

  

Basic

 

$

0.37

 

$

0.31

Diluted

 

$

0.37

 

$

0.31

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

Ended March 31,

 

    

2018

    

2017

Net income

 

$

9,112

    

$

6,862

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

 

 

(3,665)

 

 

366

Reclassification adjustments for net realized gains included in net income

 

 

 —

 

 

 —

Change in related deferred income tax

 

 

770

 

 

(128)

Other comprehensive income (loss), net of tax

 

 

(2,895)

 

 

238

Total comprehensive income

 

$

6,217

 

$

7,100

 

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 Three Months Ended March 31, 2018 and 2017

(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 at December 31, 2016

 

22,971,504

 

$

230

 

$

278,501

 

$

95,274

 

(909,432)

 

$

(15,446)

 

$

(922)

 

$

357,637

Net income

 

 —

 

 

 —

 

 

 —

 

 

6,862

 

 —

 

 

 —

 

 

 —

 

 

6,862

Dividends on common stock, $0.05 per share

 

 —

 

 

 —

 

 

 —

 

 

(1,103)

 

 —

 

 

 —

 

 

 —

 

 

(1,103)

Stock-based compensation expense

 

 —

 

 

 —

 

 

 9

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 9

Other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

238

 

 

238

Balance at March 31, 2017

 

22,971,504

 

 

230

 

 

278,510

 

 

101,033

 

(909,432)

 

 

(15,446)

 

 

(684)

 

 

363,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

25,731,504

 

$

257

 

$

343,249

 

$

118,353

 

(898,272)

 

$

(15,256)

 

$

(389)

 

$

446,214

Net income

 

 —

 

 

 —

 

 

 —

 

 

9,112

 

 —

 

 

 —

 

 

 —

 

 

9,112

Dividends on common stock, $0.05 per share

 

 —

 

 

 —

 

 

 —

 

 

(1,252)

 

 —

 

 

 —

 

 

 —

 

 

(1,252)

Stock-based compensation expense

 

 —

 

 

 —

 

 

392

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

392

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,895)

 

 

(2,895)

Balance at March 31, 2018

 

25,731,504

 

$

257

 

$

343,641

 

$

126,213

 

(898,272)

 

$

(15,256)

 

$

(3,284)

 

$

451,571

 

See accompanying notes to condensed consolidated financial statements.

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CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

    

2018

 

2017

Cash flows from operating activities:

 

 

  

 

 

 

Net income

 

$

9,112

 

$

6,862

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

 

 

  

 

 

  

Provision for loan losses

 

 

865

 

 

960

Depreciation

 

 

825

 

 

818

Deferred income tax provision

 

 

499

 

 

252

Amortization of intangibles

 

 

255

 

 

278

Valuation adjustments on repossessed real estate and other assets

 

 

 —

 

 

51

Net realized gains on debt securities

 

 

(6)

 

 

(6)

Net gains on sales of assets

 

 

(130)

 

 

(364)

Earnings on bank-owned life insurance

 

 

(451)

 

 

(326)

Amortization of premiums on securities

 

 

291

 

 

313

Stock-based compensation expense

 

 

392

 

 

 9

Change in operating assets and liabilities:

 

 

  

 

 

  

Loans held for sale

 

 

1,464

 

 

40

Other assets

 

 

2,312

 

 

564

Other liabilities

 

 

(7,726)

 

 

1,377

Total adjustments

 

 

(1,410)

 

 

3,966

Net cash provided by operating activities

 

 

7,702

 

 

10,828

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of debt securities

 

 

(85,675)

 

 

(99,387)

Proceeds from sales, calls and maturities of debt securities

 

 

78,890

 

 

79,628

Principal repayments of debt securities

 

 

4,861

 

 

4,760

Net (contributions to) dividends from equity investments

 

 

(449)

 

 

79

Net increase in loans

 

 

(45,514)

 

 

(69,318)

Sales of loan participations

 

 

7,500

 

 

5,934

Purchases of loan participations

 

 

(7,000)

 

 

(205)

Sales of U.S. Small Business Administration loans

 

 

237

 

 

568

Purchases of bank-owned life insurance

 

 

(1,700)

 

 

 —

Proceeds from sales of repossessed real estate and other assets

 

 

393

 

 

1,668

Purchases of premises and equipment

 

 

(354)

 

 

(479)

Proceeds from sales of premises and equipment

 

 

 —

 

 

580

Net cash used in investing activities

 

 

(48,811)

 

 

(76,172)

Cash flows from financing activities:

 

 

  

 

 

  

Net increase (decrease) in noninterest-bearing deposits

 

 

10,732

 

 

(31,586)

Net decrease in interest-bearing deposits

 

 

(14,002)

 

 

(10,729)

Net increase (decrease) in securities sold under agreements to repurchase

 

 

(664)

 

 

121

Repayments of note payable

 

 

 —

 

 

(1,107)

Dividends paid on common stock

 

 

(1,241)

 

 

(1,103)

Net cash used in financing activities

 

 

(5,175)

 

 

(44,404)

Net decrease in cash, cash equivalents and restricted cash

 

 

(46,284)

 

 

(109,748)

Cash, cash equivalents and restricted cash, beginning

 

 

326,199

 

 

382,103

Cash, cash equivalents and restricted cash, ending

 

$

279,915

 

$

272,355

 

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., or the Company, was formed on January 26, 2007, and through its subsidiary, CommunityBank of Texas, N.A., or the Bank, operates 33 locations in the Houston and Beaumont/East Texas market areas. The Company’s primary sources of revenue are 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, or OCC and the Federal Deposit Insurance Corporation, or 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, or U.S. GAAP, but do not include all 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 March 31, 2018 and December 31, 2017, consolidated results of operations for the three months ended March 31, 2018 and 2017, consolidated shareholders’ equity for the three months ended March 31, 2018 and 2017 and consolidated cash flows for the three months ended March 31, 2018 and 2017.

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 year ended December 31, 2017 included within our Annual Report on Form 10-K.

Accounting Standards Recently Adopted

Accounting Standards Update, or ASU, 2014‑09, Revenue from Contracts with Customers (Topic 606): 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. The Company adopted ASU 2014-09 effective January 1, 2018 with no significant impact to the Company’s consolidated financial statements as the Company’s revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014‑09 and noninterest income. The Company’s revenue recognition for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposits accounts, did not materially change from previous practice.

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

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at amortized cost on the balance sheet, (iv) clarifies that entities use the exit price notion when measuring the fair value of loans for disclosure purposes and not use a practicability exception, (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 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 (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available‑for‑sale investments. ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) clarifies certain aspects of ASU 2016-01. The Company implemented ASU 2016-01 and ASU 2018-03 effective January 1, 2018 with no significant impact to the Company’s consolidated financial statements. See Note 12 – Fair Value Disclosures.

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. The Company implemented ASU 2016‑15 effective January 1, 2018. The Company has elected to use the nature of distribution approach to determine the nature of distribution approach to determine whether income received from equity investments is operating or investing on the cash flow statement. Based on the nature of previous income streams from our equity investments, we expect these amounts will continue to be reported in cash provided by operating activities on the cash flow statement and the other items in ASU 2016-15 will be considered if such items arise.

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. The Company implemented ASU 2016‑16 effective January 1, 2018. As we have not historically transferred assets between entities, we expect no 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. The Company implemented ASU 2016‑18 effective January 1, 2018. The only cash the Company has considered to be restricted is the amount of our Federal Bank reserves, which we had already included in cash and equivalents in 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. The Company implemented ASU 2017‑01 effective January 1, 2018 and will follow this guidance for any future acquisitions or dispositions.

ASU 2017‑09, Compensation—Stock Compensation (Topic 718): ASU 2017-09 provides guidance about which changes in terms or conditions of a share‑based award require application of modification accounting. The Company implemented ASU 2017‑09 effective January 1, 2018 and will follow this guidance for any future modifications of share-based awards.

Accounting Standards Not Yet Adopted

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. 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.

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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.

ASU 2017‑04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 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.

Revenue Recognition

The Company records revenue from contracts with customers in accordance with ASU 2014-09, as applicable. A majority of the Company’s revenue-generating transactions are not subject to ASU 2014-09, such as interest and fees on loans, income from debt securities, income from federal funds and interest-bearing deposits. Our revenue-generating activities that are within the scope of ASU 2014-09, are included in our condensed consolidated income statements in noninterest income. See table below. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed and charged either on a periodic basis or based on activity.

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(Dollars in thousands)

    

2018

 

2017

Deposit account service charges

 

$

1,478

 

$

1,500

Net gain on sale of assets

 

 

130

 

 

364

Card interchange fees

 

 

927

 

 

832

 

Deposit account service charges– this is comprised of fees from our customers for deposit related services, such as monthly account maintenance and activity or transaction-based fees. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction is completed. Payment for such performance obligations are generally received at the time the performance obligation is satisfied.

Net gain on sale of assets this is comprised of gains on sales of fixed assets, gains on sales of loans and gains on sales of other real estate owned, or OREO. Gains on sales of loans are excluded from ASU 2014-09. The performance obligation in the sale of OREO or fixed assets is delivery of control over the property to the buyer. The Company does not typically provide financing and the transaction price is identified in the purchase and sale agreement.  If the Company provides financing, the Company must determine a transaction price depending on if the sales contract is at market terms and taking into account the credit risk inherent in the sale agreement.

Card interchange fees– this is comprised of fees generated from debit card transactions. Revenue is recognized when our performance obligation is completed generally when a transaction is completed. Payment for such performance obligations are generally received at the time the performance obligation is satisfied.

Cash Flow Reporting

Cash, cash equivalents and restricted cash include cash, interest‑bearing and noninterest‑bearing transaction accounts with other banks and federal funds sold. The Bank is required to maintain regulatory reserves with the Federal Reserve Bank. The reserve requirements for the Bank were approximately $15.6 million and $15.8 million at March 31, 2018 and December 31, 2017, respectively and cash and due from banks balances were restricted to that extent.

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Supplemental disclosures of cash flow information are as follows for the periods indicated below:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(Dollars in thousands)

    

2018

 

2017

Supplemental disclosures of cash flow information:

 

 

  

 

 

 

Cash paid for taxes

 

$

 —

 

$

 —

Cash paid for interest on deposits and repurchase agreements

 

 

1,960

 

 

1,866

Cash paid for interest on notes payable

 

 

 —

 

 

256

Cash paid for interest on junior subordinated debt

 

 

87

 

 

74

Supplemental disclosures of non-cash flow information:

 

 

  

 

 

 

Dividends accrued for restricted stock

 

 

10

 

 

 —

Real estate acquired through foreclosure

 

 

 —

 

 

166

 

 

NOTE 2: DEBT SECURITIES

The amortized cost and fair values of investments in debt securities as of the dates shown below were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

March 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

59,319

 

$

468

 

$

(649)

 

$

59,138

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities

 

 

17,315

 

 

 —

 

 

(556)

 

 

16,759

Collateralized mortgage obligations

 

 

65,948

 

 

37

 

 

(1,376)

 

 

64,609

Mortgage-backed securities

 

 

81,616

 

 

176

 

 

(2,223)

 

 

79,569

Other securities

 

 

1,110

 

 

 —

 

 

(35)

 

 

1,075

Total

 

$

225,308

 

$

681

 

$

(4,839)

 

$

221,150

Debt securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage-backed securities

 

$

33

 

$

 2

 

$

 —

 

$

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

60,861

 

$

1,173

 

$

(118)

 

$

61,916

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities

 

 

17,315

 

 

 —

 

 

(370)

 

 

16,945

Collateralized mortgage obligations

 

 

61,878

 

 

50

 

 

(675)

 

 

61,253

Mortgage-backed securities

 

 

82,510

 

 

330

 

 

(866)

 

 

81,974

Other securities

 

 

1,104

 

 

 —

 

 

(17)

 

 

1,087

Total

 

$

223,668

 

$

1,553

 

$

(2,046)

 

$

223,175

Debt securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage-backed securities

 

$

33

 

$

 2

 

$

 —

 

$

35

 

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The amortized cost and estimated fair value of debt securities, by contractual maturity, as of the dates shown below are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Available for Sale

 

Debt Securities Held to Maturity

 

 

Amortized

 

Fair

 

Amortized

 

Fair

(Dollars in thousands)

    

Cost

    

Value

    

Cost

    

Value

March 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Amounts maturing in:

 

 

  

 

 

  

 

 

  

 

 

  

1 year or less

 

$

3,379

 

$

3,355

 

$

 —

 

$

 —

1 year through 5 years

 

 

25,445

 

 

25,054

 

 

 —

 

 

 —

5 years through 10 years

 

 

10,730

 

 

10,768

 

 

 —

 

 

 —

After 10 years

 

 

185,754

 

 

181,973

 

 

33

 

 

35

 

 

$

225,308

 

$

221,150

 

$

33

 

$

35

December 31, 2017

 

 

  

 

 

  

 

 

  

 

 

  

Amounts maturing in:

 

 

  

 

 

  

 

 

  

 

 

  

1 year or less

 

$

6,203

 

$

6,194

 

$

 —

 

$

 —

1 year through 5 years

 

 

26,811

 

 

26,635

 

 

 —

 

 

 —

5 years through 10 years

 

 

9,215

 

 

9,348

 

 

 —

 

 

 —

After 10 years

 

 

181,439

 

 

180,998

 

 

33

 

 

35

 

 

$

223,668

 

$

223,175

 

$

33

 

$

35

 

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

There were no security sales during the three months ended March 31, 2018 and 2017. At March 31, 2018 and December 31, 2017, debt securities with a carrying amount of approximately $60.9 million and $58.7 million,  respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

The Company held 52 and 52 debt securities at March 31, 2018 and December 31, 2017, that were in a gross unrealized loss position for 12 months or more as illustrated in the table below. The unrealized losses are attributable primarily to changes in market interest rates relative to those available when the debt securities were acquired. The fair value of these debt securities is expected to recover as the debt securities reach their maturity or re‑pricing date, or if changes in market rates for such investments decline. Management does not believe that any of the debt securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2018 and December 31, 2017, management believes the unrealized losses detailed in the table below are temporary and no impairment loss has been recorded in the Company’s condensed consolidated statements of income for the three months ended March 31, 2018 and 2017.

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Debt securities with unrealized losses as of the dates shown below, aggregated by category and the length of time were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

 

 

 

Gross

 

 

 

Gross

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(Dollars in thousands)

    

Value

    

Losses

    

Value

    

Losses

March 31, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale: