stxb-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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: 001-38484

 

Spirit of Texas Bancshares, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Texas

90-0499552

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

1836 Spirit of Texas Way

Conroe, TX

77301

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (936) 521-1836

 

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, 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

 

  (Do not check if a smaller reporting company)

  

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 May 25, 2018, the registrant had 9,786,611 shares of common stock, no par value, outstanding.

 

 

 

 


TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

3

Item 1.

Consolidated Financial Statements (Unaudited)

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Income

4

 

Consolidated Statements of Comprehensive Income

5

 

Consolidated Statements of Changes in Stockholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

Item 4.

Controls and Procedures

53

PART II.

OTHER INFORMATION

54

Item 1.

Legal Proceedings

54

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

Item 3.

Defaults Upon Senior Securities

54

Item 4.

Mine Safety Disclosures

54

Item 5.

Other Information

54

Item 6.

Exhibits

55

Signatures

56

 

 

2


PART I.     FINANCIAL INFORMATION

Item 1.Consolidated Financial Statements (Unaudited)

 

SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share data)

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Assets:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,786

 

 

$

19,054

 

Interest-bearing deposits in other banks

 

 

33,509

 

 

 

38,895

 

Total cash and cash equivalents

 

 

52,295

 

 

 

57,949

 

Time deposits in other banks

 

 

245

 

 

 

245

 

Investment securities:

 

 

 

 

 

 

 

 

Available for sale securities, at fair value

 

 

35,802

 

 

 

37,243

 

Total investment securities

 

 

35,802

 

 

 

37,243

 

Loans held for sale

 

 

4,530

 

 

 

3,814

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

882,101

 

 

 

869,119

 

Less: allowance for loan and lease losses

 

 

(5,727

)

 

 

(5,652

)

Loans, net

 

 

876,374

 

 

 

863,467

 

Premises and equipment, net

 

 

43,343

 

 

 

42,189

 

Accrued interest receivable

 

 

3,115

 

 

 

3,466

 

Other real estate owned and repossessed assets

 

 

268

 

 

 

21

 

Goodwill

 

 

4,485

 

 

 

4,485

 

Core deposit intangible

 

 

3,311

 

 

 

3,486

 

SBA servicing asset

 

 

3,512

 

 

 

3,411

 

Deferred tax asset, net

 

 

1,588

 

 

 

1,480

 

Bank-owned life insurance

 

 

480

 

 

 

479

 

Federal Home Loan Bank and other bank stock, at cost

 

 

4,802

 

 

 

4,812

 

Other assets

 

 

5,328

 

 

 

3,751

 

Total assets

 

$

1,039,478

 

 

$

1,030,298

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Transaction accounts:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

178,457

 

 

$

176,726

 

Interest-bearing

 

 

235,831

 

 

 

250,491

 

Total transaction accounts

 

 

414,288

 

 

 

427,217

 

Time deposits

 

 

426,675

 

 

 

408,151

 

Total deposits

 

 

840,963

 

 

 

835,368

 

Accrued interest payable

 

 

424

 

 

 

407

 

Short-term borrowings

 

 

15,000

 

 

 

15,000

 

Long-term borrowings

 

 

75,203

 

 

 

76,411

 

Other liabilities

 

 

4,909

 

 

 

3,973

 

Total liabilities

 

 

936,499

 

 

 

931,159

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred stock, $1 par value; 5 million shares authorized; 0 shares

   issued and outstanding

 

 

 

 

 

 

Common stock, no par value; 50 million shares authorized; 7,486,611 and

   7,280,183 shares issued and outstanding

 

 

84,952

 

 

 

82,615

 

Retained earnings

 

 

19,038

 

 

 

17,025

 

Accumulated other comprehensive income (loss)

 

 

(1,011

)

 

 

(501

)

Total stockholders' equity

 

 

102,979

 

 

 

99,139

 

Total liabilities and stockholders' equity

 

$

1,039,478

 

 

$

1,030,298

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements

3


SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

12,291

 

 

$

10,445

 

Interest and dividends on investment securities

 

 

214

 

 

 

 

Other interest income

 

 

148

 

 

 

306

 

Total interest income

 

 

12,653

 

 

 

10,751

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,731

 

 

 

1,585

 

Interest on FHLB advances and other borrowings

 

 

541

 

 

 

391

 

Total interest expense

 

 

2,272

 

 

 

1,976

 

Net interest income

 

 

10,381

 

 

 

8,775

 

Provision for loan losses

 

 

339

 

 

 

550

 

Net interest income after provision for loan losses

 

 

10,042

 

 

 

8,225

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges and fees

 

 

357

 

 

 

384

 

SBA loan servicing fees

 

 

624

 

 

 

546

 

Mortgage referral fees

 

 

156

 

 

 

130

 

Gain on sales of loans, net

 

 

1,474

 

 

 

1,030

 

Gain (loss) on sales of other assets

 

 

(32

)

 

 

(22

)

Other noninterest income

 

 

9

 

 

 

7

 

Total noninterest income

 

 

2,588

 

 

 

2,075

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,858

 

 

 

6,604

 

Occupancy and equipment expenses

 

 

1,236

 

 

 

1,201

 

Loan and other real estate related expenses

 

 

63

 

 

 

123

 

Professional services

 

 

311

 

 

 

273

 

Data processing and network

 

 

313

 

 

 

269

 

Regulatory assessments and insurance

 

 

255

 

 

 

232

 

Amortization of intangibles

 

 

176

 

 

 

176

 

Advertising

 

 

115

 

 

 

127

 

Marketing

 

 

118

 

 

 

131

 

Telephone expense

 

 

98

 

 

 

135

 

Other operating expenses

 

 

583

 

 

 

639

 

Total noninterest expense

 

 

10,126

 

 

 

9,910

 

Income before income tax expense

 

 

2,504

 

 

 

390

 

Income tax expense

 

 

491

 

 

 

171

 

Net income

 

$

2,013

 

 

$

219

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.03

 

Diluted

 

$

0.27

 

 

$

0.03

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,348,992

 

 

 

7,099,941

 

Diluted

 

 

7,543,606

 

 

 

7,406,228

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements

4


SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net income

 

$

2,013

 

 

$

219

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized net holding gains (losses) on investment securities available for sale, net of

   taxes of $136 and $0, respectively

 

 

(510

)

 

 

 

Reclassification adjustment for realized (gains) losses on investment securities available

   for sale included in net income, net of taxes of $0 and $0, respectively

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(510

)

 

 

 

Total comprehensive income

 

$

1,503

 

 

$

219

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements

5


SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

(Dollars in thousands)

 

 

 

Shares of Common

 

 

Shares of Preferred

 

 

Common

 

 

Preferred

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance as of January 1, 2017

 

 

7,069,527

 

 

 

170,236

 

 

$

78,871

 

 

$

1,753

 

 

$

12,272

 

 

$

 

 

$

92,896

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

219

 

 

 

 

 

 

219

 

Conversion of preferred stock

 

 

170,236

 

 

 

(170,236

)

 

 

1,753

 

 

 

(1,753

)

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

1,500

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

16

 

Stock-based compensation

 

 

 

 

 

 

 

 

959

 

 

 

 

 

 

 

 

 

 

 

 

959

 

Balance as of March 31, 2017

 

 

7,241,263

 

 

 

 

 

$

81,599

 

 

$

 

 

$

12,491

 

 

$

 

 

$

94,090

 

Balance as of January 1, 2018

 

 

7,280,183

 

 

 

 

 

$

82,615

 

 

$

 

 

$

17,025

 

 

$

(501

)

 

$

99,139

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,013

 

 

 

 

 

 

2,013

 

Exercise of stock options and warrants

 

 

206,428

 

 

 

 

 

 

2,185

 

 

 

 

 

 

 

 

 

 

 

 

2,185

 

Stock-based compensation

 

 

 

 

 

 

 

 

152

 

 

 

 

 

 

 

 

 

 

 

 

152

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(510

)

 

 

(510

)

Balance as of March 31, 2018

 

 

7,486,611

 

 

 

 

 

$

84,952

 

 

$

 

 

$

19,038

 

 

$

(1,011

)

 

$

102,979

 

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements

6


SPIRIT OF TEXAS BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,013

 

 

$

219

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

339

 

 

 

550

 

Depreciation and amortization

 

 

446

 

 

 

445

 

Net amortization (accretion) of premium (discount) on investment securities

 

 

108

 

 

 

 

Amortization of intangible assets

 

 

176

 

 

 

176

 

Accretion of discount on retained SBA loans

 

 

(275

)

 

 

(184

)

Deferred tax expense (benefit)

 

 

27

 

 

 

(220

)

Originations of loans held for sale

 

 

(17,941

)

 

 

(17,791

)

Proceeds from loans held for sale

 

 

18,730

 

 

 

17,656

 

Net gains on sale of loans held for sale

 

 

(1,474

)

 

 

(1,030

)

Gain (loss) on sale of other real estate owned

 

 

3

 

 

 

(49

)

Fair value adjustment on SBA servicing asset

 

 

231

 

 

 

134

 

Stock-based compensation

 

 

152

 

 

 

959

 

Increase in cash surrender value of BOLI

 

 

(1

)

 

 

 

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Net change in accrued interest receivable

 

 

351

 

 

 

129

 

Net change in accrued interest payable

 

 

17

 

 

 

98

 

Net change in other assets

 

 

(1,577

)

 

 

(361

)

Net change in other liabilities

 

 

936

 

 

 

(490

)

Net cash provided by (used in) operating activities

 

 

2,261

 

 

 

241

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Paydown and maturities of investment securities available for sale

 

 

688

 

 

 

1

 

Net purchase of FHLB and other bank stock

 

 

10

 

 

 

(13

)

Net change in loans

 

 

(13,603

)

 

 

(16,195

)

Proceeds from the sale of other real estate owned

 

 

18

 

 

 

16

 

Purchase of premises and equipment

 

 

(1,600

)

 

 

(608

)

Proceeds from the sale of premises and equipment

 

 

 

 

 

55

 

Net cash provided by (used in) investing activities

 

 

(14,487

)

 

 

(16,744

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

5,595

 

 

 

23,286

 

Repayment of long-term borrowings

 

 

(1,208

)

 

 

(1,143

)

Proceeds from short-term borrowings

 

 

5,000

 

 

 

1,250

 

Repayment of short-term borrowings

 

 

(5,000

)

 

 

 

Exercise of stock options

 

 

2,185

 

 

 

16

 

Net cash provided by (used in) financing activities

 

 

6,572

 

 

 

23,409

 

Net Change in Cash and Cash Equivalents

 

 

(5,654

)

 

 

6,906

 

Cash and Cash Equivalents at Beginning of Period

 

 

57,949

 

 

 

152,232

 

Cash and Cash Equivalents at End of Period

 

$

52,295

 

 

$

159,138

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,255

 

 

$

1,878

 

Income taxes paid

 

 

 

 

 

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned and repossessed assets

 

$

268

 

 

$

270

 

The accompanying notes are an integral part of these unaudited, consolidated financial statements

 

7


SPIRIT OF TEXAS BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Spirit of Texas Bancshares, Inc. (the “Holding Company” or “Company”) is a bank holding company headquartered in Conroe, Texas that provides, through its bank subsidiary, a variety of financial services to individuals and corporate customers in Texas, which are primarily agricultural, light industrial and commercial areas.

On March 16, 2017, the Company filed a Second Amended and Restated Certificate of Formation with the Texas Secretary of State to affect a reverse stock split of its outstanding common stock which became effective on March 16, 2017. As a result of the reverse split, every two shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock. The computations of all share and per share amounts have been adjusted retroactively to reflect the reverse stock split.

Basis of Presentation

The consolidated financial statements include the accounts of the Holding Company and the accounts of its wholly-owned subsidiary, Spirit of Texas Bank (the “Bank”).  All significant intercompany balances and transactions have been eliminated in consolidation.  

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2017 in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 4, 2018.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included.  The preparation of financial statements in conformity with these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and income and expense during the reporting periods and the related disclosures.  Although management’s estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that in 2018 actual conditions could vary from those anticipated, which could affect the Company’s financial condition and results of operations.  Actual results could differ from those estimates.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.”  ASU 2017-09 seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. In fact, ASU 2017-09 provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. Note that the current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. The amendments of ASU 2017-09 were effective for the Company as of January 1, 2018 and adoption of the ASU had no impact on the consolidated financial statements; however, should the Company modify the terms or conditions of any share-based payment award in the future, this modification would be evaluated and disclosed as appropriate based on the amendments of ASU 2017-09.

ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.”  Issued in March 2017, ASU 2017-08 amends the amortization period for certain purchased callable debt securities held at a premium.  In particular, the amendments in ASU 2017-08 require the premium to be amortized to the earliest call date. The amendments do not, however, require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity.  Notably, the amendments in this ASU more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities.  Securities within the scope of ASU 2017-08 are purchased

8


debt securities that have explicit, non-contingent call features that are callable at fixed prices and on preset dates.  The amendments of ASU 2017-08 become effective for public entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019.    Management will adopt this ASU using the public company effective date as early adoption is permitted and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-08 is not expected to have a material impact on the Company’s consolidated financial statements.

ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”  Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.  Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill.  In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test.  ASU 2017-04 is effective prospectively for public entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019 and for all other entities for impairment tests in fiscal years beginning after December 15, 2021.  Management will adopt this ASU using the public company effective date as early adoption is permitted and will continue to evaluate the impact this ASU will have on the consolidated financial statements through its effective date; however, the adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.  

ASU 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business.” Issued in January 2017, ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses, which determines whether goodwill should be recorded or not. The amendments in ASU No. 2017-01 provide a screen to determine when a set of assets and activities (collectively, a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated.  If, however, the screen is not met, then the amendments in ASU 2017-01 require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and remove the evaluation of whether a market participant could replace missing elements.  The revised definition will result in more transactions being recorded as asset acquisitions or dispositions as opposed to business acquisitions or dispositions.  The amendments of ASU 2017-01 are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018.  Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements; however, the adoption of ASU 2017-01 is not expected to have a material impact on the Company’s consolidated financial statements.  

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." The amendments in this ASU require 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 amendments in this ASU do not provide a definition of restricted cash or restricted cash equivalents. The Company has adopted the amendments in ASU 2016-18 as of January 1, 2018.  Adoption of the ASU did not impact the consolidated financial statements given that the Company does not have restrictions on cash for any period presented.

In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." The objective of issuing this ASU is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. As such, the Board decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this guidance eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments of this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018.  Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues interim financial statements. Management has elected to adopt this ASU using

9


the private company effective date and is currently evaluating this guidance to determine the impact on its consolidated financial position, results of operations or cash flows.

ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments of ASU 2016-15 provide guidance on eight specific cash flow items: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon bonds; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle.  The amendments of ASU 2016-15 are effective for public entities for interim and annual periods beginning after December 15, 2017 and for all other entities for periods beginning after December 15, 2018.  Management has adopted the amendments in ASU 2016-15 as of January 1, 2018.  Adoption of the ASU did not impact the consolidated financial statements given that the consolidated financial statements do not contain any of the eight specific cash flow items for any period presented.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.”  The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.  The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses.  ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate.  Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a write-down.  The amendments of ASU 2016-13 are effective for public entities for interim and annual periods beginning after December 15, 2019 and for all other entities for periods beginning after December 15, 2020.  Earlier application is permitted for interim and annual periods beginning after December 15, 2018.  Management has elected to adopt this ASU using the private company effective date and is currently evaluating the impact this ASU will have on the consolidated financial statements and that evaluation will depend on economic conditions and the composition of the Company’s loan and lease portfolio at the time of adoption.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements.  ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014.  The amendments of ASU 2016-02 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities for periods beginning after December 15, 2019.  The adoption of this ASU will result in an increase to the Consolidated Balance Sheets for right-of-use assets and associated lease liabilities for operating leases in which the Company is the lessee.  Management will adopt this ASU using the public company effective date as early adoption is permitted and is currently evaluating the impact this ASU will have on the consolidated financial statements and is in the process of preparing an inventory of existing leases and service contracts that could contain right-of-use assets.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).”  Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information.  The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring 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) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets.  The amendments of ASU were adopted as of January 1, 2018 and resulted in an increase in the disclosed fair value of loans of approximately $500 thousand.

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ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards.  ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount.  The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled.  Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer.  ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation.  In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09.  The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application.  If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes.  ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year.  ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for public business entities for fiscal years beginning after December 15, 2017, and for private companies for fiscal years beginning after December 15, 2018.  All subsequently issued ASU’s which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective.  These subsequently issued ASU’s include ASU 2016-08 “Revenue from Contracts with Customers (Topic 606)-Principal versus Agent Considerations,” ASU 2016-10 “Revenue from Contracts with Customers (Topic 606)-Identifying Performance Obligations and Licensing,” and ASU 2016-12 “Revenue from Contracts with Customers (Topic 606)-Narrow Scope Improvements and Practical Expedients.”  These amendments clarify the main provisions of ASU-2014-09 with respect to specific revenue types based upon implementation questions submitted.  Specifically, revenue in which a third party satisfies a portion of the performance obligations, revenue from licensing activities, and the assessment of collectability, treatment of sales taxes, non-cash consideration, and contract modifications at transition.  Management has elected to adopt this ASU using the private company effective date and has completed an analysis to determine which revenue streams are within the scope of ASU 2014-09 and the related clarifying ASU’s and has determined that interest income and revenue generated from transfers and servicing of financial instruments, specifically, gain on sale of loans and servicing fees are out of scope.  Management is continuing to evaluate the most appropriate transition method of application and the impact that ASU 2014-09 and the related clarifying ASU’s will have on in scope revenue streams, specifically, service charges and fees, mortgage referral fees, and gains or losses on other real estate owned.

NOTE 2. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale are as follows:

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

March 31, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

2,011

 

 

$

 

 

$

104

 

 

$

1,907

 

Residential mortgage-backed securities

 

 

29,371

 

 

 

 

 

 

1,005

 

 

 

28,366

 

Corporate bonds and other debt securities

 

 

5,700

 

 

 

 

 

 

171

 

 

 

5,529

 

Total available for sale

 

$

37,082

 

 

$

 

 

$

1,280

 

 

$

35,802

 

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

December 31, 2017

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

2,010

 

 

$

 

 

$

61

 

 

$

1,949

 

Residential mortgage-backed securities

 

 

30,156

 

 

 

 

 

 

527

 

 

 

29,629

 

Corporate bonds and other debt securities

 

 

5,711

 

 

 

 

 

 

46

 

 

 

5,665

 

Total available for sale

 

$

37,877

 

 

$

 

 

$

634

 

 

$

37,243

 

 

There were no securities pledged at March 31, 2018 or December 31, 2017, respectively.

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The amortized cost and estimated fair value of securities available for sale, by contractual maturity, are as follows:

 

 

 

Amortized

 

 

Fair

 

March 31, 2018

 

Cost

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

Due in one year or less

 

$

 

 

$

 

Due after one year through five years

 

 

4,133

 

 

 

4,017

 

Due after five years through ten years

 

 

3,102

 

 

 

2,965

 

Due after ten years

 

 

476

 

 

 

454

 

Residential mortgage-backed securities

 

 

29,371

 

 

 

28,366

 

Total available for sale

 

$

37,082

 

 

$

35,802

 

 

For purposes of the maturity table, residential mortgage-backed securities, the principal of which are repaid periodically, are presented as a single amount. The expected lives of these securities will differ from contractual maturities because borrowers may have the right to prepay the underlying loans with or without prepayment penalties.

The following tables present the estimated fair values and gross unrealized losses on investment securities available for sale, aggregated by investment category and length of time individual securities have been in a continuous unrealized loss position as of the periods presented:

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

March 31, 2018

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,907

 

 

$

104

 

 

$

 

 

$

 

 

$

1,907

 

 

$

104

 

Residential mortgage-backed securities

 

 

24,399

 

 

 

865

 

 

 

3,967

 

 

 

140

 

 

 

28,366

 

 

 

1,005

 

Corporate bonds and other debt securities

 

 

5,529

 

 

 

171

 

 

 

 

 

 

 

 

 

5,529

 

 

 

171

 

Total available for sale

 

$

31,835

 

 

$

1,140

 

 

$

3,967

 

 

$

140

 

 

$

35,802

 

 

$

1,280

 

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

December 31, 2017

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

1,949

 

 

$

61

 

 

$

 

 

$

 

 

$

1,949

 

 

$

61

 

Residential mortgage-backed securities

 

 

29,627

 

 

 

527

 

 

 

 

 

 

 

 

 

29,627

 

 

 

527

 

Corporate bonds and other debt securities

 

 

5,665

 

 

 

46

 

 

 

 

 

 

 

 

 

5,665

 

 

 

46

 

Total available for sale

 

$

37,241

 

 

$

634

 

 

$

 

 

$

 

 

$

37,241

 

 

$

634

 

 

At March 31, 2018, the Company’s security portfolio consisted of 50 securities, all of which were in an unrealized loss position. 44 of the 50 securities in an unrealized loss position at March 31, 2018 were in an unrealized loss position for less than 12 months. The unrealized losses for these securities resulted primarily from changes in interest rates and spreads.

The Company monitors its investment securities for other-than-temporary-impairment (“OTTI”). Impairment is evaluated on an individual security basis considering numerous factors, and its relative significance. The Company has evaluated the nature of unrealized losses in the investment securities portfolio to determine if OTTI exists. The unrealized losses relate to changes in market interest rates and specific market conditions that do not represent credit-related impairments. Furthermore, the Company does not intend to sell nor is it more likely than not that it will be required to sell these investments before the recovery of their amortized cost basis. Management has completed an assessment of each security in an unrealized loss position for credit impairment and has determined that no individual security was other-than-temporarily impaired at March 31, 2018. The following describes the basis under which the Company has evaluated OTTI:

U.S. Government Agencies and Residential Mortgage-Backed Securities (“MBS”):

The unrealized losses associated with U.S. Government agencies and residential MBS are primarily driven by changes in interest rates. These securities have either an explicit or implicit U.S. government guarantee.

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Corporate Bonds & Other Debt Securities:

Securities were generally underwritten in accordance with the Company’s investment standards prior to the decision to purchase, without relying on a bond issuer’s guarantee in making the investment decision. These investments are investment grade and will continue to be monitored as part of the Company’s ongoing impairment analysis, but are expected to perform in accordance with their terms.

There were no securities sold for the three months ended March 31, 2018 or 2017.

NOTE 3. LOANS, NET

Loans consisted of the following at March 31, 2018 and December 31, 2017:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(Dollars in thousands)

 

Commercial and industrial loans (1)

 

$

137,400

 

 

$

135,040

 

Real estate:

 

 

 

 

 

 

 

 

1-4 single family residential loans

 

 

238,382

 

 

 

232,510

 

Construction, land and development

 

 

143,646

 

 

 

139,470

 

Commercial real estate loans (including multifamily)