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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, 2019

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 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, 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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, no par value

 

STXB

 

The NASDAQ Stock Market LLC

 

As of May 3, 2019, the registrant had 13,780,232 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

28

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

Controls and Procedures

51

PART II.

OTHER INFORMATION

52

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

 

 

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,

2019

 

 

December 31,

2018

 

Assets:

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

19,397

 

 

$

22,664

 

Interest-bearing deposits in other banks

 

 

103,265

 

 

 

66,351

 

Total cash and cash equivalents

 

 

122,662

 

 

 

89,015

 

Investment securities:

 

 

 

 

 

 

 

 

Available for sale securities, at fair value

 

 

131,068

 

 

 

179,461

 

Total investment securities

 

 

131,068

 

 

 

179,461

 

Loans held for sale

 

 

6,300

 

 

 

3,945

 

Loans:

 

 

 

 

 

 

 

 

Loans held for investment

 

 

1,115,995

 

 

 

1,092,940

 

Less: allowance for loan and lease losses

 

 

(6,569

)

 

 

(6,286

)

Loans, net

 

 

1,109,426

 

 

 

1,086,654

 

Premises and equipment, net

 

 

55,237

 

 

 

53,877

 

Accrued interest receivable

 

 

4,849

 

 

 

4,934

 

Other real estate owned and repossessed assets

 

 

518

 

 

 

782

 

Goodwill

 

 

18,253

 

 

 

18,253

 

Core deposit intangible

 

 

7,954

 

 

 

8,558

 

SBA servicing asset

 

 

3,747

 

 

 

3,965

 

Deferred tax asset, net

 

 

 

 

 

328

 

Bank-owned life insurance

 

 

7,442

 

 

 

7,401

 

Federal Home Loan Bank and other bank stock, at cost

 

 

5,264

 

 

 

5,304

 

Other assets

 

 

4,464

 

 

 

4,276

 

Total assets

 

$

1,477,184

 

 

$

1,466,753

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Transaction accounts:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

258,440

 

 

$

256,784

 

Interest-bearing

 

 

363,326

 

 

 

378,822

 

Total transaction accounts

 

 

621,766

 

 

 

635,606

 

Time deposits

 

 

581,486

 

 

 

547,042

 

Total deposits

 

 

1,203,252

 

 

 

1,182,648

 

Accrued interest payable

 

 

737

 

 

 

702

 

Short-term borrowings

 

 

 

 

 

12,500

 

Long-term borrowings

 

 

65,676

 

 

 

67,916

 

Deferred tax liability, net

 

 

449

 

 

 

 

Other liabilities

 

 

3,094

 

 

 

4,191

 

Total liabilities

 

 

1,273,208

 

 

 

1,267,957

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

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; 12,195,891 and

   12,103,753 shares issued and outstanding

 

 

171,159

 

 

 

169,939

 

Retained earnings

 

 

30,813

 

 

 

27,003

 

Accumulated other comprehensive income (loss)

 

 

2,004

 

 

 

1,854

 

Total stockholders' equity

 

 

203,976

 

 

 

198,796

 

Total liabilities and stockholders' equity

 

$

1,477,184

 

 

$

1,466,753

 

 

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,

 

 

 

2019

 

 

2018

 

Interest income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

17,118

 

 

$

12,291

 

Interest and dividends on investment securities

 

 

1,182

 

 

 

214

 

Other interest income

 

 

584

 

 

 

148

 

Total interest income

 

 

18,884

 

 

 

12,653

 

Interest expense:

 

 

 

 

 

 

 

 

Interest on deposits

 

 

3,071

 

 

 

1,731

 

Interest on FHLB advances and other borrowings

 

 

378

 

 

 

541

 

Total interest expense

 

 

3,449

 

 

 

2,272

 

Net interest income

 

 

15,435

 

 

 

10,381

 

Provision for loan losses

 

 

849

 

 

 

339

 

Net interest income after provision for loan losses

 

 

14,586

 

 

 

10,042

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges and fees

 

 

729

 

 

 

357

 

SBA loan servicing fees

 

 

264

 

 

 

624

 

Mortgage referral fees

 

 

110

 

 

 

156

 

Gain on sales of loans, net

 

 

804

 

 

 

1,474

 

Gain on sales of investment securities

 

 

1,081

 

 

 

-

 

Other noninterest income

 

 

69

 

 

 

(23

)

Total noninterest income

 

 

3,057

 

 

 

2,588

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,124

 

 

 

6,858

 

Occupancy and equipment expenses

 

 

1,262

 

 

 

1,236

 

Professional services

 

 

1,041

 

 

 

311

 

Data processing and network

 

 

485

 

 

 

313

 

Regulatory assessments and insurance

 

 

98

 

 

 

255

 

Amortization of intangibles

 

 

603

 

 

 

176

 

Advertising

 

 

97

 

 

 

115

 

Marketing

 

 

139

 

 

 

118

 

Telephone expense

 

 

140

 

 

 

98

 

Conversion expense

 

 

1,151

 

 

 

-

 

Other operating expenses

 

 

864

 

 

 

646

 

Total noninterest expense

 

 

13,004

 

 

 

10,126

 

Income before income tax expense

 

 

4,639

 

 

 

2,504

 

Income tax expense

 

 

829

 

 

 

491

 

Net income

 

$

3,810

 

 

$

2,013

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.27

 

Diluted

 

$

0.30

 

 

$

0.27

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

12,152,558

 

 

 

7,348,992

 

Diluted

 

 

12,607,445

 

 

 

7,543,606

 

 

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,

 

 

 

2019

 

 

2018

 

Net income

 

$

3,810

 

 

$

2,013

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

   (tax) and benefit of $(308) and $136, respectively

 

 

1,162

 

 

 

(510

)

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

   for sale included in net income, net of taxes of $269 and $0, respectively

 

 

(1,012

)

 

 

 

Total other comprehensive income (loss)

 

 

150

 

 

 

(510

)

Total comprehensive income

 

$

3,960

 

 

$

1,503

 

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, 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

 

Balance as of January 1, 2019

 

 

12,103,753

 

 

 

 

 

$

169,939

 

 

$

 

 

$

27,003

 

 

$

1,854

 

 

$

198,796

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,810

 

 

 

 

 

 

3,810

 

Exercise of stock options and warrants

 

 

92,138

 

 

 

 

 

 

1,103

 

 

 

 

 

 

 

 

 

 

 

 

1,103

 

Stock-based compensation

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

 

 

 

 

 

 

117

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150

 

 

 

150

 

Balance as of March 31, 2019

 

 

12,195,891

 

 

 

 

 

$

171,159

 

 

$

 

 

$

30,813

 

 

$

2,004

 

 

$

203,976

 

 

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,

 

 

 

2019

 

 

2018

 

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,810

 

 

$

2,013

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

849

 

 

 

339

 

Depreciation and amortization

 

 

582

 

 

 

446

 

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

 

 

45

 

 

 

108

 

Amortization of core deposit intangible

 

 

603

 

 

 

176

 

Accretion of discount on retained SBA loans

 

 

(450

)

 

 

(275

)

Deferred tax expense (benefit)

 

 

740

 

 

 

27

 

Originations of loans held for sale

 

 

(12,453

)

 

 

(17,941

)

Proceeds from loans held for sale

 

 

10,933

 

 

 

18,730

 

Net gains on sale of loans held for sale

 

 

(804

)

 

 

(1,474

)

(Gain) loss on sale of investment securities

 

 

(1,081

)

 

 

 

(Gain) loss on sale of other real estate owned

 

 

(21

)

 

 

3

 

Fair value adjustment on SBA servicing asset

 

 

416

 

 

 

231

 

Stock-based compensation

 

 

117

 

 

 

152

 

Increase in cash surrender value of BOLI

 

 

(41

)

 

 

(1

)

Net change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Net change in accrued interest receivable

 

 

(73

)

 

 

351

 

Net change in accrued interest payable

 

 

35

 

 

 

17

 

Net change in other assets

 

 

(188

)

 

 

(1,577

)

Net change in other liabilities

 

 

(1,097

)

 

 

936

 

Net cash provided by (used in) operating activities

 

 

1,922

 

 

 

2,261

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

 

Sales of investment securities available for sale

 

 

45,243

 

 

 

 

Paydown and maturities of investment securities available for sale

 

 

4,531

 

 

 

688

 

Net purchase of FHLB and other bank stock

 

 

(37

)

 

 

10

 

Net change in loans

 

 

(23,451

)

 

 

(13,603

)

Proceeds from the sale of other real estate owned

 

 

336

 

 

 

18

 

Purchase of premises and equipment

 

 

(1,942

)

 

 

(1,600

)

Net cash provided by (used in) investing activities

 

 

24,680

 

 

 

(14,487

)

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

20,604

 

 

 

5,595

 

Redemption of trust preferred securities

 

 

78

 

 

 

 

Proceeds from long-term borrowings

 

 

1,818

 

 

 

 

Repayment of long-term borrowings

 

 

(4,058

)

 

 

(1,208

)

Proceeds from short-term borrowings

 

 

 

 

 

5,000

 

Repayment of short-term borrowings

 

 

(12,500

)

 

 

(5,000

)

Exercise of stock options and warrants

 

 

1,103

 

 

 

2,185

 

Net cash provided by (used in) financing activities

 

 

7,045

 

 

 

6,572

 

Net Change in Cash and Cash Equivalents

 

 

33,647

 

 

 

(5,654

)

Cash and Cash Equivalents at Beginning of Period

 

 

89,015

 

 

 

57,949

 

Cash and Cash Equivalents at End of Period

 

$

122,662

 

 

$

52,295

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,415

 

 

$

2,255

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate owned and repossessed assets

 

$

51

 

 

$

268

 

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. 

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 $42.1 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 March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2018 previously filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K.

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) 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” – issued in April 2019, ASU No. 2019-04 clarifies a number of issues discussed at the June 2018 and November 2018 Credit Losses Transition Resource Group meetings.  The clarifications address a variety of identified issues including but not limited to the treatment of accrued interest receivable as it relates to the allowance for credit losses, transfers between loan classifications and categories, recoveries, and using projections of future interest rate environments in expected cash flow calculations.  Management is evaluating these clarifications concurrently with our assessment of ASU 2016-13.

ASU 2018-15, “Intangibles – Goodwill and Other – Internal Use Software” – issued in August 2018, ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.  The amendments of ASU 2018-15 are effective for public entities for interim and annual periods beginning after December 15, 2019 and for other entities for periods beginning after December 15, 2020.  Management adopted ASU 2018-15 as of January 1, 2019; adoption did not have an impact on the Company’s consolidated financial statements.  

ASU 2018-13, “Fair Value Measurement Disclosure Framework” – issued in August 2018, ASU No. 2018-13 modifies the disclosure requirements on fair value measurements outlined in Topic 820, Fair Value Measurements.  Specifically the amendments in the ASU remove the requirements to disclose the amount and reasons for transfers between fair value hierarchy levels, the policy for timing of transfers between levels, the valuation processes for Level 3 fair value measurements, and for nonpublic entities, disclosure of the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value

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measurements.  Additionally, the ASU adds disclosure requirements regarding changes in unrealized gains and losses for the period included in other comprehensive income related to Level 3 fair value measurements, and disclosure of the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  The amendments of ASU 2018-13 are effective for all entities for interim and annual periods beginning after December 15, 2019.  Management adopted the provisions of this ASU removing fair value disclosure requirements as of December 31, 2018 as early adoption of the removal provisions was allowed and will adopt the remaining provisions of the ASU as of the effective date.

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. ASU 2018-09 is not expected to have a material impact on the Company’s consolidated financial statements.  

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 for periods beginning after December 15, 2019.  Management adopted ASU 2018-07 as of January 1, 2019; adoption did not have an impact on the Company’s 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 adopted ASU 2017-08 as of January 1, 2019; adoption did not have an 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 adopted ASU 2017-01 as of January 1, 2019; adoption did not have an impact on the Company’s consolidated financial statements.

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