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, 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, every Interactive Data File required to be submitted 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 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 October 26, 2018, there were 25,961,584 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 230,080 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  September 30, 2018 and December 31, 2017

1

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017

2

 

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

3

 

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

4

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2018

    

2017

 

 

(Unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Cash and due from banks

 

$

51,980

 

$

59,255

Interest-bearing deposits at other financial institutions

 

 

229,660

 

 

266,944

Total cash and cash equivalents

 

 

281,640

 

 

326,199

Time deposits in other banks

 

 

 —

 

 

600

Debt securities

 

 

222,493

 

 

223,208

Equity investments

 

 

15,101

 

 

12,226

Loans held for sale

 

 

384

 

 

1,460

Loans, net of allowance for loan loss of $24,486 and $24,778 at September 30, 2018 and December 31, 2017, respectively

 

 

2,438,711

 

 

2,286,766

Premises and equipment, net

 

 

52,032

 

 

53,607

Goodwill

 

 

80,950

 

 

80,950

Other intangible assets, net of accumulated amortization of $14,678 and $13,930 at September 30, 2018 and December 31, 2017, respectively

 

 

6,038

 

 

6,770

Bank-owned life insurance

 

 

71,070

 

 

68,010

Deferred tax asset, net

 

 

7,710

 

 

5,780

Repossessed real estate and other assets

 

 

175

 

 

705

Other assets

 

 

14,149

 

 

14,802

Total assets

 

$

3,190,453

 

$

3,081,083

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

  

 

 

  

Liabilities

 

 

  

 

 

  

Noninterest-bearing deposits

 

$

1,144,985

 

$

1,109,789

Interest-bearing deposits

 

 

1,545,095

 

 

1,493,183

Total deposits

 

 

2,690,080

 

 

2,602,972

Repurchase agreements

 

 

1,351

 

 

1,525

Junior subordinated debt

 

 

6,726

 

 

6,726

Other liabilities

 

 

20,445

 

 

23,646

Total liabilities

 

 

2,718,602

 

 

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

 

 

257

 

 

257

Additional paid-in capital

 

 

344,222

 

 

343,249

Retained earnings

 

 

147,768

 

 

118,353

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

 

 

(14,825)

 

 

(15,256)

Accumulated other comprehensive loss, net of tax of $1,482 and $104 at September 30, 2018 and December 31, 2017, respectively.

 

 

(5,571)

 

 

(389)

Total shareholders’ equity

 

 

471,851

 

 

446,214

Total liabilities and shareholders’ equity

 

$

3,190,453

 

$

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 September 30,

 

For the Nine Months Ended September 30,

 

    

2018

    

2017

    

2018

    

2017

Interest income

 

 

  

 

 

  

 

 

  

 

 

  

Interest and fees on loans

 

$

31,513

 

$

27,129

 

$

90,468

 

$

79,642

Debt securities

 

 

1,535

 

 

1,334

 

 

4,478

 

 

3,990

Federal Funds and interest-bearing deposits

 

 

1,617

 

 

1,106

 

 

3,931

 

 

2,661

Total interest income

 

 

34,665

 

 

29,569

 

 

98,877

 

 

86,293

Interest expense

 

 

  

 

 

  

 

 

  

 

 

  

Deposits

 

 

2,961

 

 

1,964

 

 

7,035

 

 

5,659

Repurchase agreements

 

 

 1

 

 

 2

 

 

 3

 

 

 5

Federal Home Loan Bank advances

 

 

61

 

 

 —

 

 

73

 

 

 —

Note payable

 

 

 4

 

 

269

 

 

11

 

 

784

Junior subordinated debt

 

 

112

 

 

83

 

 

314

 

 

236

Total interest expense

 

 

3,139

 

 

2,318

 

 

7,436

 

 

6,684

Net interest income

 

 

31,526

 

 

27,251

 

 

91,441

 

 

79,609

Provision (recapture) for loan losses

 

 

(1,142)

 

 

(1,654)

 

 

413

 

 

(1,388)

Net interest income after provision for loan losses

 

 

32,668

 

 

28,905

 

 

91,028

 

 

80,997

Noninterest income

 

 

  

 

 

  

 

 

  

 

 

  

Deposit account service charges

 

 

1,597

 

 

1,395

 

 

4,572

 

 

4,412

Net gain on sale of assets

 

 

152

 

 

828

 

 

492

 

 

1,531

Card interchange fees

 

 

922

 

 

803

 

 

2,820

 

 

2,512

Earnings on bank-owned life insurance

 

 

443

 

 

459

 

 

1,359

 

 

1,120

Other

 

 

412

 

 

601

 

 

1,150

 

 

1,485

Total noninterest Income

 

 

3,526

 

 

4,086

 

 

10,393

 

 

11,060

Noninterest expense

 

 

  

 

 

  

 

 

  

 

 

  

Salaries and employee benefits

 

 

12,499

 

 

11,829

 

 

37,690

 

 

34,552

Net occupancy expense

 

 

2,428

 

 

2,221

 

 

7,126

 

 

6,805

Regulatory fees

 

 

488

 

 

458

 

 

1,546

 

 

1,689

Data processing

 

 

664

 

 

662

 

 

2,013

 

 

1,955

Printing, stationery and office

 

 

503

 

 

348

 

 

1,394

 

 

1,065

Amortization of intangibles

 

 

245

 

 

267

 

 

748

 

 

816

Professional and director fees

 

 

809

 

 

606

 

 

2,414

 

 

1,937

Correspondent bank and customer related transaction expenses

 

 

66

 

 

67

 

 

201

 

 

219

Loan processing costs

 

 

102

 

 

115

 

 

295

 

 

320

Advertising, marketing and business development

 

 

437

 

 

266

 

 

1,418

 

 

953

Repossessed real estate and other asset expense

 

 

 3

 

 

340

 

 

65

 

 

543

Security and protection expense

 

 

346

 

 

331

 

 

959

 

 

1,055

Telephone and communications

 

 

342

 

 

311

 

 

1,122

 

 

972

Other expenses

 

 

1,032

 

 

1,196

 

 

3,269

 

 

3,422

Total noninterest expense

 

 

19,964

 

 

19,017

 

 

60,260

 

 

56,303

Net income before income tax expense

 

 

16,230

 

 

13,974

 

 

41,161

 

 

35,754

Income tax expense

 

 

3,207

 

 

3,927

 

 

7,984

 

 

10,140

Net income

 

$

13,023

 

$

10,047

 

$

33,177

 

$

25,614

Earnings per common share

 

 

  

 

 

  

 

 

  

 

 

  

Basic

 

$

0.52

 

$

0.46

 

$

1.34

 

$

1.16

Diluted

 

$

0.52

 

$

0.45

 

$

1.33

 

$

1.16

 

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 September 30,

 

For the Nine Months Ended September 30,

 

    

2018

    

2017

    

2018

    

2017

Net income

 

$

13,023

    

$

10,047

    

$

33,177

    

$

25,614

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

 

 

(1,957)

 

 

253

 

 

(6,583)

 

 

1,673

Reclassification adjustments for net realized gains included in net income

 

 

23

 

 

13

 

 

23

 

 

27

Change in related deferred income tax

 

 

407

 

 

(93)

 

 

1,378

 

 

(594)

Other comprehensive income (loss), net of tax

 

 

(1,527)

 

 

173

 

 

(5,182)

 

 

1,106

Total comprehensive income

 

$

11,496

 

$

10,220

 

$

27,995

 

$

26,720

 

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 Nine Months Ended September 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

 

 —

 

 

 —

 

 

 —

 

 

25,614

 

 —

 

 

 —

 

 

 —

 

 

25,614

Dividends on common stock, $0.15 per share

 

 —

 

 

 —

 

 

 —

 

 

(3,309)

 

 —

 

 

 —

 

 

 —

 

 

(3,309)

Stock-based compensation expense

 

 —

 

 

 —

 

 

56

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

56

Exercise of stock options

 

 —

 

 

 —

 

 

 —

 

 

 —

 

1,000

 

 

17

 

 

 —

 

 

17

Other comprehensive income, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,106

 

 

1,106

Balance at September 30, 2017

 

22,971,504

 

 

230

 

 

278,557

 

 

117,579

 

(908,432)

 

 

(15,429)

 

 

184

 

 

381,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

25,731,504

 

$

257

 

$

343,249

 

$

118,353

 

(898,272)

 

$

(15,256)

 

$

(389)

 

$

446,214

Net income

 

 —

 

 

 —

 

 

 —

 

 

33,177

 

 —

 

 

 —

 

 

 —

 

 

33,177

Dividends on common stock, $0.15 per share

 

 —

 

 

 —

 

 

 —

 

 

(3,762)

 

 —

 

 

 —

 

 

 —

 

 

(3,762)

Stock-based compensation expense

 

 —

 

 

 —

 

 

1,154

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,154

Exercise of stock options

 

 —

 

 

 —

 

 

(181)

 

 

 —

 

25,400

 

 

431

 

 

 —

 

 

250

Other comprehensive loss, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(5,182)

 

 

(5,182)

Balance at September 30, 2018

 

25,731,504

 

$

257

 

$

344,222

 

$

147,768

 

(872,872)

 

$

(14,825)

 

$

(5,571)

 

$

471,851

 

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 Nine Months Ended September 30,

 

    

2018

 

2017

Cash flows from operating activities:

 

 

  

 

 

 

Net income

 

$

33,177

 

$

25,614

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

 

 

  

 

 

  

Provision (recapture) for loan losses

 

 

413

 

 

(1,388)

Depreciation

 

 

2,483

 

 

2,538

Deferred income tax provision (benefit)

 

 

(553)

 

 

535

Amortization of intangibles

 

 

748

 

 

816

Valuation adjustments on repossessed real estate and other assets

 

 

 —

 

 

341

Net realized gains on debt securities

 

 

(42)

 

 

(44)

Net gains on sales of assets

 

 

(492)

 

 

(1,531)

Earnings on bank-owned life insurance

 

 

(1,359)

 

 

(1,120)

Amortization of premiums on securities

 

 

841

 

 

965

Stock-based compensation expense

 

 

1,154

 

 

56

Change in operating assets and liabilities:

 

 

  

 

 

  

Loans held for sale

 

 

1,398

 

 

516

Other assets

 

 

641

 

 

(4,372)

Other liabilities

 

 

(3,236)

 

 

4,088

Total adjustments

 

 

1,996

 

 

1,400

Net cash provided by operating activities

 

 

35,173

 

 

27,014

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of debt securities

 

 

(336,204)

 

 

(267,970)

Proceeds from sales, calls and maturities of debt securities

 

 

312,840

 

 

240,802

Principal repayments of debt securities

 

 

16,720

 

 

15,208

Net contributions to equity investments

 

 

(2,875)

 

 

(28)

Net decrease in time deposits in other banks

 

 

600

 

 

 —

Net increase in loans

 

 

(163,908)

 

 

(73,796)

Sales of loan participations

 

 

40,871

 

 

30,826

Purchases of loan participations

 

 

(31,453)

 

 

(4,091)

Proceeds from sales of U.S. Small Business Administration loans

 

 

1,972

 

 

2,173

Purchases of bank-owned life insurance

 

 

(1,700)

 

 

(15,000)

Proceeds from sales of repossessed real estate and other assets

 

 

856

 

 

1,910

Purchases of premises and equipment

 

 

(909)

 

 

(699)

Proceeds from sales of premises and equipment

 

 

 —

 

 

2,977

Net cash used in investing activities

 

 

(163,190)

 

 

(67,688)

Cash flows from financing activities:

 

 

  

 

 

  

Net increase in noninterest-bearing deposits

 

 

35,196

 

 

26,330

Net increase (decrease) in interest-bearing deposits

 

 

51,912

 

 

(12,463)

Net decrease in securities sold under agreements to repurchase

 

 

(174)

 

 

(104)

Proceeds from exercise of stock options

 

 

250

 

 

17

Repayments of note payable

 

 

 —

 

 

(3,322)

Dividends paid on common stock

 

 

(3,726)

 

 

(3,309)

Net cash provided by financing activities

 

 

83,458

 

 

7,149

Net decrease in cash, cash equivalents and restricted cash

 

 

(44,559)

 

 

(33,525)

Cash, cash equivalents and restricted cash, beginning

 

 

326,199

 

 

382,103

Cash, cash equivalents and restricted cash, ending

 

$

281,640

 

$

348,578

 

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 September 30, 2018 and December 31, 2017, consolidated results of operations for the three and nine months ended September 30, 2018 and 2017, consolidated shareholders’ equity for the nine months ended September 30, 2018 and 2017 and consolidated cash flows for the nine months ended September 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

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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 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 2018-10, Codification Improvements to Topic 842, Leases was issued in July 2018 to clarify narrow aspects of ASU 2016-02. In addition, ASU 2018-11, Leases (Topic 842) was also issued in July 2018 and allows application of ASU 2016-02 at the date of the adoption date and recognize a cumulative-effect adjustment to retained earnings. Prior to the issuance of ASU 2018-11, transition to the new lease accounting under ASU 2016-02 required 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. ASU 2016‑02 will be effective for the Company on January 1, 2019. The Company will use the modified retrospective approach and intends to elect the available practical expedients on adoption.

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This standard is anticipated to have a material impact on the Company’s consolidated balance sheets, but is not expected to have a material impact on the Company’s consolidated income statements. The Company is nearing completion of the assessment of the impacts of the standard and currently expects that the most significant impact will be 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 its liability to make the lease payments under these operating leases.

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 ASC 606, as applicable. A majority of the Company’s revenue-generating transactions are not subject to ASC 606, 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 ASC 606, 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.

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

(Dollars in thousands)

    

2018

 

2017

Deposit account service charges

 

$

4,572

 

$

4,412

Net gain on sale of assets

 

 

492

 

 

1,531

Card interchange fees

 

 

2,820

 

 

2,512

 

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 ASC 606. 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.

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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 $20.0 million and $15.8 million at September 30, 2018 and December 31, 2017, respectively. Additionally, as of September 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:

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

(Dollars in thousands)

    

2018

 

2017

Supplemental disclosures of cash flow information:

 

 

  

 

 

 

Cash paid for taxes

 

$

7,827

 

$

9,515

Cash paid for interest on deposits and repurchase agreements

 

 

6,943

 

 

5,718

Cash paid for interest on notes payable

 

 

 —

 

 

780

Cash paid for interest on junior subordinated debt

 

 

300

 

 

230

Supplemental disclosures of non-cash flow information:

 

 

  

 

 

 

Dividends accrued for restricted stock

 

 

44

 

 

 —

Repossessed real estate and other assets

 

 

312

 

 

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

September 30, 2018

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities available for sale:

 

 

  

 

 

  

 

 

  

 

 

  

State and municipal securities

 

$

56,155

 

$

119

 

$

(1,150)

 

$

55,124

U.S. agency securities:

 

 

  

 

 

  

 

 

  

 

 

  

Debt securities

 

 

17,315

 

 

 —

 

 

(628)

 

 

16,687

Collateralized mortgage obligations

 

 

66,737

 

 

 8

 

 

(2,206)

 

 

64,539

Mortgage-backed securities

 

 

88,185

 

 

95

 

 

(3,239)

 

 

85,041

Other securities

 

 

1,123

 

 

 —

 

 

(52)

 

 

1,071

Total

 

$

229,515

 

$

222

 

$

(7,275)

 

$

222,462

Debt securities held to maturity:

 

 

  

 

 

  

 

 

  

 

 

  

Mortgage-backed securities

 

$

31

 

$

 2

 

$

 —

 

$

33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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