SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

CBTX, Inc., or the Company, or CBTX, operates 35 branches, 19 in the Houston market area, 15 in the Beaumont/East Texas market area and one in Dallas, through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to small and mid-sized businesses and professionals with operations within the Bank’s markets. The Bank operates under a national charter and therefore is subject to regulation by the Office of the Comptroller of the Currency, or OCC, and the Federal Deposit Insurance Corporation, or FDIC. The Company is subject to regulation by the Board of Governors of the Federal Reserve, or the Federal Reserve.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, but do not include all the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated financial position at June 30, 2020 and December 31, 2019, consolidated results of operations and consolidated shareholders’ equity for the three and six months ended June 30, 2020 and 2019, and consolidated cash flows for the six months ended June 30, 2020 and 2019.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2019 included within the Company’s Annual Report on Form 10-K.

Reclassification—Within noninterest expense for 2019, data processing and software have been combined together. In addition, printing, stationary and office, correspondent bank and customer related transaction fees, loan processing costs and repossessed real estate and other asset expenses have been combined with other expenses. These reclassifications were made to conform to the 2020 financial statement presentation in the condensed consolidated statements of income.

Share Repurchase Program

During the six months ended June 30, 2020, 240,445 shares were repurchased under the Company’s share repurchase program at an average price of $22.29 per share and retired and returned to the status of authorized but unissued shares. There were no shares repurchased during the six months ended June 30, 2019.

Accounting Standards Recently Adopted

The Company adopted Accounting Standards Update, or ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or CECL, effective January 1, 2020. The scope of CECL includes loans, debt securities classified as held to maturity, other receivables, off-balance sheet credit exposures and any other financial assets not excluded from the scope that have the contractual right to receive cash. In addition, CECL amends the accounting and reporting for credit losses on available for sale securities.

CECL requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. As part of the implementation of CECL, the Company changed its methodology of determining the allowance for credit losses, or ACL, for loans and for determining an ACL associated with the Company’s off-balance sheet credit exposures, which are primarily unfunded commitments to borrowers. Through a one-time cumulative effect reduction of retained earnings of $3.0 million, the adoption of ASU 2016-13 increased the ACL for loans by $874,000, increased the liability related to the ACL for unfunded commitments by $2.9 million, with the associated deferred tax assets increasing by $809,000.

The adoption of CECL did not have any impact on held-to-maturity securities as the Company did not hold any as of January 1, 2020. Additionally, the Company assessed the impact of CECL on its available for sale securities utilizing various qualitative factors and determined there were no credit losses within the portfolio requiring an allowance upon adoption. The Company did not have any purchased financial assets with credit deterioration as of January 1, 2020. See Note 6: Allowance for Credit Losses for further discussion related to CECL and related disclosures.

Accounting Standards Not Yet Adopted

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for the Company’s interest-rate swaps and approximately 12.5% of the Company’s loans as of June 30, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the impact of this pronouncement on those financial assets where LIBOR is used as an index rate.

Cash Flow Reporting

The Bank is required to maintain regulatory reserves with the Federal Reserve Bank of Dallas or the Federal Reserve Bank, and the reserve requirements for the Bank were $16.2 million and $18.6 million at June 30, 2020 and December 31, 2019, respectively. Additionally, as of June 30, 2020 and December 31, 2019, the Company had $10.1 million and $3.1 million, respectively, in cash collateral on deposit with other financial institution counterparties related to interest rate swap transactions. The reserves maintained with the Federal Reserve Bank and the cash collateral for interest rate swap transactions are considered restricted cash.

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

	Six Months Ended June 30,
(Dollars in thousands)	2020		2019
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	3,707	$	4,323
Cash paid for interest		6,444		7,789
Supplemental disclosures of non-cash flow information:
Operating lease right-to-use asset obtained in exchange for lease liabilities		1,898		13,208
Dividends accrued		(6)		1,292
Repossessed real estate and other assets		—		77