stxb-10q_20180630.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 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: 001-38484

 

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 August 3, 2018, the registrant had 9,787,449 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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

59

Item 4.

Controls and Procedures

59

PART II.

OTHER INFORMATION

60

Item 1.

Legal Proceedings

60

Item 1A.

Risk Factors

60

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults Upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

Signatures

62

 

 

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)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Assets:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

17,181

 

 

$

19,054

 

Interest-bearing deposits in other banks

 

 

35,805

 

 

 

38,895

 

Total cash and cash equivalents

 

 

52,986

 

 

 

57,949

 

Time deposits in other banks

 

 

245

 

 

 

245

 

Investment securities:

 

 

 

 

 

 

 

 

Available for sale securities, at fair value

 

 

34,519

 

 

 

37,243

 

Total investment securities

 

 

34,519

 

 

 

37,243

 

Loans held for sale

 

 

7,715

 

 

 

3,814

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

917,521

 

 

 

869,119

 

Less: allowance for loan and lease losses

 

 

(6,015

)

 

 

(5,652

)

Loans, net

 

 

911,506

 

 

 

863,467

 

Premises and equipment, net

 

 

44,945

 

 

 

42,189

 

Accrued interest receivable

 

 

3,195

 

 

 

3,466

 

Other real estate owned and repossessed assets

 

 

289

 

 

 

21

 

Goodwill

 

 

4,485

 

 

 

4,485

 

Core deposit intangible

 

 

3,135

 

 

 

3,486

 

SBA servicing asset

 

 

3,521

 

 

 

3,411

 

Deferred tax asset, net

 

 

1,616

 

 

 

1,480

 

Bank-owned life insurance

 

 

482

 

 

 

479

 

Federal Home Loan Bank and other bank stock, at cost

 

 

4,830

 

 

 

4,812

 

Other assets

 

 

3,207

 

 

 

3,751

 

Total assets

 

$

1,076,676

 

 

$

1,030,298

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Transaction accounts:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

183,618

 

 

$

176,726

 

Interest-bearing

 

 

220,087

 

 

 

250,491

 

Total transaction accounts

 

 

403,705

 

 

 

427,217

 

Time deposits

 

 

440,978

 

 

 

408,151

 

Total deposits

 

 

844,683

 

 

 

835,368

 

Accrued interest payable

 

 

431

 

 

 

407

 

Short-term borrowings

 

 

15,000

 

 

 

15,000

 

Long-term borrowings

 

 

66,191

 

 

 

76,411

 

Other liabilities

 

 

2,385

 

 

 

3,973

 

Total liabilities

 

 

928,690

 

 

 

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; 9,786,611 and

   7,280,183 shares issued and outstanding

 

 

127,344

 

 

 

82,615

 

Retained earnings

 

 

21,719

 

 

 

17,025

 

Accumulated other comprehensive income (loss)

 

 

(1,077

)

 

 

(501

)

Total stockholders' equity

 

 

147,986

 

 

 

99,139

 

Total liabilities and stockholders' equity

 

$

1,076,676

 

 

$

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

13,078

 

 

$

11,228

 

 

$

25,369

 

 

$

21,673

 

Interest and dividends on investment securities

 

 

195

 

 

 

114

 

 

 

409

 

 

 

114

 

Other interest income

 

 

215

 

 

 

278

 

 

 

363

 

 

 

584

 

Total interest income

 

 

13,488

 

 

 

11,620

 

 

 

26,141

 

 

 

22,371

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,941

 

 

 

1,644

 

 

 

3,672

 

 

 

3,229

 

Interest on FHLB advances and other borrowings

 

 

465

 

 

 

384

 

 

 

1,006

 

 

 

775

 

Total interest expense

 

 

2,406

 

 

 

2,028

 

 

 

4,678

 

 

 

4,004

 

Net interest income

 

 

11,082

 

 

 

9,592

 

 

 

21,463

 

 

 

18,367

 

Provision for loan losses

 

 

635

 

 

 

650

 

 

 

974

 

 

 

1,200

 

Net interest income after provision for loan losses

 

 

10,447

 

 

 

8,942

 

 

 

20,489

 

 

 

17,167

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fees

 

 

419

 

 

 

349

 

 

 

776

 

 

 

733

 

SBA loan servicing fees

 

 

548

 

 

 

625

 

 

 

1,172

 

 

 

1,171

 

Mortgage referral fees

 

 

208

 

 

 

243

 

 

 

364

 

 

 

373

 

Gain on sales of loans, net

 

 

1,041

 

 

 

2,288

 

 

 

2,515

 

 

 

3,318

 

Gain (loss) on sales of other assets

 

 

7

 

 

 

45

 

 

 

(25

)

 

 

23

 

Other noninterest income

 

 

80

 

 

 

4

 

 

 

89

 

 

 

11

 

Total noninterest income

 

 

2,303

 

 

 

3,554

 

 

 

4,891

 

 

 

5,629

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,043

 

 

 

5,899

 

 

 

12,901

 

 

 

12,503

 

Occupancy and equipment expenses

 

 

1,221

 

 

 

1,302

 

 

 

2,457

 

 

 

2,503

 

Loan and other real estate related expenses

 

 

14

 

 

 

101

 

 

 

77

 

 

 

224

 

Professional services

 

 

314

 

 

 

476

 

 

 

625

 

 

 

749

 

Data processing and network

 

 

321

 

 

 

313

 

 

 

634

 

 

 

582

 

Regulatory assessments and insurance

 

 

266

 

 

 

236

 

 

 

521

 

 

 

468

 

Amortization of intangibles

 

 

175

 

 

 

175

 

 

 

351

 

 

 

351

 

Advertising

 

 

102

 

 

 

157

 

 

 

217

 

 

 

284

 

Marketing

 

 

121

 

 

 

150

 

 

 

239

 

 

 

281

 

Telephone expense

 

 

114

 

 

 

81

 

 

 

212

 

 

 

216

 

Other operating expenses

 

 

690

 

 

 

604

 

 

 

1,273

 

 

 

1,243

 

Total noninterest expense

 

 

9,381

 

 

 

9,494

 

 

 

19,507

 

 

 

19,404

 

Income before income tax expense

 

 

3,369

 

 

 

3,002

 

 

 

5,873

 

 

 

3,392

 

Income tax expense

 

 

688

 

 

 

993

 

 

 

1,179

 

 

 

1,164

 

Net income

 

$

2,681

 

 

$

2,009

 

 

$

4,694

 

 

$

2,228

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.30

 

 

$

0.28

 

 

$

0.58

 

 

$

0.31

 

Diluted

 

$

0.29

 

 

$

0.27

 

 

$

0.56

 

 

$

0.29

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,851,446

 

 

 

7,273,351

 

 

 

8,104,370

 

 

 

7,187,125

 

Diluted

 

 

9,306,029

 

 

 

7,568,921

 

 

 

8,445,960

 

 

 

7,482,695

 

 

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

 

$

2,681

 

 

$

2,009

 

 

$

4,694

 

 

$

2,228

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

   taxes of $17, $66, $153 and $66, respectively

 

 

(65

)

 

 

(128

)

 

 

(576

)

 

 

(128

)

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

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

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

 

(65

)

 

 

(128

)

 

 

(576

)

 

 

(128

)

Total comprehensive income

 

$

2,616

 

 

$

1,881

 

 

$

4,118

 

 

$

2,100

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,228

 

 

 

 

 

 

2,228

 

Conversion of preferred stock

 

 

170,236

 

 

 

(170,236

)

 

 

1,753

 

 

 

(1,753

)

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

38,000

 

 

 

 

 

 

446

 

 

 

 

 

 

 

 

 

 

 

 

446

 

Stock-based compensation

 

 

 

 

 

 

 

 

1,160

 

 

 

 

 

 

 

 

 

 

 

 

1,160

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(128

)

 

 

(128

)

Balance as of June 30, 2017

 

 

7,277,763

 

 

 

 

 

$

82,230

 

 

$

 

 

$

14,500

 

 

$

(128

)

 

$

96,602

 

Balance as of January 1, 2018

 

 

7,280,183

 

 

 

 

 

$

82,615

 

 

$

 

 

$

17,025

 

 

$

(501

)

 

$

99,139

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,694

 

 

 

 

 

 

4,694

 

Shares issued in offering, net

 

 

2,300,000

 

 

 

 

 

 

42,219

 

 

 

 

 

 

 

 

 

 

 

 

42,219

 

Exercise of stock options and warrants

 

 

206,428

 

 

 

 

 

 

2,185

 

 

 

 

 

 

 

 

 

 

 

 

2,185

 

Stock-based compensation

 

 

 

 

 

 

 

 

325

 

 

 

 

 

 

 

 

 

 

 

 

325

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(576

)

 

 

(576

)

Balance as of June 30, 2018

 

 

9,786,611

 

 

 

 

 

$

127,344

 

 

$

 

 

$

21,719

 

 

$

(1,077

)

 

$

147,986

 

 

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)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,694

 

 

$

2,228

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

974

 

 

 

1,200

 

Depreciation and amortization

 

 

945

 

 

 

882

 

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

 

 

162

 

 

 

57

 

Amortization of intangible assets

 

 

351

 

 

 

351

 

Accretion of discount on retained SBA loans

 

 

(560

)

 

 

(389

)

Deferred tax expense (benefit)

 

 

17

 

 

 

(366

)

Originations of loans held for sale

 

 

(34,082

)

 

 

(37,898

)

Proceeds from loans held for sale

 

 

32,740

 

 

 

41,764

 

Net gains on sale of loans held for sale

 

 

(2,515

)

 

 

(3,318

)

Gain (loss) on sale of other real estate owned

 

 

3

 

 

 

(23

)

Fair value adjustment on SBA servicing asset

 

 

469

 

 

 

382

 

Stock-based compensation

 

 

325

 

 

 

1,160

 

Increase in cash surrender value of BOLI

 

 

(3

)

 

 

(1

)

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Net change in accrued interest receivable

 

 

271

 

 

 

(223

)

Net change in accrued interest payable

 

 

24

 

 

 

92

 

Net change in other assets

 

 

544

 

 

 

(1,266

)

Net change in other liabilities

 

 

(1,588

)

 

 

1,707

 

Net cash provided by (used in) operating activities

 

 

2,771

 

 

 

6,339

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Purchase of investment securities available for sale

 

 

 

 

 

(39,447

)

Paydown and maturities of investment securities available for sale

 

 

1,833

 

 

 

254

 

Net purchase of FHLB and other bank stock

 

 

(18

)

 

 

(28

)

Proceeds from the sale of loans held for investment

 

 

1,451

 

 

 

 

Net change in loans

 

 

(50,816

)

 

 

(64,875

)

Proceeds from the sale of other real estate owned

 

 

18

 

 

 

171

 

Purchase of premises and equipment

 

 

(3,701

)

 

 

(2,990

)

Proceeds from the sale of premises and equipment

 

 

 

 

 

55

 

Net cash provided by (used in) investing activities

 

 

(51,233

)

 

 

(106,860

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

9,315

 

 

 

21,766

 

Proceeds from long-term borrowings

 

 

 

 

 

7,684

 

Repayment of long-term borrowings

 

 

(10,220

)

 

 

(3,125

)

Proceeds from short-term borrowings

 

 

10,000

 

 

 

5,000

 

Repayment of short-term borrowings

 

 

(10,000

)

 

 

(5,000

)

Shares issued in offering, net

 

 

42,219

 

 

 

 

Exercise of stock options and warrants

 

 

2,185

 

 

 

446

 

Net cash provided by (used in) financing activities

 

 

43,499

 

 

 

26,771

 

Net Change in Cash and Cash Equivalents

 

 

(4,963

)

 

 

(73,750

)

Cash and Cash Equivalents at Beginning of Period

 

 

57,949

 

 

 

152,232

 

Cash and Cash Equivalents at End of Period

 

$

52,986

 

 

$

78,482

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,648

 

 

$

3,137

 

Income taxes paid

 

 

2,050

 

 

 

435

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned and repossessed assets

 

$

289

 

 

$

450

 

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 stock 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 in this Quarterly Report on Form 10-Q (this “Form 10-Q”) have been adjusted retroactively to reflect the reverse stock split.

The Company consummated the underwritten initial public offering of its common stock in May 2018. In connection with the initial public offering, the Company issued and sold 2,300,000 shares of its common stock, including 300,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, at an offering price of $21.00 per share, for aggregate gross proceeds of $48.3 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $42.2 million after deducting underwriting discounts and offering expenses.

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 SSB (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 June 30, 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 included in our prospectus filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 4, 2018, related to our initial public offering.

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 and assumptions are based on current expectations, estimates, forecasts and projections about future performance of the Company, such estimates and assumptions are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult for the Company to assess. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

Accounting Standards Update (ASU) 2018-09, “Codification Improvements.”  Issued in July 2018, ASU No. 2018-09 makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. Management is currently evaluating the effects the adoption of ASU 2018-09 will have on the consolidated financial statements, results of operations and cash flows.

ASU 2018-07, “Compensation-Stock Compensation.” Issued in June 2018, ASU 2018-07 expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  The amendments also clarify that ASC 718 does not apply to share-based payments used to provide either financing to the issuer or awards granted in conjunction with selling goods or services to customers under a contract subject to ASC 606, Revenue from Contracts with Customers.  The amendments of ASU 2018-07 are effective for public entities for interim and annual periods beginning after December 15, 2018 and for other entities

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for periods beginning after December 15, 2019.  Management will adopt ASU 2018-07 using the public company effective date as early adoption is permitted and is currently evaluating the impact the ASU will have on the consolidated financial statements.

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 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 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

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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 2016-13, “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.  Additionally, in July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases, Targeted Improvements. The amendments in these updates provide additional clarification and implementation guidance on certain aspects of ASU 2016-02 and have the same effective and transition requirements as ASU 2016-02. Specifically, ASU 2018-11 creates an additional transition method option allowing entities to record a cumulative effect adjustment to opening retained earnings in the year of adoption.  Management will adopt these ASU’s using the public company effective date as early adoption is permitted and is currently evaluating the impact to the consolidated financial statements, specifically, we are in the process of reviewing service contracts to determine if right-of-use assets exist.

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

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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 will adopt this ASU using the modified retrospective method of application and is continuing to evaluate 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

 

June 30, 2018

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

2,013

 

 

$

 

 

$

109

 

 

$

1,904

 

Residential mortgage-backed securities

 

 

28,180

 

 

 

 

 

 

1,072

 

 

 

27,108

 

Corporate bonds and other debt securities

 

 

5,689

 

 

 

 

 

 

182

 

 

 

5,507

 

Total available for sale

 

$

35,882

 

 

$

 

 

$

1,363

 

 

$

34,519

 

 

 

 

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

 

 

$