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 June 30, 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.

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

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 July 26, 2018, there were 25,962,584 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 231,080 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 June 30, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017

2

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017

3

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017

4

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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

33

 

Cautionary Note Regarding Forward-looking Statements

33

 

Overview

34

 

Results of Operations

35

 

Financial Condition

42

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2018

    

2017

 

 

(Unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

54,279

 

$

59,255

Interest-bearing deposits at other financial institutions

 

 

190,986

 

 

266,944

Total cash and cash equivalents

 

 

245,265

 

 

326,199

Time deposits in other banks

 

 

200

 

 

600

Debt securities

 

 

230,393

 

 

223,208

Equity investments

 

 

15,038

 

 

12,226

Loans held for sale

 

 

560

 

 

1,460

Loans, net of allowance for loan loss of $25,746 and $24,778 at June 30, 2018 and December 31, 2017, respectively

 

 

2,378,386

 

 

2,286,766

Premises and equipment, net

 

 

52,607

 

 

53,607

Goodwill

 

 

80,950

 

 

80,950

Other intangible assets, net of accumulated amortization of $14,434 and $13,930 at June 30, 2018 and December 31, 2017, respectively

 

 

6,276

 

 

6,770

Bank-owned life insurance

 

 

70,627

 

 

68,010

Deferred tax asset, net

 

 

6,922

 

 

5,780

Repossessed real estate and other assets

 

 

137

 

 

705

Other assets

 

 

13,399

 

 

14,802

Total assets

 

$

3,100,760

 

$

3,081,083

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Noninterest-bearing deposits

 

$

1,114,155

 

$

1,109,789

Interest-bearing deposits

 

 

1,447,119

 

 

1,493,183

Total deposits

 

 

2,561,274

 

 

2,602,972

Repurchase agreements

 

 

1,448

 

 

1,525

Federal Home Loan Bank advances

 

 

50,000

 

 

 —

Junior subordinated debt

 

 

6,726

 

 

6,726

Other liabilities

 

 

20,117

 

 

23,646

Total liabilities

 

 

2,639,565

 

 

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 June 30, 2018 and December 31, 2017, 24,858,632 and 24,833,232 shares outstanding at June 30, 2018 and  December 31, 2017, respectively

 

 

257

 

 

257

Additional paid-in capital

 

 

343,807

 

 

343,249

Retained earnings

 

 

136,000

 

 

118,353

Treasury stock, at cost (872,872 and 898,272 shares held at June 30, 2018 and December 31, 2017, respectively)

 

 

(14,825)

 

 

(15,256)

Accumulated other comprehensive loss, net of tax of $1,075 and $104 at June 30, 2018 and December 31, 2017, respectively.

 

 

(4,044)

 

 

(389)

Total shareholders’ equity

 

 

461,195

 

 

446,214

Total liabilities and shareholders’ equity

 

$

3,100,760

 

$

3,081,083

 

See accompanying notes to condensed consolidated financial statements.

 

 

1


 

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

    

2018

    

2017

    

2018

    

2017

Interest income

 

 

  

 

 

  

 

 

  

 

 

  

Interest and fees on loans

 

$

30,493

 

$

26,560

 

$

58,955

 

$

52,513

Debt securities

 

 

1,507

 

 

1,353

 

 

2,943

 

 

2,656

Federal Funds and interest-bearing deposits

 

 

1,127

 

 

813

 

 

2,314

 

 

1,555

Total interest income

 

 

33,127

 

 

28,726

 

 

64,212

 

 

56,724

Interest expense

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

2,126

 

 

1,857

 

 

4,074

 

 

3,695

Repurchase agreements

 

 

 1

 

 

 1

 

 

 2

 

 

 3

Federal Home Loan Bank advances

 

 

12

 

 

 —

 

 

12

 

 

 —

Note payable

 

 

 3

 

 

264

 

 

 7

 

 

515

Junior subordinated debt

 

 

109

 

 

79

 

 

202

 

 

153

Total interest expense

 

 

2,251

 

 

2,201

 

 

4,297

 

 

4,366

Net interest income

 

 

30,876

 

 

26,525

 

 

59,915

 

 

52,358

Provision (recapture) for loan losses

 

 

690

 

 

(694)

 

 

1,555

 

 

266

Net interest income after provision for loan losses

 

 

30,186

 

 

27,219

 

 

58,360

 

 

52,092

Noninterest income

 

 

  

 

 

  

 

 

  

 

 

  

Deposit account service charges

 

 

1,497

 

 

1,517

 

 

2,975

 

 

3,017

Net gain on sale of assets

 

 

210

 

 

339

 

 

340

 

 

703

Card interchange fees

 

 

971

 

 

877

 

 

1,898

 

 

1,709

Earnings on bank-owned life insurance

 

 

465

 

 

335

 

 

916

 

 

661

Other

 

 

363

 

 

458

 

 

738

 

 

884

Total noninterest Income

 

 

3,506

 

 

3,526

 

 

6,867

 

 

6,974

Noninterest expense

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and employee benefits

 

 

12,496

 

 

11,299

 

 

25,191

 

 

22,723

Net occupancy expense

 

 

2,433

 

 

2,351

 

 

4,698

 

 

4,584

Regulatory fees

 

 

513

 

 

621

 

 

1,058

 

 

1,231

Data processing

 

 

666

 

 

651

 

 

1,349

 

 

1,293

Printing, stationery and office

 

 

480

 

 

370

 

 

891

 

 

717

Amortization of intangibles

 

 

248

 

 

271

 

 

503

 

 

549

Professional and director fees

 

 

686

 

 

706

 

 

1,605

 

 

1,331

Correspondent bank and customer related transaction expenses

 

 

68

 

 

78

 

 

135

 

 

152

Loan processing costs

 

 

75

 

 

133

 

 

193

 

 

205

Advertising, marketing and business development

 

 

475

 

 

508

 

 

981

 

 

687

Repossessed real estate and other asset expense

 

 

 5

 

 

85

 

 

62

 

 

203

Security and protection expense

 

 

311

 

 

352

 

 

613

 

 

724

Telephone and communications

 

 

394

 

 

307

 

 

780

 

 

661

Other expenses

 

 

1,162

 

 

1,127

 

 

2,237

 

 

2,226

Total noninterest Expense

 

 

20,012

 

 

18,859

 

 

40,296

 

 

37,286

Net income before income tax expense

 

 

13,680

 

 

11,886

 

 

24,931

 

 

21,780

Income tax expense

 

 

2,638

 

 

3,181

 

 

4,777

 

 

6,213

Net income

 

$

11,042

 

$

8,705

 

$

20,154

 

$

15,567

Earnings per common share

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 

$

0.44

 

$

0.39

 

$

0.81

 

$

0.71

Diluted

 

$

0.44

 

$

0.39

 

$

0.81

 

$

0.70

 

See accompanying notes to condensed consolidated financial statements.

2


 

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

    

2018

    

2017

    

2018

    

2017

Net income

 

$

11,042

    

$

8,705

    

$

20,154

    

$

15,567

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

 

 

(961)

 

 

1,055

 

 

(4,626)

 

 

1,420

Reclassification adjustments for net realized gains included in net income

 

 

 —

 

 

14

 

 

 —

 

 

14

Change in related deferred income tax

 

 

201

 

 

(374)

 

 

971

 

 

(501)

Other comprehensive income (loss), net of tax

 

 

(760)

 

 

695

 

 

(3,655)

 

 

933

Total comprehensive income

 

$

10,282

 

$

9,400

 

$

16,499

 

$

16,500

 

See accompanying notes to condensed consolidated financial statements.

3


 

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended June 30, 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

 

 —

 

 

 —

 

 

 —

 

 

15,567

 

 —

 

 

 —

 

 

 —

 

 

15,567

Dividends on common stock, $0.10 per share

 

 —

 

 

 —

 

 

 —

 

 

(2,206)

 

 —

 

 

 —

 

 

 —

 

 

(2,206)

Stock-based compensation expense

 

 —

 

 

 —

 

 

16

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

16

Exercise of stock options

 

 —

 

 

 —

 

 

 —

 

 

 —

 

1,000

 

 

17

 

 

 —

 

 

17

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

933

 

 

933

Balance at June 30, 2017

 

22,971,504

 

 

230

 

 

278,517

 

 

108,635

 

(908,432)

 

 

(15,429)

 

 

11

 

 

371,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

25,731,504

 

$

257

 

$

343,249

 

$

118,353

 

(898,272)

 

$

(15,256)

 

$

(389)

 

$

446,214

Net income

 

 —

 

 

 —

 

 

 —

 

 

20,154

 

 —

 

 

 —

 

 

 —

 

 

20,154

Dividends on common stock, $0.10 per share

 

 —

 

 

 —

 

 

 —

 

 

(2,507)

 

 —

 

 

 —

 

 

 —

 

 

(2,507)

Stock-based compensation expense

 

 —

 

 

 —

 

 

739

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

739

Exercise of stock options

 

 —

 

 

 —

 

 

(181)

 

 

 —

 

25,400

 

 

431

 

 

 —

 

 

250

Other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(3,655)

 

 

(3,655)

Balance at June 30, 2018

 

25,731,504

 

$

257

 

$

343,807

 

$

136,000

 

(872,872)

 

$

(14,825)

 

$

(4,044)

 

$

461,195

 

See accompanying notes to condensed consolidated financial statements.

4


 

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

    

2018

 

2017

Cash flows from operating activities:

 

 

  

 

 

 

Net income

 

$

20,154

 

$

15,567

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

 

 

  

 

 

  

Provision for loan losses

 

 

1,555

 

 

266

Depreciation

 

 

1,652

 

 

1,703

Deferred income tax provision

 

 

171

 

 

334

Amortization of intangibles

 

 

503

 

 

549

Valuation adjustments on repossessed real estate and other assets

 

 

 —

 

 

51

Net realized gains on debt securities

 

 

(12)

 

 

(25)

Net gains on sales of assets

 

 

(340)

 

 

(703)

Earnings on bank-owned life insurance

 

 

(916)

 

 

(661)

Amortization of premiums on securities

 

 

574

 

 

625

Stock-based compensation expense

 

 

739

 

 

16

Change in operating assets and liabilities:

 

 

  

 

 

  

Loans held for sale

 

 

1,095

 

 

274

Other assets

 

 

1,055

 

 

359

Other liabilities

 

 

(4,824)

 

 

(696)

Total adjustments

 

 

1,252

 

 

2,092

Net cash provided by operating activities

 

 

21,406

 

 

17,659

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of debt securities

 

 

(175,549)

 

 

(178,534)

Proceeds from sales, calls and maturities of debt securities

 

 

154,050

 

 

155,230

Principal repayments of debt securities

 

 

10,397

 

 

9,403

Net contributions to equity investments

 

 

(2,812)

 

 

(25)

Net decrease in time deposits in other banks

 

 

400

 

 

 —

Net increase in loans

 

 

(109,272)

 

 

(63,929)

Sales of loan participations

 

 

35,000

 

 

24,978

Purchases of loan participations

 

 

(20,446)

 

 

(1,297)

Sales of U.S. Small Business Administration loans

 

 

1,534

 

 

2,173

Purchases of bank-owned life insurance

 

 

(1,700)

 

 

(15,000)

Proceeds from sales of repossessed real estate and other assets

 

 

719

 

 

1,900

Purchases of premises and equipment

 

 

(653)

 

 

(627)

Proceeds from sales of premises and equipment

 

 

 —

 

 

580

Net cash used in investing activities

 

 

(108,332)

 

 

(65,148)

Cash flows from financing activities:

 

 

  

 

 

  

Net increase in noninterest-bearing deposits

 

 

4,366

 

 

5,440

Net decrease in interest-bearing deposits

 

 

(46,064)

 

 

(29,416)

Net decrease in securities sold under agreements to repurchase

 

 

(77)

 

 

(164)

Proceeds from exercise of stock options

 

 

250

 

 

17

Net increase in Federal Home Loan Bank advances

 

 

50,000

 

 

 —

Repayments of note payable

 

 

 —

 

 

(2,215)

Dividends paid on common stock

 

 

(2,483)

 

 

(1,103)

Net cash provided by (used in) financing activities

 

 

5,992

 

 

(27,441)

Net decrease in cash, cash equivalents and restricted cash

 

 

(80,934)

 

 

(74,930)

Cash, cash equivalents and restricted cash, beginning

 

 

326,199

 

 

382,103

Cash, cash equivalents and restricted cash, ending

 

$

245,265

 

$

307,173

 

See accompanying notes to condensed consolidated financial statements.

5


 

Table of Contents

CBTX, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 June 30, 2018 and December 31, 2017, consolidated results of operations for the three and six months ended June 30, 2018 and 2017, consolidated shareholders’ equity for the six months ended June 30, 2018 and 2017 and consolidated cash flows for the six months ended June 30, 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 at amortized cost on the balance sheet, (iv) clarifies that entities use the exit price notion when measuring the fair value of

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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 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 material impact on the consolidated financial statements and will follow this guidance for any future intra-entity transfers of assets other than inventory.

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 Company considers its Federal Bank reserves and collateral for its interest rate swaps to be restricted and these amounts were 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 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’s implementation of ASU 2016-02 will result in an increase in assets due to the addition of  right-of-use assets for assets underlying its operating leases and an increase in liabilities reflecting the Company’s liability to make the lease payments under these leases. The Company  is currently evaluating the impact of these adjustments 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.

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(Dollars in thousands)

    

2018

 

2017

Deposit account service charges

 

$

2,975

 

$

3,017

Net gain on sale of assets

 

 

340

 

 

703

Card interchange fees

 

 

1,898

 

 

1,709

 

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 and the reserve requirements for the Bank were $18.9 million and $15.8 million at June 30, 2018 and

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December 31, 2017, respectively. Additionally, as of June 30, 2018 and December 31, 2017, the Company had $1.6 million in cash collateral used in our interest rate swap transactions. 

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

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

(Dollars in thousands)

    

2018

 

2017

Supplemental disclosures of cash flow information:

 

 

  

 

 

 

Cash paid for taxes

 

$

3,928

 

$

5,550

Cash paid for interest on deposits and repurchase agreements

 

 

4,062

 

 

3,751

Cash paid for interest on notes payable

 

 

 —

 

 

512

Cash paid for interest on junior subordinated debt

 

 

187

 

 

149

Supplemental disclosures of non-cash flow information:

 

 

  

 

 

 

Dividends accrued for restricted stock

 

 

33

 

 

 —

Repossessed real estate and other assets

 

 

137

 

 

583

 

 

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

June 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

61,355

 

$

413

 

$

(660)

 

$

61,108

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities

 

 

17,315

 

 

 —

 

 

(584)

 

 

16,731

Collateralized mortgage obligations

 

 

67,554

 

 

17

 

 

(1,747)

 

 

65,824

Mortgage-backed securities

 

 

88,140

 

 

153

 

 

(2,668)

 

 

85,625

Other securities

 

 

1,116

 

 

 —

 

 

(43)

 

 

1,073

Total

 

$

235,480

 

$

583

 

$

(5,702)

 

$

230,361

Debt securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage-backed securities

 

$

32

 

$

 2

 

$

 —

 

$

34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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