10-K 1 rbnc-123118x10kdoc.htm 10-K Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
______________________________

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the fiscal year ended December 31, 2018
 
¨
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 001-37391
______________________________

RELIANT BANCORP, INC.
(Exact name of registrant as specified in its charter)
______________________________

Tennessee
37-1641316
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1736 Carothers Parkway, Suite 100, Brentwood, Tennessee
37027
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (615) 221-2020
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Exchange on which Registered
 
 
common stock, par value $1.00 per share
Nasdaq Capital Market
 
                        
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ¨ Yes     ý  No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ¨ Yes    ý No
 
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.     ý 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).   ý   Yes    ¨   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
 
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
ý
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
ý

 
 
 
 
 
 
Emerging growth company
ý
 
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 Act).    ¨ Yes    ý No
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 29, 2018 was $300,518,107 (computed on the basis of $28.05 per share).
 
APPLICABLE ONLY TO CORPORATE REGISTRANTS
 
The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of March 7, 2019 was 11,503,492.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive proxy statement for the annual meeting of shareholders, scheduled to be held May 23, 2019, are incorporated by reference into Part III of this Form 10-K.

 



TABLE OF CONTENTS
 
Item No.
 
Page No.
 
 
 
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
 
 
 
ITEM 15.



FORWARD-LOOKING STATEMENTS
 
Reliant Bancorp, Inc. (“Reliant Bancorp”) may from time to time make written or oral statements, including statements contained in this report (including, without limitation, certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7), that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential” and other similar words and expressions of the future are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Reliant Bancorp to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others:  (i) the possibility that our asset quality would decline or that we experience greater loan losses than anticipated, (ii) increased levels of other real estate, primarily as a result of foreclosures, (iii) the impact of liquidity needs on our results of operations and financial condition, (iv) competition from financial institutions and other financial service providers, (v) the effect of interest rate increases on the cost of deposits, (vi) unanticipated weakness in loan demand or loan pricing, (vii) lack of strategic growth opportunities or our failure to execute on those opportunities, (viii) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ix) the ability to grow and retain low-cost core deposits and retain large, uninsured deposits, (x) our ability to effectively manage problem credits, (xi) our ability to successfully implement efficiency initiatives on time and in amounts projected, (xii) our ability to successfully develop and market new products and technology, (xiii) the impact of negative developments in the financial industry and U.S. and global capital and credit markets, (xiv) our ability to retain the services of key personnel, (xv) our ability to adapt to technological changes, (xvi) risks associated with litigation, including the applicability of insurance coverage; (xvii) the vulnerability of Reliant Bank’s network and online banking portals, and the systems of parties with whom Reliant Bancorp and Reliant Bank contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xviii) changes in state and federal laws, rules, regulations or policies applicable to banks or bank or financial holding companies, including regulatory or legislative developments; (xix) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions; and (xx) general competitive, economic, political and market conditions, including economic conditions in the local markets where we operate. A more detailed description of these and other risks is contained in “Item 1A. Risk Factors” below. Many of such factors are beyond Reliant Bancorp’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Reliant Bancorp does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Reliant Bancorp.

PART I
ITEM 1. BUSINESSS
 
Overview
 
Reliant Bancorp, Inc. (f/k/a Commerce Union Bancshares, Inc.) (the “Company” or “Reliant Bancorp”), a Tennessee corporation, was incorporated on March 4, 2011, to serve as a holding company for and the sole shareholder of Reliant Bank (f/k/a Commerce Union Bank). It became the holding company of Reliant Bank upon completion of Reliant Bank’s reorganization into a holding company structure on June 6, 2012.
 
Reliant Bancorp is a registered financial holding company under the Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Tennessee. Reliant Bank was organized in April 17, 2006, as a state chartered bank under the laws of the State of Tennessee. Reliant Bank opened for business on August 14, 2006.
 
Acquisitions
 
Commerce Union/Legacy Reliant Bank Merger
 
On April 1, 2015, the Company completed the acquisition of legacy Reliant Bank, a Tennessee banking corporation (“Legacy Reliant Bank”). The Legacy Reliant Bank merger was accounted for as a reverse merger using the acquisition method of accounting, in accordance with the provisions of FASB ASC Topic 805-10 Business Combinations. As such, for accounting purposes, Legacy Reliant Bank was considered to be acquiring Reliant Bancorp in this transaction. As a result, the financial statements of the Company prior to the Legacy Reliant Bank merger are the historical financial statements of Legacy Reliant Bank. In periods following the Legacy Reliant Bank merger, the comparative historical financial statements of the Company are those of Legacy

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Reliant Bank prior to the merger. These consolidated financial statements include the results attributable to the operations of the Company beginning on April 1, 2015.
 
Community First, Inc. Merger
 
On August 22, 2017, Reliant Bancorp entered into an Agreement and Plan of Merger with Community First, Inc. (“Community First”), Pioneer Merger Sub, Inc., a wholly owned subsidiary of Reliant Bancorp, Reliant Bank, and Community First Bank & Trust, a Tennessee-chartered commercial bank and wholly owned subsidiary of Community First (“Community First Bank”). On January 1, 2018, Reliant Bancorp completed the acquisition of Community First and Community First Bank and issued approximately 2,416,444 shares of Reliant Bancorp common stock valued at approximately $62.0 million to shareholders of Community First. All of Community First’s outstanding restricted share awards became fully vested and were cancelled and converted automatically into the right to receive the merger consideration.
 
Target Markets
 
Reliant Bancorp, through its subsidiary Reliant Bank, provides a full range of traditional banking products and services throughout the Middle Tennessee Region and the Nashville-Davidson-Murfreesboro-Franklin, TN Metropolitan Statistical Area (the “Nashville MSA”). In October 2018, Reliant Bank opened a full service branch office in Chattanooga, Tennessee. At the same time, Reliant Bank closed its Chattanooga commercial loan and deposit production office and consolidated the operations of this commercial loan and deposit production office into the new full service Chattanooga branch. Based on the deposit market share data published by the FDIC as of June 30, 2018, the latest available date, Reliant Bank is ranked the 11th largest bank in the Nashville MSA. Reliant Bank primarily markets its services to small businesses and residents within its markets. Reliant Bank operates its main office and sixteen branches in Davidson, Hickman, Hamilton, Maury, Robertson, Rutherford, Sumner, and Williamson counties in Tennessee. Additionally, Reliant Bank operates mortgage production offices in Brentwood and Hendersonville, Tennessee.
 
Employees
 
As of December 31, 2018, Reliant Bancorp and Reliant Bank had 263 employees on a full-time or part-time basis. The employees are not represented by a collective bargaining unit. Reliant Bancorp believes that its relationship with its employees is good. Reliant Bank employs seasoned banking professionals with experience in its market areas and who are active in their communities.

Products and Services Overview
 
Reliant Bank is a full-service community bank. Its principal business is banking, consisting of lending and deposit gathering from (as well as other banking-related products and services) businesses and individuals within the communities it serves, and the operational support to deliver, fund and manage such banking services. Reliant Bank provides a wide range of commercial banking services for businesses and individuals, including checking, savings, and money market deposit accounts, certificates of deposit and consumer, commercial and real estate loans. Reliant Bank’s profitability is dependent on responsible lending with strong focus on lending standards to help ensure long-term growth in assets, loans, deposits and net income in a manner consistent with safe, sound and prudent banking practices. To achieve this goal, Reliant Bank’s strategy is to: (1) expand loans and deposits through organic market share growth and strategic acquisitions; (2) provide customers with a breadth of products and financial services; (3) employ, empower and motivate management to provide personalized customer service, consistent with the best traditions of community banking, while maximizing profits; and (4) maintain asset quality and control overhead expense.
 
Reliant Bank provides a variety of loans, deposits and related services to its business customers. Such services include but are not limited to business checking, deposit products and services, business loans, and lines of credit. Reliant Bank offers similar services to its consumer customers, including but not limited to personal loans, checking accounts, residential mortgage loans and mortgage refinancing, safe deposit boxes, debit cards, direct deposit, and official bank checks.
 
Competition
 
Reliant Bank has substantial competition in attracting and retaining deposits and making loans to its customers in all of its principal markets. We face competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources than we do. Such competitors primarily include national, regional, and internet banks, in addition to other community banks that seek to offer service levels similar to ours. We also face competition from many others types of financial institutions, including, without limitation, savings and loans associations, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries.
 

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The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms, and insurance companies can operate as affiliates under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking services. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. Finally, as a result of the passage of the Tax Cuts and Jobs Act, which was signed into law in late 2017, our competitors may choose to offer lower interest rates and pay higher deposit rates than we do.
 
We believe that we successfully compete with larger banks and other community banks in our target markets by focusing on personal service and financial products to meets the needs of the businesses and consumers in those markets.
 
Intellectual Property
 
Reliant Bank holds the ownership rights to two trademarks registered with the United States Patent and Trademark Office for the protection of “RELIANT BANK” in the company’s respective colors and fonts. Reliant Bank also utilizes the website domain reliantbank.com. Reliant Bank also holds the rights to three trademarks registered with the United States Patent and Trademark Office for the continued protection of “COMMERCE UNION BANK” in the former entity’s respective colors and fonts and one trademark registered with the United States Patent and Trademark Office for the continued protection of "COMMUNITY FIRST BANK & TRUST" .

Available Information
Our website address is www.reliantbank.com. Please note that our website address is provided as an inactive textual reference only. 
We make available free of charge through our website the annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, that we file with or furnish to the Securities and Exchange Commission (the “SEC”), as soon as reasonably practicable after we electronically file such material with or furnish such material to the SEC. The information made available through our website is not part of this report and is therefore not incorporated by reference, unless such information is otherwise specifically referenced elsewhere in this report.

Supervision and Regulation
 
Reliant Bancorp, Inc.
 
Reliant Bancorp owns 100% of the stock of Reliant Bank, and, therefore, we are considered a bank holding company as that term is defined under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). Additionally, we have elected under the Bank Holding Company Act to be treated as a financial holding company. As a financial holding company, we are primarily subject to supervision and examination by and the reporting requirements of the Federal Reserve, under the Bank Holding Company Act and the regulations promulgated thereunder. Moreover, as the holding company for a bank chartered in Tennessee, we also are subject to the Tennessee Banking Act.
Subject to certain exceptions, the Bank Holding Company Act generally prohibits a bank holding company from engaging in or acquiring direct or indirect control of more than 5% of the voting stock of any company engaged in non-banking activities. An exception to this prohibition is for activities expressly found by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Financial holding companies, however, are allowed to engage without prior Federal Reserve approval in a broader range of banking and non-banking activities that are deemed to be financial in nature or incidental to a financial activity. These “financial in nature” activities include securities underwriting, dealing and market making; organizing, sponsoring and managing mutual funds; insurance underwriting and agency; merchant banking activities; and other activities that the Federal Reserve has determined to be closely related to banking. In order for a bank holding company to make a declaration to be considered a financial holding company, the bank holding company and its subsidiary depository institutions must be “well capitalized” and “well managed.” 
As a bank holding company that has elected to be a financial holding company, Reliant Bancorp is required to file semi-annual reports with the Federal Reserve together with any additional information as the Federal Reserve may require. The Federal Reserve may, and does, also examine Reliant Bancorp.

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Bank and financial holding companies are required to act as a source of financial strength to their subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when a holding company may not be able to provide such support. In the event of a loss suffered or anticipated by the FDIC-as a result of default of a banking subsidiary of Reliant Bancorp or related to FDIC assistance provided to a banking subsidiary in danger of default-the other banking subsidiaries of Reliant Bancorp, if any, may be assessed for the FDIC’s loss, subject to certain exceptions.
Regulation Y of the Rules and Regulations of the Federal Reserve Board of Governors requires persons acting directly or indirectly or in concert with one or more other persons to give the Federal Reserve 60 days’ prior written notice before acquiring control of a bank or financial holding company. Under the regulation, control is defined as the ownership of or control with the power to vote 25% or more of any class of voting securities of the bank or financial holding company. The regulation also provides for a presumption of control if a person owns, controls, or holds with the power to vote 10% or more (but less than 25%) of any class of voting securities of a bank or financial holding company and either the company has securities registered under Section 12 of the Exchange Act or no other person owns a greater percentage of that class of voting securities.
 
Payment of Dividends
 
Reliant Bancorp is a legal entity separate and distinct from Reliant Bank. Because Reliant Bancorp is a legal entity separate and distinct from Reliant Bank and does not conduct stand-alone operations, our ability to pay dividends depends on the ability of Reliant Bank to pay dividends to us, which is subject to regulatory restrictions. The principal source of Reliant Bancorp’s cash flow, including cash flow to pay interest to the holders of its trust preferred securities and dividends to holders of its common stock, is dividends that Reliant Bank pays to Reliant Bancorp as its sole shareholder. Under Tennessee law, Reliant Bancorp is not permitted to pay dividends if, after giving effect to the payment of the dividends, it would not be able to pay its debts as they become due in the usual course of business or its total assets would be less than the sum of its total liabilities plus any amounts needed to satisfy any preferential rights if it were dissolving. In addition, in deciding whether or not to declare a dividend of any particular size, Reliant Bancorp’s board of directors must consider its and Reliant Bank’s current and prospective capital, liquidity, and other needs.
Additionally, various federal and state statutory provisions limit the amount of dividends subsidiary banks can pay to their holding companies without regulatory approval. The payment of dividends by any bank also may be affected by numerous other factors, such as the maintenance of adequate capital for the bank. In addition to the foregoing restrictions, the Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. Furthermore, the Tennessee Department of Financial Institutions (the “TDFI”) also has authority to prohibit the payment of dividends by a Tennessee chartered bank when it determines such payment of dividends to be an unsafe and unsound banking practice. In the event an insured Federal Reserve-member bank controlled by a bank or financial holding company is “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, the Federal Reserve may require prior approval for any capital distribution by the bank or financial holding company.
During the fiscal year ended December 31, 2018, Reliant Bancorp declared dividends totaling $0.33 per share on outstanding shares of its common stock for a total of $3,945 in aggregate dividend declarations for year. The amount and timing of all future dividend payments, if any, is subject to our board’s discretion and our compliance with applicable laws, rules, regulations and regulatory guidance, and will depend on our earnings, capital position, financial condition and other factors, including new regulatory capital requirements, as they become known to us.
 
Other Restrictions
 
A bank or financial holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the bank holding company’s subsidiaries are located, unless the bank holding company and its subsidiaries are well-capitalized and well-managed. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit or provision of any property or service. An affiliate of a bank holding company may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these items on the condition that (i) the customer must obtain or provide some additional credit, property or services from or to its bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, lease, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.

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In approving acquisitions by bank or financial holding companies of banks and certain other non-bank companies, the Federal Reserve considers a number of factors, including expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.
The Attorney General of the United States may, within 30 days after approval by the Federal Reserve of an acquisition involving a bank or financial holding company, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge an acquisition does not, however, exempt the bank or financial holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopoly provisions of the Sherman Antitrust Act.
 
Capital Guidelines
 
Federal banking regulators have implemented risk-based capital guidelines for bank and financial holding companies and insured depository institutions.
In July 2013, in response to the statutory requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), federal banking regulators adopted regulations implementing the Basel Capital Adequacy Accord (“Basel III”), which had been approved by the Basel member central bank governors in 2010 as an agreement among the countries’ central banks and bank regulators on the amount of capital banks must hold as a cushion against losses and insolvency. These regulations provide for the following minimum capital to risk-weighted assets requirements in order for an institution to be considered “adequately capitalized”: a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. Additionally, to be considered “adequately capitalized,” an institution must have a leverage ratio (Tier 1 capital to total assets) of at least 4.0%. In order to be considered “well capitalized,” an institution must have a common equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0%, a total capital ratio of 10.0%, and a leverage ratio of 5.0%. The regulations also changed the definition of capital, mainly by adopting stricter eligibility criteria for regulatory capital instruments, and new constraints on the inclusion of minority interests, mortgage-servicing assets (“MSAs”), deferred tax assets (“DTAs”), and certain investments in the capital of unconsolidated financial institutions. In addition, the regulations require that most regulatory capital deductions be made from common equity Tier 1 capital. 
Under Basel III, in order to avoid limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. The capital conservation buffer was phased in starting January 1, 2016, and it became fully phased in on January 1, 2019. A banking organization with a buffer greater than 2.5% is not subject to limits on capital distributions or discretionary bonus payments. A banking organization with a buffer of less than 2.5% is subject to increasingly stringent limitations as the buffer approaches zero. The regulation also prohibits a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. The minimum capital requirements plus the capital conservation buffer exceed the current prompt corrective action (PCA) well-capitalized thresholds.
Under Basel III, certain DTAs arising from temporary differences, MSAs, and significant investments in the capital of unconsolidated financial institutions in the form of common stock are each subject to an individual limit of 10% of common equity Tier 1 capital elements and are subject to an aggregate limit of 15% of common equity Tier 1 capital elements. The amount of these items in excess of the 10% and 15% thresholds are to be deducted from common equity Tier 1 capital. Amounts of MSAs, DTAs, and significant investments in unconsolidated financial institutions that are not deducted due to the aforementioned 10% and 15% thresholds must be assigned a 250% risk weight. Finally, the regulations increase the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and make selected other changes in risk weights and credit conversion factors.
Basel III took effect on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital were phased in over time. Similarly, non-qualifying capital instruments were phased out over time, except as described above. Most existing non-qualifying capital instruments issued by community banks before May 19, 2010, such as trust preferred securities and cumulative perpetual preferred stock, continue to count as regulatory capital.

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The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) enacted on May 24, 2018, requires federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will be exempt from Basel III capital rules and deemed to be in compliance with all other capital and leverage requirements.
On November 21, 2018, pursuant to the Regulatory Relief Act, the federal banking agencies issued a notice of proposed rulemaking proposing a community bank leverage ratio of 9%. The comment period for the proposed rule has since closed and the regulation is not yet finalized. The final community bank ratio is not known at this time.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject the institution to a variety of enforcement remedies available to state and federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.

Tennessee Banking Act; Federal Deposit Insurance Act
 
Reliant Bank is incorporated under the laws of the State of Tennessee and is subject to the applicable provisions of the laws of the State of Tennessee, including state corporate and banking laws. Reliant Bank is subject to the supervision of and regular examination by the TDFI. Reliant Bank is a member of the Federal Reserve and, therefore, is subject to Federal Reserve regulations and policies and is subject to regular examination by the Federal Reserve. Reliant Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund (“DIF”), and Reliant Bank is, therefore, subject to the provisions of the Federal Deposit Insurance Act (“FDIA”).
The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. Under the Dodd-Frank Act, the FDIC was required to adopt regulations that would base deposit insurance assessments on total assets less capital rather than deposit liabilities and to include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments. The Emergency Economic Stabilization Act (“EESA”) provided for a temporary increase in the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. This increased level of basic deposit insurance was made permanent by the Dodd-Frank Act. In addition, on October 14, 2008, the FDIC instituted temporary unlimited FDIC coverage of non-interest-bearing deposit transaction accounts, but this extra coverage expired December 31, 2012. The Dodd-Frank Act also repealed the prohibition on paying interest on demand transaction accounts, but did not extend unlimited insurance protection for these accounts.
The FDIC may terminate its insurance of deposits if it finds that a financial institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.
Tennessee statutes and federal law regulate a variety of the banking activities of Reliant Bank, including required reserves, investments, loans, mergers and acquisitions, issuances of securities, payments of dividends, and the establishment of branches. There are certain limitations under federal and Tennessee law on the payment of dividends by banks or bank or financial holding companies. A state bank, with the approval of the TDFI, may transfer funds from its surplus account to the undivided profits (retained earnings) account or any part of its paid-in-capital account. The payment of dividends by any bank is dependent upon its earnings and financial condition and, in addition to the limitations referred to above, is subject to the statutory power of certain federal and state regulatory agencies to act to prevent what they deem unsafe or unsound banking practices. The payment of dividends by Reliant Bank could, depending upon the bank’s financial condition, be deemed to constitute such an unsafe or unsound practice. Also, without regulatory approval, a dividend only can be paid in one year to the extent of the net income of the bank for that year plus the net income of the prior two years. The FDIA prohibits a state bank, the deposits of which are insured by the FDIC, from paying dividends if it is in default in the payment of any assessments due the FDIC.
State banks also are subject to regulation respecting the maintenance of certain minimum capital levels (described above), and Reliant Bank is required to provide certain periodic reports and such additional information as the Tennessee Banking Act and applicable federal laws, rules, and regulations require. Reliant Bank is also subject to certain restrictions on loan amounts, interest rates, “insider” loans to officers, directors and principal shareholders, tying arrangements, privacy, transactions with affiliates, and many other matters. Strict compliance at all times with state and federal banking laws is required.
Tennessee law contains limitations on the interest rates that may be charged by banks on various types of loans and restrictions on the nature and amount of loans that may be granted and on the types of investments that may be made by banks. The operations

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of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks must become and remain insured banks under the FDIA.
Under Tennessee law, a state bank is prohibited from lending to any one person, firm, or corporation amounts more than 15% of its equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable nonperishable staples or (ii) that the bank may make a loan to one person, firm or corporation in an amount up to 25% of its equity capital accounts with the prior written approval of the bank’s board of directors.

Community Reinvestment Act
The Community Reinvestment Act (the “CRA”), first enacted by Congress in 1977 and amended from time to time thereafter, requires that each depository institution’s record of helping meet the needs of its entire community be evaluated by the depository institution’s primary federal regulator. The CRA helps assure that banks and other financial institutions make credit available to low- and moderate-income borrowers, consistent with safe and sound operations. These regulations provide for a regular assessment of a bank’s record in meeting the credit needs of its service area. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. The federal banking agencies consider a bank’s CRA rating when a bank submits an application to establish banking centers, merge, or acquire the assets and assume the liabilities of another bank. In the case of an application by a bank or financial holding company for approval of a merger or acquisition, the CRA performance record of all banks involved in the merger or acquisition are reviewed in connection with the application filing. An unsatisfactory record of CRA performance can substantially delay, block or result in the imposition of conditions in connection with expansionary activities. Reliant Bank’s last CRA performance evaluation was in October 2016, and Reliant Bank was assigned a rating of “Satisfactory.”
 
Federal Deposit Insurance Corporation Improvement Act of 1991
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) substantially revised the depository institution regulatory and funding provisions of the FDIA, and revised several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take “prompt corrective action” in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA established five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under currently applicable prompt corrective action regulations, an FDIC-insured depository institution is defined to be well capitalized if (i) it maintains a Tier 1 leverage capital ratio of at least 5%, a common equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10% and (ii) it is not subject to a directive, order, or written agreement to meet and maintain specific capital levels. An FDIC-insured depository institution is defined to be adequately capitalized if it maintains a Tier 1 leverage capital ratio of at least 4%, a common equity Tier 1 risk-based capital ratio of at least 4.5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 8%. An-FDIC insured depository institution is defined to be undercapitalized if it has a Tier 1 leverage capital ratio of less than 4%, a common equity Tier 1 risk-based capital ratio of less than 4.5%, a Tier 1 risk-based capital ratio of less than 6%, or a total risk-based capital ratio of less than 8%. An-FDIC insured depository institution is defined to be significantly undercapitalized if it has a Tier 1 leverage capital ratio of less than 3%, a common equity Tier 1 risk-based capital ratio of less than 3%, a Tier 1 risk-based capital ratio of less than 4%, or a total risk-based capital ratio of less than 6%. An institution is considered critically undercapitalized if fails to maintain tangible equity to total assets of greater than 2%. An insured depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.
The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions and are not directly applicable to the holding companies that control those institutions. However, the Federal Reserve has indicated that, in regulating bank and financial holding companies, it will take appropriate action at the holding company level based on an assessment of the effectiveness of supervisory actions imposed upon subsidiary depository institutions pursuant to these provisions and regulations.
FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payments of dividends) or paying any management fee to its holding company (if any) if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable capital plan, it is treated as if it is significantly undercapitalized.

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These levels will differ for community banks such as Reliant Bank who qualify for and elect to use the new community bank leverage ratio pursuant to the requirements of the Regulatory Relief Act. The Regulatory Relief Act requires federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements.
On November 21, 2018, pursuant to the Regulatory Relief Act, the federal banking agencies issued a notice of proposed rulemaking proposing a community bank leverage ratio of 9% and corresponding capital adequacy levels. As proposed, a community bank with a community bank leverage ratio of greater than 9% would be considered “well capitalized;” a community bank with a community bank leverage ratio of 7.5% or greater would be considered “adequately capitalized;” a community bank with a community bank leverage ratio of less than 7.5% would be considered “undercapitalized;” and a community bank with a community bank leverage ratio of less than 6% would be considered “significantly undercapitalized” and would be required to provide its primary regulator with additional information in order to determine whether such organization would be classified as “critically undercapitalized.” The comment period for the proposed rule has since closed, but the regulation is not yet finalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator generally within 90 days of the date on which they became critically undercapitalized.
The FDIC has adopted regulations under FDICIA governing the receipt of brokered deposits and pass-through insurance. Under the regulations, a bank cannot accept, roll over or renew brokered deposits unless it is well-capitalized or it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer “pass-through” insurance on certain employee benefit accounts. Whether or not it has obtained this waiver, an adequately capitalized bank may not pay an interest rate on any deposits in excess of 75 basis points over certain index prevailing market rates specified by regulation. There are no such restrictions on a bank that is well-capitalized.
FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.
 
Gramm-Leach-Bliley Act
 
In 1999, the Gramm-Leach-Bliley Act (“GLBA”) expanded the universe of activities in which bank holding companies and affiliates of banks are permitted to engage, especially in the areas of securities and insurance. This law also includes requirements regarding the privacy and protection of non-public customer information held by financial institutions, as well as many other providers of financial services. There are provisions providing for functional regulation of the various services provided by institutions among different regulators. GLBA codified the “safeguards rule” which requires financial institutions to develop a written information security plan that describes how the company is prepared for and plans to continue to protect customers’ and consumers’ non-public personal information. GLBA did not remove the restrictions in the Bank Holding Company Act that prevent non-financial companies from entering retail and/or commercial banking. Finally, among many other sections of this law, there is some relief for small banks from the regulatory burden of the Community Reinvestment Act.
 
Bank Secrecy Act and USA PATRIOT Act
 
The Currency and Foreign Transactions Reporting Act of 1970, better known as the Bank Secrecy Act (“BSA”), requires all United States financial institutions to assist United States government agencies to detect and prevent money laundering. Specifically, BSA requires financial institutions to keep records of cash purchases of negotiable instruments; file reports of cash transactions exceeding a daily aggregate amount of $10,000; to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities; and to obtain and retain information regarding the identify and verification of the beneficial owners of business customers.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction

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of the United States, imposed new compliance and due diligence obligations, defined new crimes and penalties, compelled the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarified the safe harbor from civil liability to customers. The U.S. Treasury Department has issued a number of regulations implementing the USA PATRIOT Act that apply certain of its requirements to financial institutions such as Reliant Bank. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. 
Under the USA PATRIOT Act, all “financial institutions” (as therein defined) must establish anti-money laundering compliance and due diligence programs. Such programs must include, among other things, adequate policies, the designation of a compliance officer, employee and director training programs, an independent audit function to review and test the program, and the ongoing due diligence and monitoring of customer relationships including the beneficial owners of business customers.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
 
In July 2010, the Dodd-Frank Act was signed into law, incorporating numerous financial institution regulatory reforms. Many of these reforms were implemented between 2011 and 2014 through regulations promulgated by banking and securities regulators. The following discussion describes certain material elements of the regulatory framework. Many of the Dodd-Frank Act provisions are stated to only apply to larger financial institutions and do not directly impact community-based institutions like Reliant Bank. For instance, provisions that regulate derivative transactions and limit derivatives trading activity of federally-insured institutions, enhance supervision of “systemically significant” institutions, impose new regulatory authority over hedge funds, limit proprietary trading by banks, and phase-out the eligibility of trust preferred securities for Tier 1 capital are among the provisions that do not directly impact Reliant Bank either because of exemptions for institutions below a certain asset size or because of the nature of our bank’s operations. Other provisions of the Dodd-Frank Act that impact Reliant Bank include provisions that:
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Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling and increase the size of the floor of the DIF, and offset the impact of the increase in the minimum floor on institutions with less than $10 billion in assets.

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Make permanent the $250,000 limit for federal deposit insurance.

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Repeal the federal prohibition on payment of interest on demand deposits, thereby permitting depositing institutions to pay interest on business transaction and other accounts.

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Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, also known as the Consumer Financial Protection Bureau (the “CFPB”), responsible for implementing federal consumer protection laws, although banks below $10 billion in assets continue to be examined and supervised for compliance with these laws by their primary federal bank regulator.

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Restrict the preemption of state law by federal law and disallow national bank subsidiaries from availing themselves of such preemption.

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Impose new requirements for mortgage lending, including new minimum underwriting standards, prohibitions on certain yield-spread compensation to mortgage originators, special consumer protections for mortgage loans that do not meet certain provision qualifications, prohibitions and limitations on certain mortgage terms and various new mandated disclosures to mortgage borrowers.

•
Apply the same leverage and risk based capital requirements that apply to insured depository institutions to bank and financial holding companies.

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Permit national and state banks to establish de novo interstate branches at any location where a bank based in that state could establish a branch, and require that bank and financial holding companies and banks be well-capitalized and well managed in order to acquire banks located outside their home state.

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Impose new limits on affiliated transactions and cause derivative transactions to be subject to lending limits.

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Implement corporate governance revisions, including with regard to executive compensation and proxy access to shareholders that apply to all public companies not just financial institutions.


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The Dodd-Frank Act has increased regulatory burdens, compliance costs, and non-interest expense for community banks. Of particular concern to many community banks is the depth and breadth of the powers of the CFPB, which may have significant impacts on consumer compliance regulation and increased costs, particularly for smaller depository institutions.

Economic Growth, Regulatory Relief and Consumer Protection Act
The Regulatory Relief Act was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While it maintains the majority of the regulatory structure established by the Dodd-Frank Act, the Regulatory Relief Act amends certain aspects for small depository institutions with less than $10 billion in assets, such as Reliant Bank. Sections in the Regulatory Relief Act address access to mortgage credit; consumer access to credit; protections for veterans, consumers, and homeowners; rules for certain bank or financial holding companies; capital access; and protections for student borrowers. Reliant Bancorp and Reliant Bank will focus on the implementing rules and guidance for the various provisions in each section of the Regulatory Relief Act that impact their operations and activities.
Among other items, the Regulatory Relief Act simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion. The Regulatory Relief Act requires federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements.
On November 21, 2018, pursuant to the Regulatory Relief Act, the federal banking agencies issued a notice of proposed rulemaking proposing a community bank leverage ratio of 9%. The comment period for the proposed rule has since closed, but the regulation is not yet finalized. The final community bank ratio is not known at this time.
The Regulatory Relief Act also expands the universe of holding companies that are permitted to rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement.” The asset size of a qualifying holding company was increased from $1 billion to $3 billion on August 30, 2018, thus excluding holding companies in this category from consolidated capital requirements. However, subsidiary depository institutions continue to be subject to minimum capital requirements.
Further, the Regulatory Relief Act decreased the burden for community banks in regards to call reports, the Volcker Rule (which generally restricts banks from engaging in certain investment activities and limits involvement with hedge funds and private equity firms), mortgage disclosures, and risk weights for some high-risk commercial real estate loans. On December 28, 2018, the federal banking agencies issued a final rule increasing the asset threshold to qualify for an 18-month examination cycle from $1 billion to $3 billion for qualifying institutions that are well capitalized, well managed and meet certain other requirements.
Any number of the provisions of the Regulatory Relief Act may have the effect of increasing our expenses, decreasing our revenues, or changing the activities in which we chooses to engage. The environment in which banking organizations operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations, may have long-term effects on the profitability of banking organizations that cannot now be foreseen.
It is difficult at this time to determine the direct impact of the Regulatory Relief Act on Reliant Bancorp and Reliant Bank. Implementing rules and regulations are required and many have not yet been written or finalized.
 
Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act (the “JOBS Act”) increased the threshold under which a bank or bank holding company may terminate registration of a security under the Securities Exchange Act of 1934, as amended, to 1,200 shareholders of record from 300. The JOBS Act also raised from 500 to 2,000 the number of “record” shareholders of a class of equity securities that triggers the requirements for an issuer to register that class of securities and become a public reporting company. Since the JOBS Act was signed, numerous banks and bank holding companies have filed to deregister their common stock.
Current Expected Credit Loss
A new accounting standard changing the current method for providing allowances for loan and lease losses has been adopted by the Financial Accounting Standards Board. This new standard is referred to as Current Expected Credit Loss (“CECL”) and

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becomes effective for Reliant Bank in 2021. The use of this standard will increase the types of data required to determine the appropriate level of the allowance for loan and lease losses.
The use of this standard may potentially increase Reliant Bank’s allowance for loan and lease losses. Any increase in Reliant Bank’s allowance for loan and lease losses or expenses incurred in order to make the determination for such allowance could have a material adverse effect on Reliant Bank’s financial condition and results of operations. The direct effects on Reliant Bank are not yet known.

Other Regulations

Interest and other charges that Reliant Bank collects or contracts for are subject to state usury laws and federal laws concerning interest rates. Reliant Bank’s loan operations are also subject to federal laws applicable to credit transactions, such as:

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The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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The Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities it serves;

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The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

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The Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

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The Fair Debt Collection Practices Act, governing debt collection practices; and

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The rules and regulations of the various governmental agencies charged with the responsibility of implementing these federal laws.

In addition, Reliant Bank’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
 
FDIC Insurance Premiums
 
Reliant Bank is required to pay quarterly FDIC deposit insurance assessments to the DIF. The FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the DIF on March 31, 2006, in accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based on the institution’s average consolidated total assets less its average tangible equity during the assessment period as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the DIF.
The FDIC has a risk-based assessment system to adjust the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits. On November 12, 2009, the FDIC announced a final rule to increase by 3 basis points the deposit assessment base rate, beginning January 1, 2011. Effective July 1, 2016, the initial base assessment rates for all insured institutions were reduced from 5 to 35 basis points to 3 to 30 basis points. Pursuant to the Regulatory Relief Act, the FDIC Board of Directors authorized the publication of a notice of proposed rulemaking proposing to apply the community bank leverage ratio framework to the deposit insurance assessment system. While an assessment estimator is available for use in determining the impact of the proposal on Reliant Bank, the regulation is not yet finalized and changes could be made.
Any future deposit insurance premium increases will adversely impact Reliant Bank’s earnings. Depending on any future losses that the FDIC insurance fund may suffer due to failed institutions, there can be no assurance that there will not be additional significant premium increases in order to replenish the fund.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a federal bank regulatory agency.
 
Effects of Governmental Policies

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Reliant Bank’s earnings are affected by the difference between the interest earned by Reliant Bank on its loans and investments and the interest paid by Reliant Bank on its deposits or other borrowings. The yields on its assets and the rates paid on its liabilities are sensitive to changes in prevailing market rates of interest. Thus, the earnings and growth of Reliant Bank are influenced by general economic conditions, fiscal policies of the federal government, and the policies of regulatory agencies, particularly the Federal Reserve, which establishes national monetary policy. The nature and impact of any future changes in fiscal or monetary policies cannot be predicted.
Commercial banks are affected by the credit policy of various regulatory authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in reserve requirements on bank deposits, changes in the discount rate on bank borrowings and limitations on interest rates that banks may pay on time and savings deposits. The Federal Reserve uses these means in varying combinations to influence overall growth of bank loans, investments and deposits, and also to affect interest rates charged on loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including the Federal Reserve, also affect the banking industry. Through changes in the reserve requirements against bank deposits, open market operations in U.S. Government securities and changes in the discount rate on bank borrowings, the Federal Reserve influences the cost and availability of funds obtained for lending and investing. No prediction can be made with respect to possible future changes in interest rates, deposit levels or loan demand or with respect to the impact of such changes on the business and earnings of Reliant Bank.
From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial institutions. With the enactments of EESA, the American Recovery and Reinvestment Act, the Dodd-Frank Act, CECL and the significant number of regulations that have or will be promulgated under these and other laws affecting financial institutions, the nature and extent of the future legislative and regulatory changes affecting financial institutions, and the resulting impact on those institutions is and will be unpredictable. Bills are currently pending which may have the effect of changing the way Reliant Bancorp and/or Reliant Bank conducts its business.

Statistical Information Required by Guide 3
 
The statistical information required to be displayed under Item 1 pursuant to Guide 3, “Statistical Disclosure by Bank Holding Companies,” of the Exchange Act Industry Guides is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

ITEM 1A. RISK FACTORS
 
Reliant Bancorp’s decisions regarding credit risk and reserves for loan losses may materially and adversely affect its business.
 
Making loans and other extensions of credit is an essential element of Reliant Bank’s business. Although Reliant Bank seeks to mitigate risks inherent in lending by adhering to specific underwriting practices, its loans and other extensions of credit may not be repaid. The risk of nonpayment is affected by a number of factors, including:
 
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the duration of the credit;
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credit risks of a particular customer;
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changes in micro or macro economic and industry conditions; and
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in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral.

Reliant Bank attempts to maintain an appropriate allowance for loan losses to provide for potential losses in its loan portfolio. Reliant Bank periodically determines the amount of the allowance based on consideration of several factors, including:

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an ongoing review of the quality, mix, and size of Reliant Bank’s overall loan portfolio;
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Reliant Bank’s historical loan loss experience;
•
evaluation of micro and macro economic conditions;
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regular reviews of loan delinquencies and loan portfolio quality; and
•
the amount and quality of collateral, including guarantees, securing the loans.


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There is no precise method of predicting credit losses; therefore, Reliant Bank faces the risk that charge-offs in future periods will exceed its allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease in Reliant Bancorp’s net income, and possibly its capital.
 
Federal and state regulators periodically review Reliant Bank’s allowance for loan losses and may require Reliant Bank to increase its provision for loan losses or recognize further loan charge-offs, based on judgments different than those of its management. Any increase in the amount of Reliant Bank’s provision or loans charged-off as required by these regulatory agencies could have a negative effect on its operating results.
 
Reliant Bank may have higher loan losses than it has allowed for in its allowance for loan losses. Our loan portfolio includes a meaningful amount of construction and development, commercial mortgage, and other commercial loans, which have a greater credit risk than residential mortgage loans.
 
Reliant Bank’s actual loan losses could exceed its allowance for loan losses. Reliant Bank’s average loan size continues to increase and reliance on its historic allowance for loan losses may not be adequate. A large portion of Reliant Bank’s loan portfolio is composed of construction and development, commercial mortgage, and other commercial loans. Repayment of such loans is generally considered more subject to market risk than residential mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria used, losses may be experienced as a result of various factors beyond Reliant Bank’s control, including, among other things, changes in market conditions affecting the value of loan collateral and problems affecting the credit of Reliant Bank’s borrowers.

A new accounting standard may require Reliant Bank to increase its allowance for loan losses and could have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for Reliant Bank beginning January 1, 2021. This standard, referred to as current expected credit loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses through provision for loan losses. This will change the current method of provisioning for loan losses that are probable, which may require Reliant Bank to increase its allowance for loan losses, and is likely to increase the types of data Reliant Bank would need to collect and review to determine the appropriate level of its allowance for loan losses. In addition, this change may result in more volatility in the level of Reliant Bank's allowance for loan losses. An increase, to the extent material, in Reliant Bank's allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses could have a material adverse effect on our capital levels, financial condition, and results of operations.

We are subject to extensive government regulation and supervision; compliance with new and existing legislation, regulations, and supervisory requirements and expectations could detrimentally affect our business.
 
Reliant Bancorp and Reliant Bank are subject to extensive federal and state regulation and supervision, the primary focus of which is to protect customers, depositors, the deposit insurance fund, and the safety and soundness of the banking system as a whole, and not shareholders. The quantity and scope of applicable federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, and leasing companies. Banking and consumer lending laws and regulations apply to almost every aspect of our business, including lending, capital, investments, deposits, other services, and products, risk management, dividends, and acquisitions.
 
Legislation and regulation with respect to our industry has increased in recent years, and we expect that federal and state supervision and regulation of our industry will continue to expand in scope and complexity. Congress and federal regulatory agencies continually review banking laws, rules, regulations and policies for possible changes. Changes to statutes, rules, regulations or regulatory policies, including changes in the interpretation or implementation of statutes, rule, regulations or policies, could affect us in substantial and unpredictable ways, and could subject us to additional costs, limits on the services and products we may offer, or limits on the pricing of banking services and products. In addition, establishing systems and processes to achieve compliance with laws, rules and regulations increases our costs and could limit our ability to pursue business opportunities.
 
If we receive less than satisfactory results on regulatory examinations, we could be subject to damage to our reputation, significant fines and penalties, requirements to increase compliance and risk management activities, and an increase in our deposit insurance assessment rate, in addition to related costs and restrictions on acquisitions, new locations, new lines of business, or continued growth. Future changes in federal and state banking laws and regulations could adversely affect our operating results and ability to continue to compete effectively. For example, the Dodd-Frank Act and related regulations subject us to additional restrictions, oversight and reporting obligations, which have significantly increased costs, although certain provisions of the Regulatory Relief Act may alleviate some of these burdens (however the impact of the Regulatory Relief Act is currently unknown because

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implementing rules and regulations are required in some instances and many of these implementing rules and regulations have not yet been written or finalized). Also, over the last several years, state and federal regulators have focused on enhanced risk management practices, compliance with the Bank Secrecy Act and anti-money laundering laws, including the new beneficial ownership rule, data integrity and security, use of service providers, and fair lending and other consumer protection issues, which has increased our need to build additional processes and infrastructure. Government agencies charged with adopting and interpreting laws, rules and regulations may do so in an unforeseen manner, including in ways that potentially expand the reach of the laws, rules or regulations more than initially contemplated or currently anticipated. We cannot predict the substance or impact of pending or future legislation or regulation. Compliance with such current and potential legislation and regulation and increased regulatory scrutiny could significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. Our success depends on our ability to maintain compliance with both existing and new laws, rules and regulations.

Our recent acquisition and growth and future expansion may result in additional risks.
 
Over the last three years, we have completed the acquisition of Community First and expanded into new markets via organic growth. We expect to continue to expand in our current markets and in other select markets through additional branches or through additional acquisitions of all or part of other financial institutions. These types of expansions involve various risks, including the risks detailed below.
 
Growth. As a result of our acquisition activity and organic growth, we may be unable to successfully:
 
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maintain acceptable loan quality in the context of significant loan growth;
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obtain regulatory and other approvals;
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attract or retain sufficient deposits and capital to fund anticipated loan growth;
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maintain adequate common equity and regulatory capital;
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avoid diversion or disruption of our existing operations or management as well as those of any acquired institution;
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maintain adequate management personnel and systems to oversee and support such growth;
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maintain adequate internal audit, loan review and compliance functions; and
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implement additional policies, procedures and operating systems required to support such growth.

Results of Operations. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profits. Our growth strategy necessarily entails growth in overhead expenses as we routinely add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices in our newer markets.
 
Development of Offices. There are considerable costs involved in opening branches, and new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, any new branches we establish can be expected to negatively impact our earnings for some period of time until they reach certain economies of scale. The same is true for our efforts to expand in current markets with the hiring of additional seasoned professionals with significant experience in those markets. Our expenses could be further increased if we encounter delays in opening new branches. We may be unable to accomplish future branch expansion plans due to a lack of available satisfactory sites, difficulties in acquiring such sites, failure to receive any required regulatory approvals, increased expenses or loss of potential sites due to complexities associated with zoning and permitting processes, higher than anticipated merger and acquisition costs or other factors. Finally, we can have no assurance any branch will be successful even after it has been established or acquired, as the case may be.
 
Regulatory and Economic Factors. Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering into or expanding in our targeted markets or allow competitors to gain or retain market share in our existing markets.

Failure to successfully address these and other issues related to our expansionary activities could have a material adverse effect on our financial condition and results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our results of operations and financial condition could be materially adversely affected.
 
Liquidity risk could impair our ability to fund our operations and jeopardize our financial condition.
 

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Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Liquidity risk arises from the possibility that we may be unable to satisfy current or future funding requirements and needs.
 
The objective of managing liquidity risk is to ensure that our cash flow requirements resulting from depositor, borrower and other creditor demands as well as our operating cash needs are met, and that our cost of funding such requirements and needs is reasonable. We maintain an asset/liability and interest rate risk policy and a liquidity and funds management policy, including a contingency funding plan, that, among other things, include procedures for managing and monitoring liquidity risk. Generally, we rely on deposits, repayments of loans and leases and cash flows from our investment securities as our primary sources of funds. Our principal deposit sources include consumer, commercial and public funds customers in our markets. We have used these funds, together with federal funds purchased and other sources of short-term and long-term borrowings, to make loans and leases, acquire investment securities and other assets and to fund continuing operations.
 
An inability to maintain or raise funds in amounts necessary to meet our liquidity needs could have a substantial negative effect on Reliant Bank’s liquidity. Our access to funding sources in amounts adequate to finance our activities, or on terms attractive to us, could be impaired by factors that affect us specifically or the financial services industry in general. For example, factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, a reduction in our credit rating, any damage to our reputation or any other decrease in depositor or investor confidence in our creditworthiness and business. Our access to liquidity could also be impaired by factors that are not specific to us, such as severe volatility or disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole. Any such event or failure to manage our liquidity effectively could affect our competitive position, increase our borrowing costs and the interest rates we pay on deposits, limit our access to the capital markets and have a material adverse effect on our results of operations or financial condition.
 
Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, general economic and market conditions and other factors. Loan and lease repayments are a relatively stable source of funds but are subject to the borrowers’ and lessees’ ability to repay loans and leases, which can be adversely affected by a number of factors including changes in general economic conditions, adverse trends or events affecting business industry groups or specific businesses, declines in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and other factors. Furthermore, loans and leases generally are not readily convertible to cash. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet growth in demand for loans and leases, deposit withdrawal demands or otherwise fund operations. Such secondary sources include FHLB advances, brokered deposits, secured and unsecured federal funds lines of credit from correspondent banks, Federal Reserve borrowings and/or accessing the equity or debt capital markets.
 
We anticipate we will continue to rely primarily on deposits, loan and lease repayments, and cash flows from our investment securities to provide liquidity. Additionally, where necessary, the secondary sources of borrowed funds described above will be used to augment our primary funding sources. If we are unable to access any of these secondary funding sources when needed, we might be unable to meet our customers’ or creditors’ needs, which would adversely affect our financial condition, results of operations, and liquidity.

We may face risks with respect to future acquisitions.
 
When we attempt to expand our business through mergers and acquisitions (as we have done over the last several years), we seek targets that are culturally similar to us, have experienced management and possess either market presence or have potential for improved profitability through economies of scale or expanded services. In addition to the general risks associated with our growth plans which are highlighted above, in general, acquiring other banks, businesses or branches, particularly those in markets with which we are less familiar, involves various risks commonly associated with acquisitions, including, among other things:
 
•
the time and costs associated with identifying and evaluating potential acquisition and merger targets;
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inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;
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the time and costs associated with evaluating new markets, hiring experienced local management, including as a result of de novo expansion into a market, and opening new bank locations, and the time lags between these activities and the generation of sufficient assets and deposits to support the significant costs of the expansion that we may incur, particularly in the first 12 to 24 months of operations;
•
our ability to finance an acquisition and possible dilution to our existing shareholders;
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the diversion of our management’s attention to the negotiation of a transaction and integration of an acquired company’s operations with ours;

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•
the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations;
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entry into new markets where we have limited or no direct prior experience;
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closing delays and increased expenses related to the resolution of lawsuits filed by our shareholders or shareholders of companies we may seek to acquire;
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the inability to receive regulatory approvals timely or at all, including as a result of community objections, or such approvals being restrictively conditional; and
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risks associated with integrating the operations, technologies and personnel of an acquired business.

We expect to continue to evaluate merger and acquisition opportunities that are presented to us in our current markets as well as other markets throughout the region and conduct due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash or equity securities and related capital raising transactions may occur at any time. Generally, acquisitions of financial institutions involve the payment of a premium over book and market values, and, therefore, some dilution of our book value and fully diluted earnings per share may occur in connection with any future transaction. Failure to realize the expected revenue increases, cost savings, increases in product presence and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.
 
In addition, we may face significant competition from numerous other financial institutions, many of which may have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. There can be no assurance that we will be successful in identifying or completing any potential future acquisitions.

The value of our goodwill and other intangible assets may decline in the future.
 
As of December 31, 2018, we had $51.9 million of goodwill and other intangible assets. A significant decline in our financial condition, a significant adverse change in the business climate, slower growth rates, or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations. Future acquisitions of other financial institutions could result in additional goodwill.
 
Reliant Bank’s focus on lending to small to mid-sized community based businesses may increase Reliant Bancorp’s credit risk.
 
Most of Reliant Bank’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the markets in which Reliant Bank operates negatively impact this important customer sector, Reliant Bancorp’s results of operations and financial condition and the value of its common stock may be adversely affected. Furthermore, the deterioration of Reliant Bank’s borrowers’ businesses may hinder their ability to repay their loans with Reliant Bank, which could have a material adverse effect on Reliant Bancorp’s financial condition and results of operations.

Reliant Bancorp is geographically concentrated in Middle Tennessee and changes in local economic conditions impact our profitability.
 
We currently operate primarily in the Nashville MSA, and most of our loan, deposit and other customers live or have operations in this area. Accordingly, our success significantly depends upon the growth in population, income levels, deposits, and housing starts in this market, along with the continued attraction of business ventures to the areas, and our profitability is impacted by the changes in general economic conditions in this market. We cannot assure you that economic conditions, including loan demand, in our market will improve during 2019, or thereafter, and in that case, we may not be able to grow our loan portfolio in line with our expectations. In addition, the ability of our customers to repay their loans to us may be negatively impacted and our financial condition and results of operations could be negatively impacted.
 
Compared to regional or national financial institutions, we are less able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Moreover, we cannot give any assurance that we will benefit from any market growth or more favorable economic conditions in our primary market areas if they do occur.
 
Reliant Bank faces strong competition for customers, which could prevent it from obtaining customers and may cause it to pay higher interest rates to attract customers.

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The banking business is highly competitive, and Reliant Bank experiences competition in its markets from many other financial institutions. Reliant Bank competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national, and international financial institutions that operate offices in Reliant Bank’s primary market areas and elsewhere. Reliant Bank competes with these institutions both in attracting deposits and in making loans. In addition, Reliant Bank has to attract its customer base from other existing financial institutions and from new residents and businesses that have relocated to the Nashville MSA. Many of Reliant Bank’s competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks, that Reliant Bank does not provide. There is a risk that Reliant Bank will not be able to compete successfully with other financial institutions in Reliant Bank’s markets, and that it may have to pay higher interest rates to attract deposits, resulting in reduced profitability. In addition, competitors that are not depository institutions are generally not subject to the extensive regulations that apply to Reliant Bank.

The financial services industry is undergoing rapid technological changes and we may not have the resources to implement new technology to stay current with these changes.
The financial services industry is undergoing rapid technological changes, with new technology-driven products and services being frequently introduced. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to provide secure electronic environments as we continue to grow and expand our market area. Many of our larger competitors have substantially greater resources to invest, and have invested significantly more than us, in technological improvements. As a result, they may be able to offer additional or more convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers, which could impair our growth and profitability.

Reliant Bank’s FDIC deposit insurance premiums and assessments may increase.

Deposits in Reliant Bank are insured by the FDIC up to legal limits and, as a result, we are subject to the payment of FDIC deposit insurance premiums and assessments. High levels of bank failures since the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund following the financial crisis, the FDIC increased deposit insurance assessment rates and charged special assessments to all FDIC-insured financial institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional failures of financial institutions. Any future special assessments, increases in assessment rates, or required prepayments of FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could have a material adverse effect on our business, financial condition, and results of operations.
 
Changes in prevailing interest rates may reduce Reliant Bancorp’s profitability.
 
Reliant Bancorp’s results of operations depend in large part upon the level of its net interest income, which is the difference between interest income from interest earning assets, such as loans and investment securities, and interest expense on interest bearing liabilities, such as deposits and other borrowings. Depending on the terms and maturities of Reliant Bancorp’s assets and liabilities, Reliant Bancorp believes it is more likely than not that a significant change in interest rates could have a material adverse effect on its net interest income and, therefore, its profitability. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. While Reliant Bancorp intends to manage the effects of changes in interest rates by adjusting the terms, maturities, and pricing of its assets and liabilities, its efforts may not be effective and its financial condition and results of operations could suffer.

Reliant Bancorp and Reliant Bank are dependent on key individuals and the loss of one or more of these key individuals could curtail its growth and adversely affect its prospects.
 
Reliant Bancorp and Reliant Bank are materially dependent on the performance of their executive management teams, loan officers, and other support personnel. The loss of the services of any of these individuals could have a material adverse effect on the business of Reliant Bancorp and Reliant Bank and our results of operations and financial condition. Many of these key personnel have important customer relationships, which are instrumental to Reliant Bank’s operations. Changes in key personnel and their responsibilities may be disruptive to Reliant Bancorp's and Reliant Bank’s business and could have a material adverse effect on Reliant Bancorp's and Reliant Bank’s business, financial condition, and results of operations. Management believes that future

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results also will depend in part upon attracting and retaining highly skilled and qualified management, especially in the new market areas into which Reliant Bank may enter, as well as sales and marketing personnel. Competition for such personnel is intense, and management cannot be sure that Reliant Bank will be successful in attracting or retaining such personnel.
 
Reliant Bancorp is an emerging growth company, and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make Reliant Bancorp’s common stock less attractive to investors.
 
Reliant Bancorp is subject to periodic reporting requirements under the Securities Exchange Act of 1934. Reliant Bancorp is an “emerging growth company,” as defined in the JOBS Act, however, and it may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, even if Reliant Bancorp chooses to comply with the reporting requirements applicable to public companies that are not emerging growth companies, Reliant Bancorp may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as Reliant Bancorp is an emerging growth company. Reliant Bancorp will remain an emerging growth company for up to five years, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if Reliant Bancorp’s total annual gross revenues equal or exceed $1.07 billion in a fiscal year. Reliant Bancorp cannot predict if investors will find its common stock less attractive because it will rely on these exemptions. If some investors find Reliant Bancorp’s common stock less attractive as a result, there may be a less active trading market for Reliant Bancorp’s common stock and its stock price may be more volatile.
 
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. Reliant Bancorp has elected not to opt out of such an extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, Reliant Bancorp, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make Reliant Bancorp’s financial statements not comparable with those of another public company that is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.

The short-term and long-term impact of the changing regulatory capital requirements and recently proposed capital rules is uncertain.
 
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement to a strengthened set of capital requirements for internationally active banking organizations in the U.S. and around the world, known as Basel III. Basel III called for increases in the requirements for minimum common equity, minimum Tier 1 capital and minimum total capital for certain systemically important financial institutions, to be phased in over time until fully phased in by January 1, 2019. The final rules were adopted by the federal banking agencies in July 2013.
 
The Regulatory Relief Act requires federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%, as well as procedures for treatment of a qualifying community bank that has a community bank leverage ratio that falls below the required minimum. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements, thus being relieved from the requirements of Basel III.
On November 21, 2018, pursuant to the Regulatory Relief Act, the federal banking agencies issued a notice of proposed rulemaking proposing a community bank leverage ratio of 9% and corresponding capital adequacy levels. As proposed, a community bank with a community bank leverage ratio of 9% or greater would be considered “well capitalized;” a community bank with a community bank leverage ratio of 7.5% or greater would be considered “adequately capitalized;” a community bank with a community bank leverage ratio of less than 7.5% would be considered “undercapitalized;” and a community bank with a community bank leverage ratio of less than 6% would be considered “significantly undercapitalized” and would be

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required to provide its primary regulator with additional information in order to determine whether such organization would be classified as “critically undercapitalized.” The comment period for the proposed rule has since closed, but the regulation is not yet finalized.

The application of more stringent capital requirements for Reliant Bancorp or Reliant Bank could, among other things, result in lower returns on invested capital, require the issuance of additional capital, and result in regulatory actions if Reliant Bancorp or Reliant Bank were to be unable to comply with such requirements.

Interest rate movements, inflation, and other economic factors can negatively impact our mortgage banking business.

Our mortgage banking business is subject to and affected by the risks generally incident to the broader mortgage banking business, including interest rate levels and the impact of government regulation on mortgage loan originations and servicing. Our mortgage banking business also is affected by interest rate fluctuations. During periods of higher and rising interest rates, the demand for mortgage loans and the level of refinancing activity generally tends to decline, which can lead to reduced loan volumes and lower revenues, which could negatively impact our earnings. Increases in interest rates may have a material adverse effect on our mortgage banking revenue and profitability. Our mortgage loan operations may also be adversely affected by other economic factors within our markets such as negative changes in employment levels, job growth, and consumer confidence and availability of mortgage financing, one or all of which could result in reduced demand or price depression from current levels. Our mortgage banking operations are also dependent upon the securitization market for mortgage-backed securities, and could be materially adversely affected by any fluctuation or downturn in such market. In the event that disruptions to the secondary markets tighten or eliminate the available liquidity within the secondary markets for mortgage loans, we could experience a material adverse effect with respect to sales of mortgage loans and the profitability of our mortgage banking business.

If the underwriting quality of our mortgage loan originations is found to be deficient, our profitability could decrease and we may incur losses.
 
We provide several different loan products to our customers to finance the purchases of their homes. We sell a large number of the mortgage loans we originate into the secondary mortgage market, and those loans are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. In the event that a substantial number of the loans that we have originated fall into default and the investors to whom we sold the loans determine that we did not underwrite the loans in accordance with their requirements, we could be required to repurchase the loans from the investors or indemnify the investors for any losses incurred. This may result in losses that could have a material adverse effect on our profitability and results of operations.

Reliant Bank could incur significant costs and expenses related to Reliant Mortgage Ventures, LLC, and these costs and expenses could have a material adverse effect on our business, financial condition, and results of operations.

Reliant Bank is a member in Reliant Mortgage Ventures, LLC (“RMV”), a Tennessee limited liability company organized in 2011. RMV provides mortgage banking services to bank customers. Reliant Bank holds 51% of the governance rights in RMV and 30% of the financial rights in RMV. VHC Fund 1, LLC (“VHC”) is the other member of RMV and holds 49% of the governance rights in RMV and 70% of the financial rights in RMV. Under the terms of the RMV operating agreement, VHC is required to fund RMV’s losses via additional capital contributions to RMV. RMV incurred a net loss of $3.58 million for the year ended December 31, 2018, and has incurred cumulative net losses of $8.06 million since inception. Also, per the terms of the RMV operating agreement, VHC is to receive all distributions of cash flow from RMV until such time as VHC has recovered its capital contributions to RMV. After the return to VHC of its capital contributions, VHC is to receive 70% of RMV cash flow distributions and Reliant Bank is to receive 30% of RMV cash flow distributions. There can be no assurance that RMV will ever generate sufficient income to return to VHC its aggregate capital contributions or that Reliant Bank will ever receive cash flow distributions from RMV.

To date, VHC has not failed to make a required contribution of additional capital to RMV to cover losses incurred by the company. In the event VHC fails to make a required contribution of additional capital to cover losses of RMV, Reliant Bank has the right to cause the dissolution of RMV. However, in such event, Reliant Bank could also be required to fund losses of RMV not funded by VHC, which losses could be significant. Additionally, in the event Reliant Bank were to cause the dissolution of RMV, there would be costs and expenses associated with dissolving RMV and winding up the company’s operations or integrating them with those of Reliant Bank, and those costs and expenses could be significant. Accordingly, VHC’s failure to make a required contribution of additional capital to cover losses of RMV and/or Reliant Bank’s decision to cause the

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dissolution of RMV in the event of such a failure could have a material adverse effect on our business, financial condition, and results of operations.

Laws and regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
 
We are subject to various privacy, information security and data protection laws, including requirements relating to security breach notification, and we could be negatively impacted by them. For example, we are subject to the Gramm-Leach-Bliley Act (“GLBA”) and related implementing regulations and guidance. Among other things, GLBA: (i) imposes certain limitations on the ability of financial institutions to share consumers’ nonpublic personal information with nonaffiliated third parties, (ii) requires that financial institutions provide certain disclosures to consumers about their information collection, sharing and security practices and affords consumers the right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions) and (iii) requires financial institutions to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of customer information processed by the financial institution as well as plans for responding to data security breaches.
 
Moreover, various United States federal agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of required individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach. Many of these requirements not only apply to us but also apply broadly to our partners that accept payments from our customers. In many countries that have yet to impose data security breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data security breaches.
 
Furthermore, legislators and/or regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.
 
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions and damage to our reputation and our brand.

Anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
 
We maintain an enterprise-wide program designed to enable us to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. We cannot be sure our policies, procedures, processes and controls will be effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.
 
Reliant Bancorp’s historical operating results may not be indicative of its future operating results.
 
Reliant Bancorp may not be able to sustain its historical rate of growth, and, consequently, Reliant Bancorp’s historical results of operations will not necessarily be indicative of its future results of operations. Various factors, such as economic conditions, political, regulatory and legislative initiatives and considerations, and competition, may impede Reliant Bancorp’s ability to expand its market presence. If Reliant Bancorp experiences a significant decrease in its historical rate of growth, Reliant Bancorp’s results of operations and financial condition may be adversely affected because a high percentage of its operating costs are fixed expenses.
 

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Reliant Bancorp may be adversely affected by the soundness of other financial institutions.
 
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose our bank to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by the bank cannot be realized on or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure. Any such losses could have a material adverse effect on our financial condition and results of operations.

Reliant Bancorp’s ability to pay cash dividends is limited, and Reliant Bancorp may be unable to pay future dividends even if it desires to do so.
 
Even though our board of directors has approved the payment of cash dividends on Reliant Bancorp’s common stock in recent years, there can be no assurance as to whether or when we may pay dividends on our common stock in the future. Future dividends, if any, will be declared and paid at the discretion of Reliant Bancorp’s board of directors and will depend on a number of factors. Reliant Bancorp’s principal source of funds used to pay cash dividends on its common stock will be dividends that Reliant Bancorp receives from Reliant Bank. Although Reliant Bank’s asset quality, earnings performance, liquidity, and capital requirements will be taken into account before Reliant Bancorp declares or pays any future dividends on its common stock, our board of directors will also consider our liquidity and capital requirements, and our board of directors could determine to declare and pay dividends without relying on dividend payments from Reliant Bank.
Federal and state banking laws and regulations and state corporate laws restrict the amount of dividends we may declare and pay and that Reliant Bank may declare and pay to Reliant Bancorp. For example, Federal Reserve regulations implementing the capital rules required under Basel III do not permit dividends unless capital levels exceed certain higher levels applying capital conservation buffers that became fully phased in beginning January 1, 2019.
In addition, the terms of the subordinated debentures Reliant Bancorp assumed in connection with our acquisition of Community First prohibit us from paying dividends on our common stock at times when we are not current with our payment obligations under the subordinated debentures. Reliant Bancorp may also from time to time enter into other contractual arrangements, including borrowing relationships with other financial institutions, that could limit the ability of Reliant Bancorp to pay dividends on its common stock in the future. 
 
Reliant Bancorp’s stock price may fluctuate, which could result in losses to investors and litigation against Reliant Bancorp.
 
Reliant Bancorp’s common stock is listed on The Nasdaq Stock Market LLC. A number of factors could cause Reliant Bancorp’s stock price to fluctuate substantially in the future. These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, Reliant Bancorp’s announcement of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational exuberance on the part of investors, new federal banking laws, rules or regulations, and other matters related to the financial services industry. Reliant Bancorp’s stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to its performance. General market declines or market volatility in the future, especially in the financial institutions sector, could adversely affect the price of Reliant Bancorp’s common stock, and the current market price may not be indicative of future market prices. Stock price volatility may make it more difficult for Reliant Bancorp’s shareholders to resell their common stock when desired and at prices they find attractive. Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of their securities. Reliant Bancorp could in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from Reliant Bancorp’s normal business.

Economic and other circumstances may require Reliant Bancorp to raise capital at times or in amounts that are unfavorable to it. If Reliant Bancorp has to issue shares of common stock, the issuance will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of Reliant Bancorp’s common stock and adversely affect the terms on which Reliant Bancorp may obtain additional capital.
 
Reliant Bancorp may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or to strengthen its capital position. Reliant Bancorp’s ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and Reliant Bancorp’s financial performance and condition. Reliant Bancorp cannot provide assurance that such financing will be available to Reliant Bancorp on acceptable terms or at all, or if Reliant Bancorp does raise additional capital that it will not be dilutive to existing shareholders.

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If Reliant Bancorp determines, for any reason, that it needs to raise capital, Reliant Bancorp’s board of directors generally has the authority, without action by or vote of Reliant Bancorp's shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuance of equity based incentives under or outside of Reliant Bancorp’s equity compensation plans, subject to certain Nasdaq rules. Additionally, Reliant Bancorp is not restricted from issuing additional common stock or preferred stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of Reliant Bancorp’s common stock could decline as a result of sales by Reliant Bancorp of a large number of shares of common stock or preferred stock or similar securities in the market or from the perception that such sales could occur. If Reliant Bancorp issues preferred stock that has a preference over its common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if Reliant Bancorp issues preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market price of Reliant Bancorp’s common stock could be adversely affected. Any issuance of additional shares of stock will dilute the percentage ownership interest of Reliant Bancorp’s shareholders and may dilute the book value per share of its common stock. Shares that Reliant Bancorp issues in connection with any such offering will increase the total number of shares outstanding and may dilute the economic and voting ownership interest of Reliant Bancorp’s existing shareholders.

A failure in or breach of Reliant Bancorp’s or Reliant Bank’s computer or information technology systems or networks, or those of third parties, could disrupt our businesses and adversely impact our financial condition and results of operations, as well as cause us reputational harm.
The potential for operational risk exposure exists throughout our organization and, as a result of our interactions with and reliance on third parties, is not limited to our own internal operating functions. Our computer and information technology systems and networks, as well as those of third parties, are integral to our business and performance. We rely on our employees and third parties in the course of our day-to-day operations, any of whom may, as a result of human error, misconduct, malfeasance, or a failure or breach of systems or networks, expose us to risk. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions in or to our computer or information technology systems or networks or those of third parties with whom we interact or upon whom we rely. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than with respect to our own systems. Our financial, accounting, data processing, backup, or other operating or security systems, or those of third parties with whom we interact or upon whom we rely, may fail to operate properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond our or such third parties’ control, which could adversely affect our ability to process transactions or provide services. There could be sudden increases in customer transaction volume; electrical, telecommunications, or other major physical infrastructure outages; newly identified vulnerabilities in key hardware or software; natural disasters such as earthquakes, tornadoes, hurricanes, and floods; disease pandemics; and events arising from local or larger scale political or social matters, including terrorist acts. In the event that backup systems are utilized, these systems may not process data as quickly as our primary systems and some data might not have been backed up. We continuously update the systems on which we rely to support our operations and to remain compliant with applicable laws, rules, and regulations. This updating entails significant costs and creates risks associated with implementing new systems and integrating them with existing ones, including business interruptions. Operational risk exposures could materially and adversely impact our business, financial condition, and results of operations, as well as cause us reputational harm.
A cyber-attack, information or security breach, or technology failure, on our part or that of a third party, could adversely affect our ability to conduct our business, result in the disclosure or misuse of confidential or proprietary information, or adversely impact our business, financial condition, and results of operations, as well as cause us reputational harm.
Our business is highly dependent on the security and integrity of our computer and information technology systems and networks, as well as those of third parties with whom we interact or on whom we rely. Our business is dependent on the secure processing, transmission, storage, and retrieval of confidential, proprietary, and other information in our computer and information technology systems and networks, and in the computer and information technology systems and networks of third parties. In addition, to access our networks, products, and services, our customers and other third parties may use personal mobile or computing devices that are outside of our network environment and are subject to their own unique cybersecurity risks.
We and our third-party service providers and customers have been subject to, and are likely to continue to be the target of, cyber-attacks. These cyber-attacks include computer viruses, malicious or destructive code, phishing attacks, denials of service or information, or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of confidential, proprietary, or other information of ours or of our employees or customers or third parties, as well as damages to our and third-party computer and information technology systems and networks and the disruption of our or our customers’ or other third parties’ systems, networks, or business. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any

25

information security vulnerabilities or incidents. Despite efforts to protect the integrity of our systems and networks and implement controls, processes, policies, and other protective measures, cyber threats are rapidly evolving and we may not be able to anticipate or prevent cyber-attacks or security breaches.
Cybersecurity risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists, and other external parties. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. The techniques used by bad actors change frequently, may not be recognized until launched, and may not be recognized until well after a breach has occurred. Additionally, the occurrence of cyber-attacks or security breaches involving third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.
Although to date we have not experienced any material losses or other material consequences relating to technology failures, cyber-attacks, or other information or security breaches, whether directed at us or third parties, there can be no assurance that we will not suffer such losses or other consequences in the future. Our risks associated with these matters remains heightened because of, among other things, the evolving nature of these threats, our size and scale, our role in the financial services industry, our plans to continue to implement our internet banking and mobile banking channel strategies and develop additional remote connectivity solutions to serve our customers when and how they want to be served, our continuous transmission of sensitive information to, and storage of such information by, third parties, the outsourcing of some of our business operations, threats of cyber terrorism, and system and customer account updates and conversions. As a result, cybersecurity and the continued development and enhancement of our controls, processes, policies, and other protective measures designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a priority.
We also face indirect technology, cybersecurity, and operational risks relating to the customers and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including financial counterparties; financial intermediaries such as clearing agents, exchanges, and clearing houses; vendors; regulators; providers of critical infrastructure such as internet access and electrical power; and retailers for whom we process transactions. As a result of increasing consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure, cyber-attack, or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. This consolidation, interdependence, and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber-attack, or other information or security breach could, among other things, adversely affect our ability to effect transactions, service our customers, manage our exposure to risk, or operate or expand our businesses.
Cyber-attacks or other information or security breaches, whether directed at us or third parties, may result in material losses or have other material adverse consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, could damage our reputation with customers and third parties with whom we do business. A successful penetration or circumvention of the security of our computer or information technology systems or networks could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information or that of our customers, or damage to our customers’ or other third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, all of which could materially and adversely affect our business, financial condition, and results of operations.

We are subject to certain operational risks, including but not limited to customer or employee fraud.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against these operational risks. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition or results of operations.

26

In addition, we rely heavily upon information supplied by third parties, including information contained in credit applications, property appraisals, title information, valuations and employment and income documentation, in deciding which loans we will originate as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended.

Negative public opinion surrounding Reliant Bancorp and the financial institutions industry generally could damage Reliant Bancorp’s reputation and adversely impact its earnings.
 
Reputation risk, or the risk to Reliant Bancorp’s business, earnings and capital from negative public opinion surrounding Reliant Bancorp or the financial institutions industry generally, is inherent in Reliant Bancorp’s business. Negative public opinion can result from Reliant Bancorp’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect Reliant Bancorp’s ability to keep and attract clients and employees and can expose it to litigation and regulatory action. Although Reliant Bancorp takes steps to minimize reputation risk in dealing with its clients and communities, this risk will always be present given the nature of Reliant Bancorp’s business.
 
We may issue additional common stock or other equity securities in the future which could dilute the ownership interest of existing shareholders.
 
In order to maintain our or Reliant Bank’s capital at desired or regulatory-required levels, we may issue additional shares of common stock, or securities convertible into, exchangeable for or representing rights to acquire shares of common stock. We may sell these shares at prices below the current market price for shares of Reliant Bancorp common stock, and the sale of these shares may significantly dilute existing shareholder ownership. We could also issue additional shares in connection with acquisitions of other financial institutions (as we did in connection with our acquisition of Community First), which could also dilute existing shareholder ownership.
 
Holders of our subordinated debentures have rights that are senior to those of our shareholders.
 
In connection with the Community First acquisition, Reliant Bancorp assumed trust preferred securities and accompanying junior subordinated debentures totaling $23.0 million, of which $10.0 million was owned by Community First prior to the acquisition and assumed by Reliant Bancorp. Payments of the principal and interest on the trust preferred securities are conditionally guaranteed by Reliant Bancorp, and the accompanying subordinated debentures are senior to shares of Reliant Bancorp’s common stock. As a result, Reliant Bancorp must make payments on the subordinated debentures (and the related trust preferred securities) before any dividends can be paid on its common stock and, in the event of Reliant Bancorp’s bankruptcy, dissolution or liquidation, the holders of the subordinated debentures must be satisfied before any distributions can be made on Reliant Bancorp’s common stock.
Reliant Bancorp may from time to time issue additional subordinated indebtedness that would have to be repaid before Reliant Bancorp’s shareholders would be entitled to receive any of the assets of Reliant Bancorp or Reliant Bank.
 
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
 
As a smaller company, it may be difficult for us to attract or retain the interest of equity research analysts. A lack of research coverage may adversely affect the liquidity of and market price of our common stock. We will not have any control over the equity research analysts or the content and opinions included in their reports. The price of our stock could decline if one or more equity research analysts downgrade our stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of our company, or fails to publish reports on us regularly, demand for our stock could decrease, which in turn could cause our stock price or trading volume to decline.
 
Shares of Reliant Bancorp common stock are not FDIC insured.
 
Shares of Reliant Bancorp common stock are not deposits with a bank and are not insured by the FDIC.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES


27

As of December 31, 2018, the main office of both Reliant Bancorp and Reliant Bank was located at 1736 Carothers Parkway, Suite 100, Brentwood, Tennessee 37027. In addition, as of December 31, 2018, we operated (i) 16 full-service branch offices located in the Tennessee counties of Davidson, Hickman, Hamilton, Maury, Robertson, Rutherford, Sumner, and Williamson and (ii) mortgage production offices in Williamson and Sumner counties.
 
All of these properties are leased by Reliant Bank except for nine branches in Maury, Hickman, Sumner, Robertson, and Williamson counties. Although the properties owned are generally considered adequate, we have a continuing program of modernization, expansion and, when necessary, occasional replacement of facilities.

 

28

ITEM 3. LEGAL PROCEEDINGS

Reliant Bancorp or one or more of its subsidiaries are from time to time parties to ordinary routine legal proceedings in the ordinary course of business. There are currently no material pending legal proceedings to which Reliant Bancorp or any of its subsidiaries is a party or of which any of the property of Reliant Bancorp or any of its subsidiaries is the subject.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Reliant Bancorp’s common stock is traded on the Nasdaq Capital Market under the symbol “RBNC.” As of March 7, 2019, there were 2,388 holders of record of Reliant Bancorp common stock. This number does not include shareholders with shares in nominee name held by the Depository Trust Company or its nominee.
 
Dividends

Reliant Bancorp has paid a quarterly cash dividend on its common stock since the second quarter of 2017. We currently expect that comparable cash dividends will continue to be paid in the future. However, no assurances can be given that any dividends will be declared or paid on Reliant Bancorp’s common stock in the future, or, if declared and paid, the amount or frequency of those dividends. The ability of Reliant Bancorp and Reliant Bank to pay dividends is restricted by certain laws and regulations, and the payment of dividends by Reliant Bancorp and Reliant Bank is within the discretion of their respective boards of directors.

Stock Performance Graph
 
The following chart, which is furnished not filed, compares the yearly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2018, with (i) the Russell 2000 Index and (ii) the SNL Southeast U.S. Bank Index. This comparison assumes $100 was invested on the last trading day of 2013, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 2015 to December 31, 2018, was obtained by using the Nasdaq closing prices as of the last trading day of each year. From August 29, 2012 to July 7, 2015, our stock was traded on the over-the-counter market, and closing prices for 2014 have been obtained by using the closing prices reported on the last trading day through the over-the-counter system.


29

stockperformancea01.jpg



 
Recent Sales of Unregistered Securities
 
There were no sales of unregistered securities for the period ended December 31, 2018.
 
Issuer Purchases of Securities
 
There were no repurchases of the Company’s common stock for the quarter ended December 31, 2018.


30
RELIANT BANCORP, INC.
 
SELECTED FINANCIAL DATA
 
December 31, 2018, 2017, 2016, 2015 AND 2014
 
(Dollar amounts in thousands except per share amounts)


ITEM 6. SELECTED FINANCIAL DATA
  
The following selected historical consolidated financial data, as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, is derived from the audited consolidated financial statements of Reliant Bancorp. The financial data presented for the Company prior to the Legacy Reliant Bank merger in 2015 is derived from the historical financial statements of Reliant Bank.
 
 
 
2018
 
2017
 
2016
 
2015
 
2014
SUMMARY OF OPERATIONS:
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
69,225

 
$
40,158

 
$
36,015

 
$
29,888

 
$
17,215

Total interest expense
 
15,396

 
5,671

 
3,363

 
2,718

 
1,629

Net interest income
 
53,829

 
34,487

 
32,652

 
27,170

 
15,586

Provision for loan losses
 
1,035

 
1,316

 
968

 
(270
)
 
(1,500
)
Net interest income after
 
 
 
 
 
 
 
 
 
 
provision for loan losses
 
52,794

 
33,171

 
31,684

 
27,440

 
17,806

Noninterest income
 
9,646

 
6,010

 
8,800

 
12,382

 
4,608

Noninterest expense
 
50,561

 
31,076

 
30,374

 
31,569

 
17,166

Income before income taxes
 
11,879

 
8,105

 
10,110

 
8,253

 
4,258

Income tax expense
 
1,372

 
1,942

 
2,213

 
2,271

 
1,816

Consolidated net income
 
10,507

 
6,163

 
7,897

 
5,982

 
2,712

Noncontrolling interest in net (income) loss of subsidiary
 
3,578

 
1,083

 
1,039

 
(407
)
 
1,184

Net income attributable to common shareholders
 
14,085

 
7,246

 
8,936

 
5,575

 
3,896

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PER COMMON SHARE DATA:
 
 
 
 
 
 
 
 
 
 
Net income attributable to common
 
 
 
 
 
 
 
 
 
 
shareholders, per share
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.24

 
$
0.89

 
$
1.18

 
$
0.88

 
$
0.98

Diluted
 
1.23

 
0.88

 
1.16

 
0.86

 
0.96

Book value per common share
 
18.07

 
15.51

 
13.75

 
13.29

 
11.13

Tangible book value per common share
 
13.58

 
14.11

 
12.08

 
11.46

 
10.84

Dividends per common share
 
0.33

 
0.24

 
0.22

 
0.20

 
0.20

Preferred shares outstanding
 
—

 
—

 
—

 
—

 
—

Basic weighted average common shares
 
11,389,122

 
8,151,492

 
7,586,993

 
6,329,316

 
3,993,206

Diluted weighted average common shares
 
11,468,789

 
8,239,301

 
7,691,493

 
6,478,952

 
4,053,804

Common shares outstanding at period end
 
11,530,810

 
9,034,439

 
7,778,309

 
7,279,620

 
3,910,191

 
 
 
 
 
 
 
 
 
 
 
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
 
Total assets
 
1,724,338

 
1,125,034
 
911,984
 
876,404
 
449,731
Mortgage loans held for sale, net
 
15,823

 
45,322
 
11,831
 
55,093
 
26,640
Total loans, net
 
1,220,184

 
762,488
 
657,701
 
608,747
 
309,497
Allowance for loan losses
 
10,892

 
9,731
 
9,082
 
7,823
 
7,353
Total securities
 
296,323

 
220,201
 
146,813
 
133,825
 
77,245
Other real estate, net
 
1,000

 
—

 
—

 
1,149
 
1,204
Goodwill and core deposit intangible
 
51,861

 
12,684
 
12,986
 
13,342
 
1,110

31
RELIANT BANCORP, INC.
 
SELECTED FINANCIAL DATA
 
December 31, 2018, 2017, 2016, 2015 AND 2014
 
(Dollar amounts in thousands except per share amounts)


Total deposits
 
1,437,903

 
883,519
 
763,834
 
640,008
 
334,365
Federal Home Loan Bank advances
 
57,498

 
96,747
 
32,287
 
135,759
 
63,500
Dividends payable
 
1,036

 
542
 
1,711
 
1,489
 
—

Stockholders' equity
 
208,414

 
140,137
 
106,919
 
96,751
 
43,516
Average total assets
 
1,644,360

 
995,436
 
885,074
 
733,651
 
417,050
Average gross loans, excluding loans held for sale
 
1,138,946

 
714,982
 
640,592
 
517,148
 
293,195
Average interest earning assets
 
1,505,748

 
939,947
 
835,337
 
694,135
 
401,487
Average deposits
 
1,337,860

 
823,088
 
664,844
 
543,341
 
323,466
Average interest bearing deposits
 
1,118,993

 
688,680
 
537,225
 
459,610
 
278,363
Average interest bearing liabilities
 
1,216,265

 
739,410
 
648,515
 
565,234
 
329,565
Average total shareholders' equity
 
203,317

 
117,780
 
104,216
 
80,122
 
41,525
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SELECTED FINANCIAL RATIOS:
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
0.86
 %
 
0.73
%
 
1.01
 %
 
0.76
 %
 
0.93
 %
Return on average equity
 
6.93
 %
 
6.15
%
 
8.57
 %
 
6.96
 %
 
9.38
 %
Average equity to average total assets
 
12.36
 %
 
11.83
%
 
11.77
 %
 
10.92
 %
 
9.96
 %
Dividend payouts
 
26.61
 %
 
26.97
%
 
18.64
 %
 
22.73
 %
 
20.41
 %
Net interest margin(1)
 
3.78
 %
 
3.97
%
 
4.15
 %
 
4.00
 %
 
3.96
 %
Net interest spread(2)
 
3.53
 %
 
3.81
%
 
4.04
 %
 
3.91
 %
 
3.88
 %
 
 
 
 
 
 
 
 
 
 
 
CAPITAL RATIOS(4)
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage
 
10.38
 %
 
11.89
%
 
10.86
 %
 
9.92
 %
 
9.71
 %
Common equity tier 1
 
11.59
 %
 
13.90
%
 
13.00
 %
 
12.02
 %
 
12.19
 %
Tier 1 risk-based capital
 
12.44
 %
 
13.90
%
 
13.00
 %
 
12.02
 %
 
12.19
 %
Total risk-based capital
 
13.28
 %
 
14.97
%
 
14.22
 %
 
13.13
 %
 
13.45
 %
 
 
 
 
 
 
 
 
 
 
 
ASSET QUALITY RATIOS:
 
 
 
 
 
 
 
 
 
 
Net charge-offs (recoveries) to average loans
 
(0.01
)%
 
0.09
%
 
(0.05
)%
 
(0.14
)%
 
(0.11
)%
Allowance to period end loans(3)
 
0.88
 %
 
1.26
%
 
1.36
 %
 
1.27
 %
 
2.32
 %
Allowance for loan losses to non-performing loans
 
259.33
 %
 
132.74
%
 
105.76
 %
 
116.59
 %
 
83.40
 %
Non-performing assets to total assets
 
0.44
 %
 
0.65
%
 
0.94
 %
 
0.90
 %
 
2.23
 %
 
 
 
 
 
 
 
 
 
 
 
OTHER DATA:
 
 
 
 
 
 
 
 
 
 
Banking locations
 
17

 
8

 
7

 
9

 
4

Loan production offices
 
2

 
2

 
3

 
8

 
7

Full-time equivalent employees
 
263

 
167

 
143

 
226

 
138


(1) Net interest margin is net interest income divided by total average earning assets.
(2) Net interest spread is the difference between the average yield on interest earning assets and the average yield on interest bearing liabilities.
(3) Period end loans exclude deferred fees and costs.
(4) Capital ratios calculated on consolidated financial statements for the Company.

32

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Executive Summary
 
The following is a summary of the Company’s financial highlights and significant events during the year ended December 31, 2018:
 
•
Acquired Community First, Inc. on January 1, 2018.
•
Net income available to common shareholders totaled $14.1 million, or $1.23 per diluted common share, during the year ending December 31, 2018 compared to $7.2 million, or $0.88 per diluted common share, during the same period in 2017.
•
Return on average assets was 0.86 percent for the year ended December 31, 2018, compared to 0.73 percent for the same period in 2017.
•
Net loan growth of $457.7 million for the year ended December 31, 2018.
•
Asset quality remains strong with nonperforming assets to total assets of just 0.44 percent.

 
In the following sections the term “Reliant Bancorp” means “Reliant Bancorp, Inc.” and the term “Bank” means “Reliant Bank”. The following discussion and analysis identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” as well as other information included in this Form 10-K. Amounts in the narrative are shown in thousands, except for economic and demographic information, numbers of shares, per share amounts and as otherwise noted.

Critical Accounting Policies
 
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair value of financial instruments are particularly subject to change.
 
Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 of the notes to the consolidated financial statements included elsewhere in this report. The critical accounting policies require our judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief summary of the more significant policies.
 
Principles of Consolidation
 
The consolidated financial statements as of and for the periods presented include the accounts of Reliant Bancorp, the Bank, Community First Trups Holding Company, which is wholly owned by Reliant Bancorp (“TRUPS”), Reliant Investment Holdings, LLC ("Holdings"), which is 100% wholly owned by the Bank, and Reliant Mortgage Ventures, LLC ("RMV"), of which the Bank controls 51% of the governance rights (Reliant Bancorp, the Bank, Holdings, TRUPS, and RMV are collectively referred to herein as the “Company”). As described in the notes to our annual consolidated financial statements, RMV is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. As described in Note 12, Reliant Bancorp and Community First, Inc. merged effective January 1, 2018. The accounting and reporting policies of the Company conform to U.S. GAAP and to general practices in the banking industry.

During 2011, the Bank and another entity organized RMV. Under the related operating agreement, the non-controlling member receives 70% of the profits of RMV, and the Bank receives 30% of the profits once the non-controlling member recovers its aggregate losses. The non-controlling member is responsible for 100% of the mortgage venture’s net losses. As of December 31, 2018, the cumulative losses to date totaled $8,058. RMV will have to generate net income of this amount before the Company will participate in future earnings.

 

33

 
Purchased Loans
 
The Company maintains an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, because we recorded all acquired loans at fair value as of the date of the merger (discussed below), we did not establish an allowance for loan losses on any of the loans we purchased as of the acquisition date as any credit deterioration evident in the loans was included in the determination of the acquisition date fair values. For purchased credit-impaired loans accounted for under ASC 310-30, management establishes an allowance for loan losses subsequent to the date of acquisition by re-estimating expected cash flows on these loans on a quarterly basis, with any decline in expected cash flows due to a credit triggering impairment recorded as provision for loan losses. The allowance established is the excess of the loan’s carrying value over the present value of projected future cash flows, discounted at the current accounting yield of the loan or the fair value of collateral (less estimated costs to sell) for collateral dependent loans. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. While the determination of specific cash flows involves estimates, each estimate is unique to the individual loan, and none is individually significant. For non-purchased credit-impaired loans acquired in the merger and that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by Reliant Bank for loans with similar characteristics as those acquired other than purchased credit-impaired loans. We record an allowance for loan losses only when the calculated amount exceeds the remaining credit mark established at acquisition.
 
Allowance for Loan Losses
 
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past-due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged off.
 
A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
 
Fair Value of Financial Instruments
 
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
Merger Between Reliant Bancorp, Inc. and Community First, Inc.
On December 15, 2017, the shareholders of Reliant Bancorp approved Reliant Bancorp's issuance of common stock to shareholders of Community First, Inc. ("Community First") in connection with the merger of Reliant Bancorp and Community First, which merger became effective on January 1, 2018 (the "Merger”). Outstanding shares of Community First common stock, including restricted shares issued as equity incentive awards, were converted into the right to receive 0.481 shares of Reliant Bancorp common stock for each shares of Community First common stock. After the Merger was completed, legacy Reliant Bancorp’s shareholders

34

owned approximately 78.9% of the common stock of the combined company, and legacy Community First’s shareholders owned approximately 21.1% of the common stock of the combined company.
The assets and liabilities of Community First as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of the Company. Any excess of purchase price over the net estimated fair values of the acquired assets and assumed liabilities of Community First was allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill.
As of December 31, 2017, Community First, including its wholly owned subsidiaries, had total assets of $480 million, total loans of $316 million and total deposits of $432 million. Community First held a loan portfolio that was primarily comprised of real estate loans.
As a result of the Merger on January 1, 2018, the Company:
 
•
grew consolidated total assets from $1,125.0 million to $1,636.0 million as of January 1, 2018 after giving effect to purchase accounting;
•
increased total loans from $762.5 million to $1,075.5 million as of January 1, 2018;
•
increased total deposits from $883.5 million to $1,316.9 million as of January 1, 2018; and
•
expanded its employee base from 167 full time equivalent employees to 272 full time equivalent employees as of January 1, 2018.

Earnings 
 
Net income attributable to shareholders amounted to $14,085, or $1.24 per basic share, for the year ended December 31, 2018, compared to $7,246, or $0.89 per basic share, for the same period in 2017 and $8,936 or $1.18 per basic share for the same period in 2016. Diluted net income attributable to shareholders per share was $1.23, $0.88 and $1.16 per diluted share for the years ended December 31, 2018, 2017, and 2016, respectively. The largest component of the increase from the year ended December 31, 2017 to the year ended December 31, 2018 includes a 56.1% increase in net interest income due to the merger with Community First compared to the same period in 2017. The largest component of the decrease from the year ended December 31, 2016 to the year ended December 31, 2017 includes the merger expenses of $1.4 million compared to none in the same period in 2016.

Net Interest Income
 
Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of our revenues. The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands):
 
Average Balances – Yields and Rates
 
 
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
 
Average Balances
 
Rates / Yields (%)
 
Interest Income / Expense
 
Average Balances
 
Rates / Yields (%)
 
Interest Income / Expense
 
Average Balances
 
Rates / Yields (%)
 
Interest Income / Expense
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
1,138,946

 
4.99

 
$
55,496

 
$
714,982

 
4.59

 
$
32,164

 
$
640,592

 
4.78

 
$
29,950

Loan fees
 
—

 
0.25

 
2,855

 
—

 
0.28

 
2,012

 
—

 
0.31

 
1,955

Loans with fees
 
1,138,946

 
5.24

 
58,351

 
714,982

 
4.87

 
34,176

 
640,592

 
5.09

 
31,905

Mortgage loans held for sale
 
24,882

 
5.14

 
1,278

 
19,016

 
4.56

 
868

 
21,064

 
3.67

 
773

Deposits with banks
 
34,504

 
1.37

 
471

 
15,177

 
0.71

 
107

 
20,240

 
0.35

 
70

Investment securities - taxable
 
70,170

 
2.62

 
1,836

 
31,557

 
2.19

 
691

 
40,463

 
1.79

 
724

Investment securities - tax-exempt
 
225,592

 
3.72

 
6,605

 
151,446

 
4.01

 
3,904

 
105,536

 
3.39

 
2,211

Fed funds sold and other
 
11,654

 
5.87

 
684

 
7,769

 
5.30

 
412

 
7,442

 
4.46

 
332

Total earning assets
 
1,505,748

 
4.80

 
69,225

 
939,947

 
4.58

 
40,158

 
835,337

 
4.56

 
36,015

Nonearning assets
 
138,612

 
 
 
 
 
55,489

 
 
 
 
 
49,737

 
 
 
 
Total assets
 
$
1,644,360

 
 
 
 
 
$
995,436

 
 
 
 
 
$
885,074

 
 
 
 

35

Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand
 
$
146,717

 
0.25

 
366

 
$
84,171

 
0.21

 
173

 
$
88,775

 
0.21

 
182

Savings and money market
 
349,986

 
0.74

 
2,589

 
196,939

 
0.38

 
748

 
186,473

 
0.34

 
632

Time deposits - retail
 
531,780

 
1.55

 
8,264

 
319,456

 
0.98

 
3,126

 
159,351

 
0.70

 
1,116

Time deposits - wholesale
 
90,510

 
1.77

 
1,598

 
88,114

 
1.10

 
969

 
102,626

 
0.70

 
719

Total interest bearing deposits
 
1,118,993

 
1.15

 
12,817

 
688,680

 
0.73

 
5,016

 
537,225

 
0.49

 
2,649

Federal Home Loan Bank advances
 
85,706

 
2.16

 
1,855

 
50,730

 
1.29

 
655

 
111,290

 
0.64

 
714

Subordinated debt
 
11,566

 
6.26

 
724

 
—

 
—

 
—

 
—

 
—

 
—

Total borrowed funds
 
97,272

 
2.65

 
2,579

 
50,730

 
1.29

 
655

 
111,290

 
0.64

 
714

Total interest-bearing liabilities
 
1,216,265

 
1.27

 
15,396

 
739,410

 
0.77

 
5,671

 
648,515

 
0.52

 
3,363

Net interest rate spread (%) / Net interest income ($)
 


 
3.53

 
53,829

 


 
3.81

 
34,487

 
 
 
4.04

 
32,652

Non-interest bearing deposits
 
218,867

 
(0.20)

 
 
 
134,408

 
(0.11)

 
 
 
127,619

 
(0.09)

 
 
Other non-interest bearing liabilities
 
5,911

 
 
 
 
 
3,838

 
 
 
 
 
4,724

 
 
 
 
Stockholder's equity
 
$
203,317

 
 
 
 
 
$
117,780

 
 
 
 
 
$
104,216

 
 
 
 
Total liabilities and stockholders' equity
 
1,644,360

 
 
 
 
 
995,436

 
 
 
 
 
885,074

 
 
 
 
Cost of funds
 
 
 
1.07

 
 
 
 
 
0.66

 
 
 
 
 
0.43

 
 
Net interest margin
 
 
 
3.78

 
 
 
 
 
3.97

 
 
 
 
 
4.15

 
 
 
Table Assumptions—Average loan balances are inclusive of nonperforming loans. Yields computed on tax-exempt instruments are on a tax equivalent basis. Net interest spread is calculated as the yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. Net interest margin is the result of net interest income calculated on a tax-equivalent basis divided by average interest earning assets for the period. Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is change in rate times the previous volume. Changes not due solely to volume or rate changes have been allocated to volume change and rate change in proportion to the relationship of the absolute dollar amounts of the change in each category.



























36

Analysis of Changes in Interest Income and Expense
 
 
 
Change for Year Ended December 31, 2018 to 2017
 
Change for Year Ended December 31, 2017 to 2016
 
 
Due to Volume
 
Due to Rate
 
Total
 
Due to Volume
 
Due to Rate
 
Total
Interest earning assets
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
20,342

 
$
2,990

 
$
23,332

 
$
3,463

 
$
(1,249
)
 
$
2,214

Loan fees
 
843

 
—

 
843

 
57

 
—

 
57

Loans with fees
 
21,185

 
2,990

 
24,175

 
3,520

 
(1,249
)
 
2,271

Mortgage loans held for sale
 
290

 
120

 
410

 
(80
)
 
175

 
95

Deposits with banks
 
210

 
154

 
364

 
(22
)
 
59

 
37

Investment securities - taxable
 
986

 
159

 
1,145

 
(177
)
 
144

 
(33
)
Investment securities - tax-exempt
 
3,119

 
(418
)
 
2,701

 
1,186

 
507

 
1,693

Fed funds sold and other
 
224

 
48

 
272

 
15

 
65

 
80

Total earning assets
 
26,014

 
3,053

 
29,067

 
4,442

 
(299
)
 
4,143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand
 
153

 
40

 
193

 
(9
)
 
—

 
(9
)
Savings and money market
 
830

 
1,011

 
1,841

 
38

 
78

 
116

Time deposits - retail
 
2,740

 
2,398

 
5,138

 
1,438

 
572

 
2,010

Time deposits - wholesale
 
27

 
602

 
629

 
(114
)
 
364

 
250

Total interest bearing deposits
 
3,750

 
4,051

 
7,801

 
1,353

 
1,014

 
2,367

Federal Home Loan Bank advances
 
607

 
593

 
1,200

 
(526
)
 
467

 
(59
)
Subordinated debt
 
—

 
724

 
724

 
—

 
—

 
—

Total borrowed funds
 
607

 
1,317

 
1,924

 
(526
)
 
467

 
(59
)
Total interest-bearing liabilities
 
$
4,357

 
$
5,368

 
$
9,725

 
$
827

 
$
1,481

 
$
2,308

Net interest rate spread (%) / Net interest income ($)
 
$
21,657

 
$
(2,315
)
 
$
19,342

 
$
3,615

 
$
(1,780
)
 
$
1,835

 
Analysis—For the year ended December 31, 2018, we recorded net interest income of approximately $53.8 million, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 3.78%. For the year ended December 31, 2017, we recorded net interest income of approximately $34.5 million, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 3.97%. For the year ended December 31, 2016, we recorded net interest income of approximately $32.7 million, which resulted in a net interest margin of 4.15%. For the years ended December 31, 2018, 2017, and 2016, our net interest spread was 3.53%, 3.81% and 4.04%, respectively. During the year ended December 31, 2018, a contributing factor to the increase in our net interest income was the merger with Community First.
 
Our year-over-year average loan volume increased by approximately 59.3% from 2017 to 2018 and 11.6% from 2016 to 2017. Our combined loan and loan fee yield increased from 4.87% to 5.24% for 2018 compared to 2017, respectively, and decreased from 5.09% to 4.87% for 2017 compared to 2016, respectively.

Our tax equivalent yield on tax-exempt investments decreased to 3.72% for the year ended December 31, 2018 from 4.01% for the year ended December 31, 2017 and increased from 3.39% for the year ended December 31, 2016. This decrease when compared to 2017 was driven by the change in the federal tax rate. Our year-over-year average tax-exempt investment volume increased by approximately 49.0% for the year ended December 31, 2018 compared to the same period in 2017 and increased 43.5% for the year ended December 31, 2017 when compared to the same period in 2016. Our year-over-year average taxable securities volume increased by 122.4% for the year ended December 31, 2018 compared to the same period in 2017 and decreased by 22.0% for the year ended December 31, 2017 when compared to the same period in 2016. During the first quarter of 2018, we completed a planned investment securities restructuring that began in the fourth quarter of 2017. As part of the restructuring, we sold $60.0

37

million of legacy Community First mortgage backed securities and purchased $79.0 million of investment grade securities including a combination of municipals, SBA floating securities, and collateralized mortgage obligations. No material changes to our investment portfolio were made during the fourth quarter of 2018.


Our cost of funds increased from 0.66% to 1.07% for 2018 compared to the same period in 2017 and from 0.43% to 0.66% for 2017 compared to the same period in 2016. Our cost of interest-bearing liabilities increased from 0.77% at December 31, 2017 to 1.27% at December 31, 2018 and from 0.52% at December 31, 2016 to 0.77% at December 31, 2017. All categories of interest-bearing liabilities contributed to the increase in our cost of funds due to rate increases by the Federal Reserve. Some of the significant increases included changes of 87 basis points, 67 basis points, 57 basis points, and 36 basis points in FHLB advances, time deposits - wholesale, time deposits - retail, and savings and money market, respectively. Additionally, we assumed subordinated debt as part of the merger with Community First, Inc., with a cost of 6.26%. Due to the merger, we also experienced a 62.8% increase in our average non-interest bearing deposits from the year ended December 31, 2017 when compared to the year ended December 31, 2018. Our non-interest bearing deposits decreased our cost of funds by 20 basis points for the year ended December 31, 2018 compared to 11 basis points and 9 basis points for years ended December 31, 2017 and 2016, respectively.
 
Our balance sheet has some components that will benefit from rising interest rates, including variable rate loans at 37% of our portfolio, some variable rate investment securities and interest rate swaps.  Conversely our interest bearing liabilities are negatively impacted with rising interest rates. Our wholesale fundings are particularly sensitive to changes in interest rates mainly due to their short term nature. We added $30 million of pay-fixed receive-variable interest rate swaps in each of the second and third quarters of 2018. We are always looking for opportunities to increase our non-interest bearing and lower cost deposits and have seen some success with a stronger focus on low cost deposits in all of our sales incentive plans.  Additionally, we anticipate continued growth in our deposits from our new branches in Murfreesboro and Chattanooga, as well as deposit growth as our treasury management services grow. These efforts will continue as well as continuing to evaluate the benefits of fixing a greater portion of our funding costs through interest rate swaps.
 
Provision for Loan Losses
 
The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management’s assessment of the loan portfolio, we adjust our allowance for loan losses on a quarterly basis to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio.
 
Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at December 31, 2018. While policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.
 
We recorded a provision for loan losses of $1,035, $1,316, and $968 for the years ended December 31, 2018, 2017, and 2016, respectively. Our provision decrease in 2018 was due to the continued improvement of credit-quality factors in our loan portfolio, continued recoveries and low charge-offs. Our provision increase in 2017 was primarily the result of loan growth that we have experienced.

Non-Interest Income
 
Our non-interest income is composed of several components, some of which vary significantly between periods. The following is a summary of our non-interest income for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands):
 

38

 
 
Year Ended
 
Dollar Increase (Decrease)
 
Percent Increase (Decrease)
 
 
 
Dollar Increase (Decrease)
 
Percent Increase (Decrease)
 
 
December 31,
 
 
 
 
 
December 31,
 
 
 
 
 
 
2018
 
2017
 
 
 
 
 
2016
 
 
 
 
Non-Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges and fees
 
$
3,419

 
$
1,251

 
$
2,168

 
173.3
 %
 
$
1,239

 
$
12

 
1.0
 %
Securities gains, net
 
43

 
59

 
(16
)
 
(27.1
)%
 
36

 
23

 
63.9
 %
Gains on mortgage loans sold, net
 
4,418

 
3,675

 
743

 
20.2
 %
 
6,317

 
(2,642
)
 
(41.8
)%
Gain on sale of other real estate
 
259

 
27

 
232

 
859.3
 %
 
301

 
(274
)
 
(91.0
)%
Gain (loss) on disposal of premises and equipment
 
13

 
(52
)
 
65

 
125.0
 %
 
—

 
(52
)
 
(100.0
)%
Other noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank-owned life insurance
 
1,185

 
836

 
349

 
41.7
 %
 
750

 
86

 
11.5
 %
Brokerage revenue
 
99

 
116

 
(17
)
 
(14.7
)%
 
89

 
27

 
30.3
 %
Miscellaneous noninterest income
 
210

 
98

 
112

 
114.3
 %
 
68

 
30

 
44.1
 %
Total other non-interest income
 
1,494

 
1,050

 
444

 
42.3
 %
 
907

 
143

 
15.8
 %
Total non-interest income
 
$
9,646

 
$
6,010

 
$
3,636

 
60.5
 %
 
$
8,800

 
$
(2,790
)
 
(31.7
)%
 
The most significant reason for the increase during the year ended December 31, 2018 when compared to the same period in 2017, related to the increase in service charges, mainly due to the increased deposits from the merger with Community First, Inc. The decrease for the year ended December 31, 2017 when compared to the same period in 2016 was primarily due to the decline in gains on mortgage loans sold, net. Following is a description of certain components of non-interest income and other reasons for fluctuations during the year ended December 31, 2018 compared to the same period in 2017 and the year ended December 31, 2017 compared to the same period in 2016.
 
Service charges on deposit accounts generally reflect customer growth trends but also are impacted by changes in our fee pricing to help attract and retain customers.
 
Securities gains and losses will fluctuate from period to period and are often attributable to various balance sheet risk strategies. During the year ended December 31, 2018, the Company sold securities classified as available for available for sale totaling $100,737 and recognized a gain of $43. During the year ended December 31, 2017, the Company sold securities classified as available for sale totaling $18,688 and recognized a net gain of $59. During the year ended December 31, 2016, the Company sold securities classified as available for sale and held to maturity totaling $31,782 and recognized a net gain of $36.
 
Gains on mortgage loans sold, net, consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated throughout the U.S. and subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage related revenue increases in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage-related revenue will fluctuate as the rate environment changes and as changes occur to our mortgage operations. Gains on mortgage loans sold, net, amounted to $4,418, $3,675 and $6,317, for the years ended December 31, 2018, 2017, and 2016, respectively. As discussed further in the notes to our consolidated financial statements, gains on mortgage loans sold are generally recognized at the time of a loan sale corresponding to the transfer of risk. We completed the transition of a majority of our out-of-market mortgage loan production offices during the quarter ended June 30, 2016 to better focus our marketing and other resources in our core Middle Tennessee markets. The decline in gains on mortgage loans sold during year ended December 31, 2018 and 2017 when compared to 2016 was directly attributable to the transition. We did notice an increase in gains on mortgage loans sold during 2018 and the second half of 2017 was influenced by our first-lien HELOC program.

During the years ended December 31, 2018, 2017, and 2016, we recognized gains of $259, $27, and $301, respectively on sales of other real estate and on the recognition of a previously deferred gains from the payoffs of loans.
 
Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $1,185, $836, and $750 for the years ended December 31, 2018, 2017, and 2016, respectively. Primarily, the increases in earnings on these bank-owned life insurance policies resulted from an additional $10.7 million which was acquired in the Merger, and an additional $4.0 million of bank-owned life insurance which was purchased with terms similar to our existing policies during 2017. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the

39

cash surrender value of the policies) is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not taxable.
 
Our brokerage revenue is solely based on commissions received from established referral relationships and fluctuate based on related activity.

Non-Interest Expense
 
The following is a summary of our non-interest expense for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands):
 
 
 
Year Ended
 
Dollar Increase (Decrease)
 
Percent Increase (Decrease)
 
Year Ended
 
Dollar Increase (Decrease)
 
Percent Increase (Decrease)
 
 
December 31,
 
 
 
 
 
December 31,
 
 
 
 
 
 
2018
 
2017
 
 
 
 
 
2016
 
 
 
 
Non-Interest Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
27,510

 
$
18,432

 
$
9,078

 
49.3
%
 
$
18,256

 
$
176

 
1.0
 %
Occupancy
 
4,949

 
3,353

 
1,596

 
47.6
%
 
3,174

 
179

 
5.6
 %
Information technology
 
5,333

 
2,715

 
2,618

 
96.4
%
 
2,486

 
229

 
9.2
 %
Advertising and public relations
 
600

 
264

 
336

 
127.3
%
 
702

 
(438
)
 
(62.4
)%
Audit, legal and consulting
 
2,976

 
1,508

 
1,468

 
97.3
%
 
1,287

 
221

 
17.2
 %
Federal deposit insurance
 
793

 
399

 
394

 
98.7
%
 
438

 
(39
)
 
(8.9
)%
Provision for losses on other real estate
 
—

 
—

 
—

 
—
%
 
70

 
(70
)
 
(100.0
)%
Merger expenses
 
2,774

 
1,426

 
1,348

 
94.5
%
 
—

 
1,426

 
100.0
 %
Other operating
 
5,626

 
2,979

 
2,647

 
88.9
%
 
3,961

 
(982
)
 
(24.8
)%
Total non-interest expense
 
$
50,561

 
$
31,076

 
$
19,485

 
62.7
%
 
$
30,374

 
$
702

 
2.3
 %
 
The most significant reason for the changes during the years ended December 31, 2018 and 2017 relate to the Merger between Reliant Bancorp Inc. and Community First Inc. that was effective January 1, 2018 which lead to increased operating cost as well as one time merger expenses. Following is a description of certain components of non-interest expense and additional reasons for fluctuations during the years ended December 31, 2018, 2017, and 2016.
 
Salaries and employee benefits increased significantly for the year ended December 31, 2018 compared to the same period in 2017 and increased slightly for the year ended December 31, 2017 compared to the same period in 2016. The primary reason for the change during the year ended December 31, 2018 was the Merger as well as the staffing of the new branches in Murfreesboro and Chattanooga. The primary reason for the change during the year ended December 31, 2017 compared to the same period in 2016 was attributable to the staffing of the Green Hills branch, the Chattanooga loan and deposit production office, and other strategic hires.

Certain of our facilities are leased while there are others that we own. Occupancy costs increased during the year ended December 31, 2018 compared to the same period in 2017 mainly due to the Merger but also due to the depreciation for the new corporate office and the new branches in Murfreesboro and Chatanooga. Occupancy costs also increased during the year ended December 31, 2017 when compared to the same period in 2016. This increase is due to the depreciation for the Green Hills location, Chattanooga loan production office and deposit production office, and Mortgage office in Brentwood. Additionally, the Chattanooga location and the Mortgage office in Brentwood were both new leases in 2017.
 

40

Information technology costs increased for the year ended December 31, 2018 and December 31, 2017 when comparing to the comparable periods in 2017 and 2016. This increase is mainly attributable to the Merger, increased IT support, and equipment costs associated with increased head counts (mainly due to the Merger), and to projects implemented in 2018 (credit workflow and enhanced IT security, as well as projects implemented in 2017.
 
Advertising and public relations costs increased $336 when comparing the year ended December 31, 2018 to the similar period in 2017. The increase was substantially attributable to the Merger and the opening of our new retail locations in Murfreesboro and Chattanooga . Advertising and public relations costs decreased when comparing the year ended December 31, 2017 to the similar period in 2016. The decrease was substantially attributable to a decline in our direct-mail, online, and print advertising and related professional consultation expenditures. The decrease was partially offset by a marketing campaign to increase core deposits.
 
Audit, legal and consulting costs increased $1,468 when comparing the year ended December 31, 2018 compared to the similar period in 2017. This increase is mainly attributable to the increase in legal fees and consulting fees incurred in connection with our mortgage venture. The increase from 2016 to 2017 of $221 was also attributable to the increase in legal fees and consulting fees incurred in connection with our mortgage venture.
 
Our FDIC expense is based on our outstanding liabilities for the period multiplied by a factor determined by the FDIC, mainly driven by our most recent regulatory rating and certain financial performance factors. Our FDIC expense increased $394 for year ended December 31, 2018, compared to the same period in 2017 and decreased $39 for the year ended December 31, 2017 compared to the same period in 2016. This increase in 2018 was attributable to the increase in average liabilities mainly driven by the Merger. This decrease in 2017 is primarily the result of a reduction in the applicable rate which was partially offset by the increase in average liabilities.
 
We recorded a provision for losses on other real estate of $70 during the year ended December 31, 2016 compared to none in 2018 and 2017. The provision recorded for 2016 related to a property held in our other real estate portfolio.
 
Other operating expenses increased by $2,647 for the year ended December 31, 2018 compared to the same period in 2017 due to increased operating cost related to the Merger and roughly $1,000 related to our mortgage venture. Other operating expenses decreased by $982 for the year ended December 31, 2017 compared to the same period in 2016 due to decreases in loan-related expenses such as processing costs relating to our mortgage operations as volume decreased and our transitioning of several of our out-of-market mortgage offices to another bank, and the reversal of the lower of cost or market adjustment for loans held for sale during 2017.
 
Income Taxes
 
During the years ended December 31, 2018, 2017, and 2016 we recorded income tax expense of $1,372, $1,942, and $2,213, respectively. The Company files separate Federal tax returns for the operations of the mortgage banking and banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Bank and non-controlling members for Federal purposes.

Our income tax expense for the year ended December 31, 2018, reflects an effective income tax rate of 10.25% (exclusive of a tax benefit from our mortgage banking operations of $236 on pre-tax loss of $3,814) compared to 21.70% (exclusive of a tax benefit from our mortgage banking operations of $66 on pre-tax loss of $1,149 and inclusive of tax expense $620 related to the revaluation of our deferred tax asset based on the change in the tax law) for the comparable period of 2017. During the years ended December 31, 2018, 2017, and 2016, the Company recognized excess tax benefits of $110, $184, and $478 related to the exercise of stock options and vesting of restricted shares, respectively, thereby reducing our effective tax rate. The Company recognized tax credits of $1,268, $650, and $650 for the years ended December 31, 2018, 2017, and 2016 due to interest-free loan agreements entered into by the Bank. Our income tax expense was also positively affected by our increase in income earned on tax-exempt securities in 2018, 2017, and 2016, and in 2018 our investment subsidiary formed in the fourth quarter. Our effective tax rate represents our blended federal and state rate of 26.135% for 2018 and 38.29% for 2017 and 2016 reduced by the impact of anticipated favorable permanent differences between our book and taxable income such as bank-owned life insurance, income earned on tax-exempt securities and certain federal and state tax credits.  The non-deductibility of certain merger related expenses also drives fluctuations in our effective tax rate. 
 






41

Noncontrolling Interest in Net Income (Loss) of Subsidiary
 
Our noncontrolling interest in net income (loss) of subsidiary is solely attributable to Reliant Mortgage Ventures, LLC. Reliant Bank has a 51% voting interest in this venture. Under the terms of the related operating agreement, the noncontrolling member receives 70% of the profits of the mortgage venture, and the Bank receives 30% of the profits. The noncontrolling member is responsible for 100% of the mortgage venture’s net losses. During the year ended December 31, 2016, the Company transitioned most of its out-of-market mortgage offices to another bank. The venture incurred a net loss of $3,578 for the year ended December 31, 2018, net loss of $1,083 for the year ended December 31, 2017, and a net loss of $1,039 for the year ended December 31, 2016. The net loss for the year ended December 31, 2018, results in a cumulative net loss from the venture of $8,058. These amounts are included in our consolidated results. See Note 20 for segment reporting in the consolidated financial statements included elsewhere herein.
 
Return on Equity and Assets
 
The following schedule details selected key ratios for the years ended December 31, 2018, 2017, and 2016:
 
 
 
2018
 
2017
 
2016
Return on assets
 
0.86
%
 
0.73
%
 
1.01
%
(Net income divided by average total assets)
 
 
 
 
 
 
Return on equity
 
6.93
%
 
6.15
%
 
8.57
%
(Net income divided by average equity)
 
 
 
 
 
 
Dividend payout ratio
 
26.61
%
 
26.97
%
 
18.64
%
(Dividends declared per share divided by net income per share)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity to assets ratio
 
12.36
%
 
11.83
%
 
11.77
%
(Average equity divided by average total assets)
 
 
 
 
 
 
Leverage capital ratio - Bank
 
10.17
%
 
11.68
%
 
10.75
%
(Equity divided by fourth quarter average total assets, excluding accumulated other comprehensive income)
 
 
 
 
 
 



























42

Under guidelines developed by regulatory agencies a “risk weight” is assigned to various categories of assets and commitments ranging from 0% to 100% based on the risk associated with the asset. The following schedule details the Bank’s risk-based capital at December 31, 2018 excluding the net unrealized gain on available-for-sale securities which is shown as an increase in shareholders’ equity in the consolidated financial statements:
 
 
In Thousands, Except Percentages
Tier 1 capital
 
Shareholders' equity, excluding accumulated other comprehensive income, disallowed goodwill, other disallowed intagible assets, and disallowed servicing assets
$
165,308

Tier 2 capital
 
Allowable allowance for loan losses (limited to 1.25% of gross risk-weighted assets)
11,317

 
 
Total risk-based capital
$
176,625

 
 
Risk-weighted assets, gross
$
1,356,173

Less: Excess allowance for loan and lease losses
—

 
 
Risk-weighted assets, net
$
1,356,173

 
 
Risk-based capital ratios:
 
Tier 1 risk-based capital ratio
12.19
%
 
 
Total risk-based capital ratio
13.02
%
 
The minimum Tier 1 risk-based capital ratio required by the regulatory agencies is 4.00%, and the minimum total risk-based capital ratio required is 9.25%. At December 31, 2018, the Company was in compliance with these requirements.
 
COMPARISON OF BALANCE SHEETS AT DECEMBER 31, 2018 AND DECEMBER 31, 2017
 
Overview
 
The Company’s total assets were $1,724,338 at December 31, 2018 and $1,125,034 at December 31, 2017. Our assets increased by 53.3% from December 31, 2017 to December 31, 2018. The increase in assets from December 31, 2017 to December 31, 2018, was substantially attributable to the Merger which lead to an increase in net loans of approximately $457.7 million, discussed further below; a net increase in our securities portfolio of $76.1 million, discussed further below; an increase of $32.2 million in goodwill; an increase of $14.5 million in cash and cash equivalents; an increase of $12.2 million in premises and equipment, net; and an increase of $11.9 million in bank-owned life insurance. These increases were offset by a decrease in mortgage loans held for sale of $29.5 million. The Company’s total liabilities were $1,515,924 at December 31, 2018 and $984,897 at December 31, 2017, an increase of 53.9%. The increase in total liabilities from December 31, 2017 to December 31, 2018, was substantially attributable to the Merger with an increase in total deposits of $554.4 million and an increase of $11.6 million in subordinated debt and somewhat offset by a decrease of $39.2 million in Federal Home Loan Bank advances. These and other components of our balance sheets are discussed further below.
 
Loans
 
Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. As previously discussed, the competition for quality loans in our markets has remained intense. Our goal is to steadily grow our loan portfolio, focusing on quality. This is not always possible for various factors, including but not limited to, scheduled maturities or early payoffs exceeding new loan volume. Early payoffs typically increase in lowering rate environments as customers identify advantageous opportunities for refinancing. We have been adding experienced lending officers to our staff to help with loan growth as the local market has continued to

43

improve. Total loans, net, at December 31, 2018, and December 31, 2017, were $1,220,184 and $762,488, respectively. This represented an increase of 60.0% from December 31, 2017 to December 31, 2018.

The table below provides a summary of the loan portfolio composition for the dates noted (including purchased credit-impaired (“PCI”) loans).
 
 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Commercial, Industrial and Agricultural
 
$
213,850

 
17.4
%
 
$
138,706

 
18.0
%
 
$
134,404

 
20.1
%
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
1-4 Family Residential
 
225,863

 
18.3
%
 
111,932

 
14.4
%
 
113,031

 
16.9
%
1-4 Family HELOC
 
88,112

 
7.2
%
 
72,017

 
9.3
%
 
57,460

 
8.6
%
Multifamily and Commercial
 
447,840

 
36.4
%
 
261,044

 
33.8
%
 
215,639

 
32.3
%
Construction, Land Development and Farmland
 
220,801

 
17.9
%
 
156,452

 
20.3
%
 
115,889

 
17.4
%
Consumer
 
20,495

 
1.7
%
 
17,605

 
2.3
%
 
17,240

 
2.6
%
Other
 
14,106

 
1.1
%
 
14,694

 
1.9
%
 
13,745

 
2.1
%
 
 
1,231,067

 
100.0
%
 
772,450

 
100.0
%
 
667,408

 
100.0
%
Less:
 
 
 
 
 
 
 
 
 
 
 
 
    Deferred loan fees (cost)
 
(9
)
 
 
 
231

 
 
 
625

 
 
    Allowance for possible loan losses
 
10,892

 
 
 
9,731

 
 
 
9,082

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans, net
 
$
1,220,184

 
 
 
$
762,488

 
 
 
$
657,701

 
 
 
 
 
As of December 31,
 
 
2015
 
2014
 
 
Amount
 
Percent
 
Amount
 
Percent
Commercial, Industrial and Agricultural
 
$
143,770

 
23.3
%
 
$
80,817

 
25.5
%
Real Estate:
 
 
 
 
 
 
 
 
1-4 Family Residential
 
110,736

 
18.0
%
 
41,297

 
13.0
%
1-4 Family HELOC
 
49,665

 
8.0
%
 
33,108

 
10.4
%
Multifamily and Commercial
 
202,736

 
32.8
%
 
112,805

 
35.6
%
Construction, Land Development and Farmland
 
89,763

 
14.5
%
 
37,127

 
11.7
%
Consumer
 
15,271

 
2.5
%
 
11,771

 
3.7
%
Other
 
5,556

 
0.9
%
 
300

 
0.1
%
 
 
617,497

 
100.0
%
 
317,225

 
100.0
%
Less:
 
 
 
 
 
 
 
 
    Deferred loan fees (cost)
 
927

 
 
 
375

 
 
    Allowance for possible loan losses
 
7,823

 
 
 
7,353

 
 
 
 
 
 
 
 
 
 
 
Loans, net
 
$
608,747

 
 
 
$
309,497

 
 
 
 
 
 
 
 
 
 
 


44

The table below provides a summary of PCI loans as of December 31, 2018, and December 31, 2017:
 
 
 
December 31, 2018
 
December 31, 2017
Commercial, Industrial and Agricultural
 
$
63

 
$
298

Real Estate:
 
 
 
 
    1-4 Family Residential
 
324

 
47

    1-4 Family HELOC
 
—

 
—

    Multifamily and Commercial
 
233

 
1,217

    Construction, Land Development and Farmland
 
1,958

 
1,508

Consumer
 
18

 
—

Other
 
—

 
—

Total gross PCI loans
 
2,596

 
3,070

Less:
 
 
 
 
    Remaining purchase discount
 
300

 
156

    Allowance for possible loan losses
 
—

 
4

 
 
 
 
 
Loans, net
 
$
2,296

 
$
2,910

 
Commercial loans above consist of commercial and industrial loans made to U.S. domiciled customers. These include loans for use in normal business operations to finance working capital needs, equipment purchases or other expansionary projects. Commercial loans of $213,850 at December 31, 2018, increased 54.2% compared to $138,706 as of December 31, 2017. Agricultural loans represent 5.8% of the total commercial, industrial and agricultural portfolio, and 1.0% of gross loans at December 31, 2018.
 
Real estate loans comprised 79.8% of the loan portfolio at December 31, 2018. Residential loans included in this category consist mainly of closed-end loans secured by first and second liens that are not held for sale and revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit. The Company increased the residential portfolio 70.7% from December 31, 2017 to December 31, 2018. Commercial loans included in the real estate category above include (in typical order of prominence) loans secured by non- owner-occupied nonfarm nonresidential properties, loans secured by owner-occupied nonfarm nonresidential properties, and loans secured by multi-family residential properties. Multi-family and commercial real estate loans of $447,840 at December 31, 2017, increased 71.6% compared to $261,044 as of December 31, 2017. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending also increased 41.1% from December 31, 2017 to December 31, 2018, based on a strong local economy and the Merger.
 
Consumer loans mainly consist of loans to individuals for household, family, and other personal expenditures under revolving credit plans and other consumer loans. We have a small but growing amount of credit card loans on our balance sheet due to the implementation of a new credit card program during the third quarter of 2017. We have a relatively small number of automobile loans. Our consumer loans experienced an increase from December 31, 2017 to December 31, 2018, of 16.4%.
 
Other loans consist mainly of loans to states and political subdivisions and loans to other depository institutions and experienced a 4.0% decrease from December 31, 2017 to December 31, 2018.












45

The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans maturing within specific intervals at December 31, 2018, excluding unearned net fees and costs.
 
 
 
One Year or Less
 
One to Five Years
 
Over Five Years
 
Total
Commercial, Industrial and Agricultural
 
$
60,734

 
$
122,597

 
$
30,519

 
$
213,850

Real Estate:
 
 
 
 
 
 
 
 
1-4 Family Residential
 
28,189

 
98,693

 
98,981

 
225,863

1-4 Family HELOC
 
4,154

 
15,452

 
68,506

 
88,112

Multifamily and Commercial
 
27,029

 
208,476

 
212,335

 
447,840

Construction, Land Development and Farmland
 
94,551

 
79,491

 
46,759

 
220,801

Consumer
 
11,626

 
8,586

 
283

 
20,495

Other
 
3,134

 
1,740

 
9,232

 
14,106

Total
 
$
229,417

 
$
535,035

 
$
466,615

 
$
1,231,067

 
 
 
 
 
 
 
 
 
Fixed interest rate
 
$
91,374

 
$
450,380

 
$
249,110

 
$
790,864

Variable interest rate
 
138,043

 
84,655

 
217,505

 
440,203

Total
 
$
229,417

 
$
535,035

 
$
466,615

 
$
1,231,067

 
The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio.
 
Allowance for Loan Losses
 
We maintain an allowance for loan losses that we believe is adequate to absorb the probable incurred losses inherent in our loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past-due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged off.
 
A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.
 
At December 31, 2018, the allowance for loan losses was $10,892 compared to $9,731 at December 31, 2017. The allowance for loan losses as a percentage of total loans was 0.88% at December 31, 2018 and 1.26% at December 31, 2016. The allowance was adjusted upward from December 31, 2017 to December 31, 2018. This increase in our allowance for loan losses is directly attributable to our loan growth. Charge-off and general economic activity has continued to improve for our area and our customers.
The following table sets forth the activity in the allowance for loan losses for the years presented.
 

46

Analysis of Changes in Allowance for Loan Losses
 
 
2018
 
2017
 
2016
 
2015
 
2014
Beginning Balance, January 1
$
9,731

 
$
9,082

 
$
7,823

 
$
7,353

 
$
8,530

Loans charged off:
 
 
 
 
 
 
 
 
 
Commercial, Industrial and Agricultural
(381
)
 
(976
)
 
(84
)
 
—

 
(9
)
Real Estate:
 
 
 
 
 
 
 
 
 
    1-4 Family Residential
(36
)
 
(14
)
 
(25
)
 
—

 
—

    1-4 Family HELOC
(6
)
 
—

 
—

 
(6
)
 
—

    Multifamily and Commercial
(76
)
 
—

 
—

 
—

 
—

    Construction, Land Development and Farmland
(215
)
 
(45
)
 
—

 
—

 
—

Consumer
(26
)
 
(36
)
 
—

 
(35
)
 
(120
)
Other
(47
)
 
—

 
(36
)
 
—

 
(11
)
Total loans charged off
(787
)
 
(1,071
)
 
(145
)
 
(41
)
 
(140
)
Recoveries on loans previously charged off:
 
 
 
 
 
 
 
 
 
Commercial, Industrial and Agricultural
590

 
378

 
323

 
346

 
178

Real estate:
 
 
 
 
 
 
 
 
 
    1-4 Family Residential
12

 
—

 
66

 
15

 
100

    1-4 Family HELOC
10

 
19

 
11

 
25

 
25

    Multifamily and Commercial
221

 
—

 
18

 
388

 
49

    Construction, Land Development and Farmland
44

 
5

 
6

 
7

 
111

Consumer
34

 
2

 
12

 
—

 
—

Other
2

 
—

 
—

 
—

 
—

Total loan recoveries
913

 
404

 
436

 
781

 
463

Net recoveries (charge-offs)
126

 
(667
)
 
291

 
740

 
323

Provision for loan losses
1,035

 
1,316

 
968

 
(270
)
 
(1,500
)
Total allowance at end of period
$
10,892

 
$
9,731

 
$
9,082

 
$
7,823

 
$
7,353

Gross loans at end of period (1)
$
1,231,067

 
$
772,450

 
$
667,408

 
$
617,497

 
$
317,225

Average gross loans (1)
$
1,138,946

 
$
714,982

 
$
640,592

 
$
517,148

 
$
293,195

Allowance to total loans
0.88
 %
 
1.26
%
 
1.36
 %
 
1.27
 %
 
2.32
 %
Net charge-offs (recoveries) to average loans (annualized)
(0.01
)%
 
0.09
%
 
(0.05
)%
 
(0.14
)%
 
(0.11
)%
     (1) Loan balances exclude loans held for sale. 

While no portion of the allowance is in any way restricted to any individual loan or group of loans, and the entire allowance is available to absorb losses from any and all loans, the following table summarizes our allocation of allowance for loan losses by loan category and loans in each category as a percentage of total loans, for the years presented.
 

47

 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
 
Amount
 
% of
Allowance
To Total
 
% of Loan
Type to
Total Loans
 
Amount
 
% of
Allowance
To Total
 
% of Loan
Type to
Total Loans
 
Amount
 
% of
Allowance
To Total
 
% of Loan
Type to
Total Loans
Commercial, Industrial and Agricultural
 
$
1,751

 
16.1
%
 
17.4
%
 
$
2,538

 
26.1
%
 
18.0
%
 
$
2,432

 
26.8
%
 
20.1
%
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 Family Residential
 
1,333

 
12.2
%
 
18.3
%
 
773

 
7.9
%
 
14.4
%
 
1,178

 
13.0
%
 
16.9
%
1-4 Family HELOC
 
656

 
6.0
%
 
7.2
%
 
595

 
6.1
%
 
9.3
%
 
704

 
7.8
%
 
8.6
%
Multifamily and Commercial
 
4,429

 
40.6
%
 
36.4
%
 
3,166

 
32.6
%
 
33.8
%
 
2,737

 
30.1
%
 
32.3
%
Construction, Land Development and Farmland
 
2,500

 
23.0
%
 
17.9
%
 
2,434

 
25.0
%
 
20.3
%
 
1,786

 
19.7
%
 
17.4
%
Consumer
 
184

 
1.7
%
 
1.7
%
 
183

 
1.9
%
 
2.3
%
 
208

 
2.3
%
 
2.6
%
Other
 
39

 
0.4
%
 
1.1
%
 
42

 
0.4
%
 
1.9
%
 
37

 
0.3
%
 
2.1
%
Unallocated
 
—

 
—
%
 
—
%
 
—

 
—
%
 
—
%
 
—

 
—
%
 
—
%
 
 
$
10,892

 
100.0
%
 
100.0
%
 
$
9,731

 
100.0
%
 
100.0
%
 
$
9,082

 
100.0
%
 
100.0
%
 
 
 
December 31, 2015
 
December 31, 2014
 
 
Amount
 
% of
Allowance
To Total
 
% of Loan
Type to
Total Loans
 
Amount
 
% of
Allowance
To Total
 
% of Loan
Type to
Total Loans
Commercial, Industrial and Agricultural
 
$
2,198

 
28.1
%
 
23.3
%
 
$
2,184

 
29.7
%
 
25.5
%
Real Estate:
 
 
 
 
 
 
 
 
 
 
 
 
1-4 Family Residential
 
1,214

 
15.5
%
 
18.0
%
 
642

 
8.7
%
 
13.0
%
1-4 Family HELOC
 
699

 
8.9
%
 
8.0
%
 
854

 
11.6
%
 
10.4
%
Multifamily and Commercial
 
2,591

 
33.1
%
 
32.8
%
 
2,070

 
28.2
%
 
35.6
%
Construction, Land Development and Farmland
 
894

 
11.4
%
 
14.5
%
 
742

 
10.1
%
 
11.7
%
Consumer
 
192

 
2.5
%
 
2.5
%
 
181

 
2.5
%
 
3.7
%
Other
 
35

 
0.5
%
 
0.9
%
 
2

 
—
%
 
0.1
%
Unallocated
 
—

 
—
%
 
—
%
 
678

 
9.2
%
 
—
%
 
 
$
7,823

 
100.0
%
 
100.0
%
 
$
7,353

 
100.0
%
 
100.0
%
 
Nonperforming Assets
 
Non-performing assets consist of non-performing loans plus real estate acquired through foreclosure or deed in lieu of foreclosure. Non-performing loans by definition consist of non-accrual loans and loans past due 90 days or more and still accruing interest. When we place a loan on non-accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. The interest on these loans is accounted for on the cash-basis, or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table provides information with respect to the Company’s non-performing assets.
 

48

 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
Non-accrual loans
 
$
4,194

 
$
5,161

 
$
5,634

 
$
5,004

 
$
2,625

Past due loans 90 days or more and still accruing interest
 
6

 
—

 
—

 
—

 
—

Restructured loans
 
2,469

 
2,170

 
2,953

 
1,706

 
6,192

Total non-performing loans
 
6,669

 
7,331

 
8,587

 
6,710

 
8,817

Foreclosed real estate ("OREO")
 
1,000

 
—

 
—

 
1,149

 
1,204

Total non-performing assets
 
$
7,669

 
$
7,331

 
$
8,587

 
$
7,859

 
$
10,021

Total non-performing loans as a percentage of total loans
 
0.54
%
 
0.95
%
 
1.29
%
 
1.09
%
 
2.78
%
Total non-performing assets as a percentage of total assets
 
0.44
%
 
0.65
%
 
0.94
%
 
0.90
%
 
2.23
%
Allowance for loan losses as a percentage of non-performing loans
 
163.32
%
 
132.74
%
 
105.76
%
 
116.59
%
 
83.40
%
 
Investment Securities and Other Earning Assets
 
The investment securities portfolio is intended to provide the Company with adequate liquidity, meet customer collateral needs, provide flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of securities classified as available-for-sale. All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in our best interest. Unrealized gains and losses on this portfolio are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.
 
Securities are a component of the Company’s earning assets. Securities totaled $296,323 at December 31, 2018. This represents a 34.6% increase from the December 31, 2017 total of $220,201. The increase is mainly attributable to the Merger and somewhat offset by sales of $100,737 and paydowns and maturities of $12,987 which were partially offset by purchases $106,893 securities available for sale during the year ended December 31, 2018.
 
Restricted equity securities totaled $11,690 at December 31, 2018. This represents a 50.4% increase from the December 31, 2017 total of $7,774 and is mainly attributable to the Merger. Restricted securities consist of Federal Reserve Bank and Federal Home Loan Bank stock.

The following table shows the Company’s investments’ amortized cost and fair value, aggregated by investment category for the periods presented:
 
 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
 
Amortized Cost
 
Fair Value
 
% of Total
 
Amortized Cost
 
Fair Value
 
% of Total
 
Amortized Cost
 
Fair Value
 
% of Total
U.S.Treasury and other U.S. government agencies
 
$
568

 
554

 
0.19
%
 
$
586

 
578

 
0.26
%
 
$
1,909

 
1,908

 
1.30
%
State and municipal
 
232,589

 
229,298

 
77.38
%
 
189,576

 
191,752

 
87.08
%
 
122,813

 
119,634

 
81.49
%
Corporate bonds
 
3,130

 
3,017

 
1.02
%
 
1,500

 
1,492

 
0.68
%
 
2,000

 
1,987

 
1.35
%
Mortgage backed securities
 
32,172

 
31,958

 
10.78
%
 
6,262

 
6,169

 
2.80
%
 
20,197

 
20,034

 
13.65
%
Asset backed securities
 
28,635

 
27,996

 
9.45
%
 
16,753

 
16,710

 
7.59
%
 
—

 
—

 
—
%
Time deposits
 
3,500

 
3,500

 
1.18
%
 
3,500

 
3,500

 
1.59
%
 
3,250

 
3,250

 
2.21
%
Total
 
$
300,594

 
296,323

 
100.00
%
 
$
218,177

 
220,201

 
100.00
%
 
$
150,169

 
146,813

 
100.00
%
 
The table below summarizes the maturities and yield characteristics of the Company’s available-for-sale securities as of December 31, 2018. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

49

 
 
 
One year or less
 
Over one year through five years
 
Over five year through ten years
 
Over ten years
 
Total
 
 
Fair Value
 
Yield
 
Fair Value
 
Yield
 
Fair Value
 
Yield
 
Fair Value
 
Yield
 
Fair Value
 
Yield
U.S.Treasury and other U.S. government agencies
 
$
—

 
—

 
$
555

 
2.21
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
555

 
2.21
%
State and municipal
 
345

 
1.71
%
 
1,977

 
2.68
%
 
11,341

 
3.47
%
 
215,650

 
3.84
%
 
229,313

 
3.81
%
Corporate bonds
 
—

 
—
%
 
982

 
3.16
%
 
2,035

 
—

 
—

 
—

 
3,017

 
1.52
%
Mortgage backed securities
 
11

 
1.54
%
 
3,658

 
2.84
%
 
1,273

 
1.88
%
 
27,016

 
3.25
%
 
31,958

 
3.14
%
Asset backed securities
 
—

 
—

 
—

 
—
%
 
1,413

 
2.63
%
 
26,567

 
3.11
%
 
27,980

 
3.10
%
Time deposits
 
2,250

 
2.16
%
 
1,250

 
2.24
%
 
—

 
—

 
—

 
—

 
3,500

 
2.19
%
Total
 
$
2,606

 
2.09
%
 
$
8,422

 
2.71
%
 
$
16,062

 
2.93
%
 
$
269,233

 
3.71
%
 
$
296,323

 
3.62
%
 
Securities pledged at December 31, 2018 and 2017 had a carrying amount of $70,097 and $78,220 and were pledged to secure public deposits and repurchase agreements.
 
At December 31, 2018 and 2017, there were no holdings of securities of any one issuer in an amount greater than 10% of stockholders’ equity.
 
Premises and Equipment
 
Premises and equipment, net, totaled $22,033 at December 31, 2018 compared to $9,790 at December 31, 2017, a net increase of $12,243 or 125.1% due in part to the Merger. Asset purchases amounted to approximately $4,342 during the year ended December 31, 2018 while related depreciation expense amounted to $1,697. At December 31, 2018, we operated from seventeen retail banking locations, as well as two stand-alone mortgage loan production offices. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Of our other fifteen bank branch locations three are in Columbia, the remaining are in Franklin, Springfield, Gallatin, Nashville, Murfreesboro, Mt. Pleasant, Thompson Station, Centerville, Lyles, and Chattanooga, Tennessee. As of December 31, 2018, our mortgage loan production offices were located in Hendersonville and Brentwood, Tennessee. During the third quarter of 2018 we opened the Murfreesboro branch and during the fourth quarter we opened the Chattanooga branch. During the year ended December 31, 2016, the Company transitioned most of it out-of-market mortgage loan production offices to another bank.

Deposits
 
Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors such as money market funds and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the interest rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.
 
At December 31, 2018, total deposits were $1,437,903, an increase of $554,384, or 62.7%, compared to $883,519 at December 31, 2017. This increase was primarily driven by the Merger. During the year ended December 31, 2018, we increased non-interest bearing deposits by $84.9 million, interest bearing demand deposits increased by $66.0 million, or 74.8%, increased savings and money market deposits by $196.1 million, or 95.5% and increased time deposits by $207.4 million, or 45.3%. We are continuing to focus on growth of our non-interest bearing deposits and using alternative sources of funds to better manage our cost of funds. As of December 31, 2018, non-interest bearing deposits represent 15.1% of total deposits.
 
The average amounts for deposits for 2018, 2017 and 2016 are detailed in the following schedule (in thousands, except for percentages).
 

50

 
 
2018
 
2017
 
2016
 
 
Average Balance
 
Average Rate
 
Average Balance
 
Average Rate
 
Average Balance
 
Average Rate
Non-interest-bearing deposits
 
$
218,867

 
—
%
 
$
134,408

 
—
%
 
$
127,619

 
—
%
Interest bearing demand
 
146,717

 
0.25
%
 
84,171

 
0.21
%
 
88,775

 
0.21
%
Savings and money market
 
349,986

 
0.74
%
 
196,939

 
0.38
%
 
186,473

 
0.34
%
Time deposits-retail
 
531,780

 
1.55
%
 
319,456

 
0.98
%
 
159,351

 
0.70
%
Time deposits-wholesale
 
90,510

 
1.77
%
 
88,114

 
1.10
%
 
102,626

 
0.70
%
Total deposits
 
$
1,337,860

 
0.96
%
 
$
823,088

 
0.61
%
 
$
664,844

 
0.40
%
 
The following table shows maturity of time deposits of $250,000 or more by category based on time remaining until maturity.
 
 
December 31, 2018
Three months or less
$
203,745

Over three months through six months
67,234

Over six months through 12 months
41,045

Over one year through three years
14,548

Over three years through five years
4,164

Over five years
—

Total
$
330,736

 
Market and Liquidity Risk Management
 
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. Our Asset Liability Management Committee (ALCO) is charged with the responsibility of monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.

Interest Rate Sensitivity—Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items to maximize long-term earnings and mitigate interest rate risk. Measurements we use to help us manage interest rate sensitivity include a gap analysis, an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.
 
Interest Rate Sensitivity Gap Analysis—The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of our interest rate sensitivity, or gap, is one of the three principal techniques we use in our asset/liability management effort.
 
Our policy is to have 12 and 24-month cumulative repricing gaps that do not exceed 15% of assets. We were in compliance with our policy as of December 31, 2018. Although we do monitor our gap on a periodic basis, we recognize the potential shortcomings of such a model. The static nature of the gap schedule makes it difficult to incorporate changes in behavior that are caused by changes in interest rates. Also, although the periods of estimated and contractual repricing are identified in the analysis, the extent of repricing is not modeled in the gap schedule (i.e. whether repricing is expected to move on a one-to-one or other basis in relationship to the market changes simulated). For these and other shortcomings, we rely more heavily on the earnings simulation model and the economic value of equity model discussed further below.
 
Earnings Simulation Model—We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from a flat

51

interest rate forecast over the next 12 and 24 months, our estimated change in net interest income as well as our policy limits are as follows:
 
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to
 
Estimated Change in Net Interest Income and Policy of Maximum Percentage Decline in Net Interest Income
 
 
Next 12
 
Next 24
 
 
Months
 
Months
 
 
Estimate
 
Policy
 
Estimate
 
Policy
-200 bp
 
(0.5)%
 
(15)%
 
(4.3)%
 
(15)%
-100 bp
 
0.7%
 
(10)%
 
(0.2)%
 
(10)%
+100 bp
 
—%
 
(10)%
 
0.2%
 
(10)%
+200 bp
 
0.5%
 
(15)%
 
0.8%
 
(15)%
+300 bp
 
0.4%
 
(20)%
 
1.0%
 
(20)%
+400 bp
 
—%
 
(25)%
 
0.9%
 
(25)%
 
We were in compliance with the earnings simulation model policies monitored by the Bank as of December 31, 2018, indicating what we believe to be a fairly neutral profile.
 
Economic value of equity—Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.
To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:
 
Instantaneous, Parallel Change in Prevailing Interest Rates Equal to
 
Maximum Percentage Decline in Economic Value of Equity from the Economic Value of Equity at Currently Prevailing Interest Rates
+100 bp
 
15%
+200 bp
 
25%
+300 bp
 
30%
+400 bp
 
35%
Non-parallel shifts
 
35%
 
At December 31, 2018, our model results indicated that we were within these policy limits.
 
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. Our ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies. 

Interest Rate Sensitivity
 
The following schedule details the Company’s interest rate sensitivity at December 31, 2018:
 

52

 
 
 
 
Repricing Within
 
 
Total
 
1-90 days
 
3 months to 12 months
 
1 to 5 years
 
Over 5 years
Earning assets:
 
 
 
 
 
 
 
 
 
 
Loans, net of unearned income (1)
$
1,226,882

 
$
351,500

 
$
67,945

 
$
505,735

 
$
301,702

 
Available for sale securities
296,323

 
43,503

 
2,606

 
9,474

 
240,740

 
Mortgage loans held for sale
15,823

 
6,567

 
—

 
—

 
9,256

 
Deposits with banks
27,468

 
27,468

 
—

 
—

 
—

 
Federal funds sold and other
371

 
371

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
          Total earning assets
1,566,867

 
429,409

 
70,551

 
515,209

 
551,698

 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand accounts
154,218

 
154,218

 
—

 
—

 
—

 
Savings and money market accounts
401,308

 
401,308

 
—

 
—

 
—

 
Time deposits
665,440

 
302,946

 
282,798

 
79,696

 
—

 
Federal funds purchased
—

 
—

 
—

 
—

 
—

 
Subordinated debt
11,603

 
1,603

 
—

 
10,000

 
—

 
Federal Home Loan Bank advances (2)
57,498

 
3,000

 
—

 
53,826

 
672

 
 
 
 
 
 
 
 
 
 
 
 
          Total interest-bearing liabilities
1,290,067

 
863,075

 
282,798

 
143,522

 
672

 
 
 
 
 
 
 
 
 
 
 
 
Interest-sensitivity gap
$
276,800

 
$
(433,666
)
 
$
(212,247
)
 
$
371,687

 
$
551,026

 
 
 
 
 
 
 
 
 
 
 
 
Cumulative gap
 
 
$
(433,666
)
 
$
(645,913
)
 
$
(274,226
)
 
$
276,800

 
 
 
 
 
 
 
 
 
 
 
 
Interest -sensitivity gap as % of total average assets
 
 
(26.37
)%
 
(12.91
)%
 
22.60
 %
 
33.51
%
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative gap as % of total average assets
 
 
(26.37
)%
 
(39.28
)%
 
(16.68
)%
 
16.83
%
 
(1)
Loans, net of unearned income excludes non-accrual loans
(2)
We moved $50,000 of Federal Home Loan Bank advances from the 1-90 days to the 1-5 years due to the swap maturity.

 Liquidity Risk Management —The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
 
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
 
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.


53

The Company has established a line of credit with the Federal Home Bank of Cincinnati which is secured by a blanket pledge of cash deposits, 1-4 family residential mortgages, multi-family residential, home equity loans, and available-for-sale securities.
 
At December 31, 2018, Federal Home Loan Bank advances totaled $57,498 compared to $96,747 as of December 31, 2017. The decrease in FHLB advances was due to the increase in deposits from the Merger.
 
At December 31, 2018, the scheduled maturities of these advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):
 
Scheduled Maturities
 
Amount
 
Weighted Average Rates
2019
 
$
53,000

 
2.46%
2020
 
—

 
—%
2021
 
367

 
2.73%
2022
 
762

 
1.22%
2023
 
2,697

 
1.94%
Thereafter
 
672

 
2.46%
 
 
 
 
 
 
 
$
57,498

 
2.42%
  
Capital
 
Stockholders’ equity was $208,414 at December 31, 2018, an increase of $68,277, or 48.7%, from $140,137 at December 31, 2017. During the third quarter of 2017, the company issued 1,137,000 shares of common stock in a private offering raising $23.2 million net of expenses of which $20.0 million was pushed-down to the Bank. Additionally, the Company raised $398 of capital through the exercise of Company stock options and issued $61,983 as consideration in the Merger during the year ended December 31, 2018. The subordinated debentures assumed in the Merger and the additional capital for the stock option exercises was pushed-down to the Bank and when combined with the accretion of earnings to capital but offset by the declared dividends and the increase in assets led to a decrease in the Bank’s December 31, 2018 Tier 1 leverage ratio to 10.17% compared with 11.68% at December 31, 2017 (see other ratios discussed further below). Additionally, the subordinated debentures qualify as Tier 1 and Total risk-based capital for the Company. Common dividends of $3,451 (of which $542 were declared in the prior year) were paid during the year ended December 31, 2018, and common dividends of $1,036 were declared in the fourth quarter of 2018 and were paid subsequent to year end.
 
On December 4, 2018, the Company announced that its board of directors has authorized a stock repurchase plan pursuant to which the Company may purchase up to $12 million of shares of the Company’s outstanding common stock, par value $1.00 per share. Stock repurchases under the plan will be made from time to time in the open market or privately negotiated transactions, or otherwise, at the discretion of management of the Company and in accordance with applicable legal requirements. The timing and amount of share repurchases under the plan will depend on a number of factors, including the Company’s stock price performance, ongoing capital planning considerations, general market conditions, and applicable legal requirements. The Company currently anticipates the stock repurchase plan will remain in effect through December 31, 2019, unless the entire authorized amount of shares is sooner repurchased. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the plan may be extended, modified, amended, suspended, or discontinued at any time.

On July 14, 2017, the Company filed a Form S-3 registration statement to offer, issue and sell from time to time in one or more offerings any combination of (i) common stock, (ii) preferred stock, (iii) debt securities, (iv) depositary shares, (v) warrants, and (vi) units, up to a maximum aggregate offering price of $75,000,000. The net proceeds from any offering will be used for general corporate purposes including acquisitions, capital expenditures, investments, and the repayment, redemption, or refinancing of any indebtedness or other securities. Until allocated to such purposes it is expected that we will invest any proceeds in short-term, interest-bearing instruments or other investment-grade securities.
 
Banks as regulated institutions are required to meet certain levels of capital. The Federal Reserve Board of Governors, the primary federal regulator for the Bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. We regularly review our capital adequacy to ensure

54

compliance with these guidelines and to help ensure that sufficient capital is available for current and future needs. It is management’s intent to maintain an optimal capital and leverage mix for growth and for shareholder return.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2018, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notifications that management believes have changed the institution’s category. There are no conditions or events since that notification that management believes have changed the institution’s category.
 
Actual and required capital amounts and ratios are presented below as of December 31, 2018 and December 31, 2017 for the Company and Bank.
 
 
 
Actual Regulatory Capital
 
Minimal Capital Adequacy
 
Minimum Required Capital Including Capital Conservation Buffer
 
To Be Well Capitalized Under Prompt Corrective Action Provisions
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
168,876

 
10.38
%
 
$
65,077

 
4.00
%
 
$
65,077

 
4.000
%
 
$
81,347

 
5.00
%
Common equity Tier 1
 
157,273

 
11.59
%
 
61,064

 
4.50
%
 
86,507

 
6.375
%
 
88,203

 
6.50
%
Tier I risk-based capital
 
168,876

 
12.44
%
 
81,451

 
6.00
%
 
106,905

 
7.875
%
 
108,602

 
8.00
%
Total risk-based capital
 
180,193

 
13.28
%
 
108,550

 
8.00
%
 
133,991

 
9.875
%
 
135,688

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
165,308

 
10.17
%
 
$
65,018

 
4.00
%
 
$
65,018

 
4.000
%
 
$
81,272

 
5.00
%
Common equity Tier 1
 
165,308

 
12.19
%
 
61,024

 
4.50
%
 
86,451

 
6.375
%
 
88,146

 
6.50
%
Tier I risk-based capital
 
165,308

 
12.19
%
 
81,366

 
6.00
%
 
106,792

 
7.875
%
 
108,488

 
8.00
%
Total risk-based capital
 
176,625

 
13.02
%
 
108,525

 
8.00
%
 
133,961

 
9.875
%
 
135,657

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
126,234

 
11.89
%
 
$
42,467

 
4.00
%
 
$
42,467

 
4.000
%
 
$
53,084

 
5.00
%
Common equity Tier 1
 
126,234

 
13.90
%
 
40,867

 
4.50
%
 
52,219

 
5.750
%
 
59,030

 
6.50
%
Tier I risk-based capital
 
126,234

 
13.90
%
 
54,489

 
6.00
%
 
65,841

 
7.250
%
 
72,653

 
8.00
%
Total risk-based capital
 
135,965

 
14.97
%
 
72,660

 
8.00
%
 
84,013

 
9.250
%
 
90,825

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
123,862

 
11.68
%
 
$
42,418

 
4.00
%
 
$
42,418

 
4.000
%
 
$
53,023

 
5.00
%
Common equity Tier 1
 
123,862

 
13.67
%
 
40,774

 
4.50
%
 
52,100

 
5.750
%
 
58,896

 
6.50
%
Tier I risk-based capital
 
123,862

 
13.67
%
 
54,365

 
6.00
%
 
65,691

 
7.250
%
 
72,487

 
8.00
%
Total risk-based capital
 
133,593

 
14.74
%
 
72,506

 
8.00
%
 
83,835

 
9.250
%
 
90,633

 
10.00
%

Contractual Obligations
 
The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2018:
 

55

 
 
December 31, 2018
 
 
Total
 
Due in one year or less
 
Due over one year and less than three years
 
Due over three years and less than five years
 
Due over five years
Deposits with maturities
 
$
665,440

 
$
585,744

 
$
60,713

 
$
18,983

 
$
—

Federal Home Loan Bank advances
 
57,498

 
53,000

 
1,129

 
2,697

 
672

Operating lease obligations
 
14,397

 
2,216

 
4,197

 
3,334

 
4,650

Total
 
$
737,335

 
$
640,960

 
$
66,039

 
$
25,014

 
$
5,322

 
Off Balance Sheet Arrangements
 
Off-balance sheet arrangements generally consist of unused lines of credit and standby letters of credit. Such commitments were as follows (dollars in thousands):
 
 
December 31, 2018
Unused lines of credit
$
253,952

Standby letters of credit
16,544

Total commitments
$
270,496

 
Emerging Growth Company Status
 
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company chooses to comply with the reporting requirements of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for an initial five year period, though it may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, it is deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by non-affiliates in excess of $700 million) or if total annual gross revenues equal or exceed $1.07 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.
 
Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this filing, as well as the financial statements we will file in the future, will be subject to all new or revised accounting standards generally applicable to private companies. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-public companies. 


56

Effects of Inflation and Changing Prices
 
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In addition, inflation affects financial institutions’ cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings, and shareholders’ equity. Commercial and other loan originations and refinancings tend to slow as interest rates increase, and can reduce our earnings from such activities.
 
Impact of Recent Accounting Guidance
 
Please see Note 1 of the consolidated financial statements where we discuss the impact of recent accounting guidance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
This item is included in “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Please see headings: “Market and Liquidity Risk Management,” “Interest Rate Sensitivity” and “Effect of Inflation and Changing Prices.”
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements required by this Item are included as a separate section of this report commencing on page F-1.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.
 
ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
 
Reliant Bancorp maintains disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, which are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to Reliant Bancorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Reliant Bancorp carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of December 31, 2018. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2018, Reliant Bancorp’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financial Reporting
 
The report of Reliant Bancorp’s management on internal control over financial reporting is set forth on page F-1 of this Annual Report on Form 10-K. This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
 
Changes in Internal Controls
 
There were no changes in Reliant Bancorp’s internal control over financial reporting during Reliant Bancorp’s fiscal quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, Reliant Bancorp’s internal control over financial reporting.
 

57

ITEM 9B. OTHER INFORMATION

None.

PART III
 

58

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The response to this item will be included in, and is incorporated by reference to, the Company’s proxy statement for the 2019 annual meeting of Company shareholders (the "Proxy Statement"), under the captions “Proposal One - Election of Directors,” “Information About the Directors,” “Information About the Executive Officers,” “Corporate Governance and the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
 
ITEM 11. EXECUTIVE COMPENSATION

The response to this item will be included in, and is incorporated by reference to, the Proxy Statement, under the captions “Compensation of Directors and Executive Officers” and “Director Compensation.”
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The response to this item will be included in, and is incorporated by reference to, the Proxy Statement , under the caption “Security Ownership of Certain Beneficial Owners and Management.”
 
The following table summarizes the Company’s equity compensation plan information as of December 31, 2018:
 
Plan category
 
Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights
 
Weighted average
exercise price of
outstanding options, warrants and rights
 
Number of securities
remaining available
for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
159,260
 
16.72
 
1,070,536 (1)
Equity compensation plans not approved by security holders
 
—
 
—
 
—
Total
 
159,260
 
16.72
 
1,070,536
 
(1)
This number includes 434,186 securities available to be issued under the Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan. Although this plan will remain in effect until March 23, 2021, the Company has no intentions to issue new awards under the plan. Future awards are intended to be issued under the Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan, under which the number of securities remaining available for future issuance is 636,350.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The response to this item will be included in, and is incorporated by reference to, the Proxy Statement, under the captions “Proposal One - Election of Directors” and “Related Party Transactions.”
 
ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The response to this item will be included in, and is incorporated by reference to, the Proxy Statement, under the caption “Proposal Two - Ratification of Independent Registered Public Accountants.”  

PART IV
 
ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
Documents filed as a part of this Annual Report on Form 10-K  
(1) Financial statements    

59

The following consolidated financial statements of the Company are incorporated in this Item 15 by reference from Part II - Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(2)
Financial statement schedules
All schedules for which provision is made in Regulation S-X are either not required to be included herein under the related instructions or are inapplicable, or the related information is included in the footnotes to the applicable financial statements, and therefore have been omitted.
(3)
Exhibits
See Item 15(b) of this Annual Report on Form 10-K
(b)
Exhibits
    
Exhibit
No.
Description
 
Location
2.1
 
Incorporated by reference to Exhibit 2.1 to Form 8-K filed August 23, 2017
3.1
 
Incorporated by reference to Exhibit 3.1 to Form 10-Q filed November 6, 2018
3.2
 
Incorporated by reference to Exhibit 3.1 to Form 8-K filed June 21, 2018
4.1
 
Incorporated by reference to Exhibit 4.4 to Form S-8 filed December 19, 2018
4.2
The rights of securities holders are defined in the Charter and Bylaws provided in Exhibits 3.1 and 3.2
 
 
10.1**
 
Incorporated by reference to Exhibit 10.14 to Form S-4 filed July 3, 2014
10.2**
 
Incorporated by reference to Exhibit 10.15 to Form S-4 filed July 3, 2014
10.3**
 
Incorporated by reference to Exhibit 10.16 to Form S-4 filed July 3, 2014
10.4**
 
Incorporated by reference to Exhibit 10.11 to Form S-4 filed July 3, 2014
10.5**
 
Incorporated by reference to Exhibit 10.12 to Form S-4 filed July 3, 2014

60

Exhibit
No.
Description
 
Location
10.6**
 
Incorporated by reference to Exhibit 10.13 to Form S-4 filed July 3, 2014
10.7**
 
Incorporated by reference to Exhibit 10.17 to Form S-4 filed July 3, 2014
10.8
 
Incorporated by reference to Exhibit 10.1 to Form 8-K filed January 22, 2016
10.9
 
Incorporated by reference to Exhibit 10.2 to Form 8-K filed January 22, 2016
10.10
 
Incorporated by reference to Exhibit 10.3 to Form 8-K filed January 22, 2016
10.11
 
Incorporated by reference to Exhibit 10.4 to Form 8-K filed January 22, 2016
10.12
 
Incorporated by reference to Exhibit 10.5 to Form 8-K filed January 22, 2016
10.13
 
Incorporated by reference to Exhibit 10.6 to Form 8-K filed January 22, 2016
10.14**
 
Incorporated by reference to Exhibit 10.24 to Form 10-K filed March 28, 2016
10.15**
 
Incorporated by reference to Exhibit 10.1 to Form 8-K filed January 5, 2018
10.16**
 
Incorporated by reference to Exhibit 10.1 to Form 8-K filed April 20, 2018
10.17**
 
Incorporated by reference to Exhibit 10.2 to Form 8-K filed April 20, 2018
10.18**
 
Incorporated by reference to Exhibit 10.3 to Form 8-K filed April 20, 2018
10.19**
 
Incorporated by reference to Exhibit 10.4 to Form 8-K filed April 20, 2018
10.20**
 
Incorporated by reference to Exhibit 10.5 to Form 8-K filed April 20, 2018
10.21**
 
Incorporated by reference to the registrant’s definitive proxy statement on Schedule 14A filed on April 10, 2018.
21.1
 
Filed herewith
23.1
 
Filed herewith
31.1
 
Filed herewith
31.2
 
Filed herewith
32.1
 
Furnished herewith

61







101.INS XBRL Instance Document * 
101.SCH XBRL Taxonomy Extension Schema Document * 
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document * 
101.DEF XBRL Taxonomy Extension Definition Linkbase Document * 
101.LAB XBRL Taxonomy Extension Label Linkbase Document * 
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * 

*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections. 

**
Indicates management contract or compensatory plan or arrangement

(c)
Financial Statement Schedules
See Item 15(a)(2) of this Annual Report on Form 10-K

ITEM 16.     FORM 10-K SUMMARY

None.
 
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT BY REGISTRANTS THAT HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE EXCHANGE ACT.
 
As of the date of this Annual Report on Form 10-K, no annual report to security holders covering the Company’s last fiscal year or proxy soliciting materials with respect to any annual or other meeting of security holders of the Company have been sent to security holders of the Company. Such an annual report and proxy soliciting materials will be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K, and copies of these materials will be furnished to the SEC when they are sent to security holders. The annual report and proxy soliciting materials shall not be deemed to be “filed” with the SEC or otherwise subject to the liabilities of Section 18 of the Exchange Act.

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
RELIANT BANCORP, INC.
 
Date: March 8, 2019
By:
/s/ DeVan D. Ard, Jr.
 
 
 
DeVan D. Ard, Jr. 
 
 
 
Chairman, Chief Executive Officer, and President
 
 
 
(Principal Executive Officer)
 
 
 
/s/    Homayoun Aminmadani        
 
March 8, 2019
Homayoun Aminmadani,
Director
 
 
 
 
 
/s/    DeVan D. Ard        
 
March 8, 2019

62

DeVan D. Ard,
Chairman, President, and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
/s/    Charles Trimble Beasley
  
March 8, 2019
Charles Trimble (Trim) Beasley,
Director
 
 
 
 
 
/s/    John Lewis Bourne
  
March 8, 2019
John Lewis (Buddy) Bourne,
Director
 
 
 
 
 
/s/    William R. DeBerry
  
March 8, 2019
William R. DeBerry,
Director
 
 
 
 
 
/s/    J. Dan Dellinger
  
March 8, 2019
J. Dan Dellinger,
Chief Financial Officer
  
 
 
 
 
/s/    Sharon H. Edwards  
  
March 8, 2019
Sharon H. Edwards,
Director  
  
 
 
 
 
/s/    Darrell S. Freeman
 
March 8, 2019
Darrell S. Freeman, Sr.,
Director
  
 
 
  
 
/s/    James Gilbert Hodges     
 
March 8, 2019
  James Gilbert Hodges,
Director
  
 
 
 
 
/s/    Louis E. Holloway        
  
March 8, 2019
Louis E. Holloway,
Director and Chief Operating Officer
  
 
 
 
 
/s/    James R. Kelley     
 
March 8, 2019
James R. Kelley,
Director
  
 
 
 
 
/s/    Don R. Sloan
  
March 8, 2019
Don Richard Sloan
Director
 
 
 
 
 
/s/ Robert E. Daniel
  
March 8, 2019
Robert E. Daniel
Director
 
 
 
 
 
/s/ Rustin A. Vest
  
March 8, 2019
Ruskin A. Vest
Director
 
 

63




64


CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2018 AND 2017 AND

FOR THE THREE PERIOD ENDED DECEMBER 31, 2018
 
 
 
TABLE OF CONTENTS
 


65

Management Report On Internal Control Over Financial Reporting
 
The management of Reliant Bancorp, Inc. and its subsidiaries (collectively referred to as “the Company”) is responsible for the preparation, integrity and fair presentation of published financial statements and all other information presented in this annual report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and, as such, include amounts based on informed judgments and estimates made by management.
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting for financial presentations in conformity with GAAP. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and included those policies and procedures that:
 
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company.
 
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and

•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, or that the degree of compliance with the policies and procedures include in such controls may deteriorate.
 
Management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2018 based on the control criteria established in a report entitled Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, we have concluded that Reliant Bancorp, Inc.’s internal control over financial reporting is effective as of December 31, 2018.
 
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

F-1

logo.jpg
 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Reliant Bancorp, Inc.
 
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Reliant Bancorp, Inc. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Maggart & Associates, P.C.
 
We have served as the Company’s auditor since 2015.
 
Nashville, Tennessee
March 8, 2019

1201 DEMONBREUN STREET ▪ SUITE 1220 ▪ NASHVILLE, TENNESSEE 3720.-3140 ▪ (615) 252-6100 ▪ Fax ▪ (615) 252-6105
www.maggartpc.com

F-2


RELIANT BANCORP, INC.
 
CONSOLIDATED BALANCE SHEETS
 
DECEMBER 31, 2018 AND 2017
 
(Dollar amounts in thousands except per share amounts)
 
 
2018
 
2017
ASSETS
 
 
 
Cash and due from banks
$
34,807

 
$
20,497

Federal funds sold
371

 
171

Total cash and cash equivalents
35,178

 
20,668

Securities available for sale
296,323

 
220,201

Loans, net
1,220,184

 
762,488

Mortgage loans held for sale, net
15,823

 
45,322

Accrued interest receivable
8,214

 
5,744

Premises and equipment, net
22,033

 
9,790

Restricted equity securities, at cost
11,690

 
7,774

Other real estate, net
1,000

 
—

Cash surrender value of life insurance contracts
45,513

 
33,663

Deferred tax assets, net
7,428

 
1,099

Goodwill
43,642

 
11,404

Core deposit intangibles
8,219

 
1,280

Other assets
9,091

 
5,601

 
 
 
 
TOTAL ASSETS
$
1,724,338

 
$
1,125,034

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Deposits
 
 
 
Demand
$
216,937

 
$
131,996

Interest-bearing demand
154,218

 
88,230

Savings and money market deposit accounts
401,308

 
205,230

Time
665,440

 
458,063

Total deposits
1,437,903

 
883,519

Accrued interest payable
1,063

 
305

Subordinated debentures
11,603

 
—

Federal Home Loan Bank advances
57,498

 
96,747

Dividends payable
1,036

 
542

Other liabilities
6,821

 
3,784

 
 
 
 
TOTAL LIABILITIES
1,515,924

 
984,897

 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $1 par value; 10,000,000 shares authorized; no shares issued to date
—

 
—


F-3

Common stock, $1 par value; 30,000,000 shares authorized; 11,530,810 and 9,034,439 shares issued and outstanding at December 31, 2018 and 2017, respectively
11,531

 
9,034

Additional paid-in capital
173,238

 
112,437

Retained earnings
27,329

 
17,189

Accumulated other comprehensive income (loss)
(3,684
)
 
1,477

 
 
 
 
TOTAL STOCKHOLDERS’ EQUITY
208,414

 
140,137

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,724,338

 
$
1,125,034

 
See accompanying notes to consolidated financial statements

F-4

RELIANT BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
 
Year Ended
December 31,
 
2018
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
Interest and fees on loans
$
58,351

 
$
34,176

 
$
31,905

Interest and fees on loans held for sale
1,278

 
868

 
773

Interest on investment securities, taxable
1,836

 
691

 
724

Interest on investment securities, nontaxable
6,605

 
3,904

 
2,211

Federal funds sold and other
1,155

 
519

 
402

 
 
 
 
 
 
TOTAL INTEREST INCOME
69,225

 
40,158

 
36,015

 
 
 
 
 
 
INTEREST EXPENSE
 
 
 
 
 
Deposits
 
 
 
 
 
Demand
366

 
173

 
182

Savings and money market deposit accounts
2,589

 
748

 
632

Time
9,862

 
4,095

 
1,835

Federal Home Loan Bank advances and other
1,855

 
655

 
714

Subordinated debentures
724

 
—

 
—

 
 
 
 
 
 
TOTAL INTEREST EXPENSE
15,396

 
5,671

 
3,363

 
 
 
 
 
 
NET INTEREST INCOME
53,829

 
34,487

 
32,652

 
 
 
 
 
 
PROVISION FOR LOAN LOSSES
1,035

 
1,316

 
968

 
 
 
 
 
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
52,794

 
33,171

 
31,684

 
 
 
 
 
 
NONINTEREST INCOME
 
 
 
 
 
Service charges on deposit accounts
3,419

 
1,251

 
1,239

Gains on mortgage loans sold, net
4,418

 
3,675

 
6,317

Gain on securities transactions, net
43

 
59

 
36

Gain on sale of other real estate
259

 
27

 
301

Gain (loss) on disposal of premises and equipment
13

 
(52
)
 
—

Other
1,494

 
1,050

 
907

 
 
 
 
 
 
TOTAL NONINTEREST INCOME
9,646

 
6,010

 
8,800

 
 
 
 
 
 
NONINTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
27,510

 
18,432

 
18,256


F-5

Occupancy
4,949

 
3,353

 
3,174

Information technology
5,333

 
2,715

 
2,486

Advertising and public relations
600

 
264

 
702

Audit, legal and consulting
2,976

 
1,508

 
1,287

Federal deposit insurance
793

 
399

 
438

Provision for losses on other real estate
—

 
—

 
70

Merger expenses
2,774

 
1,426

 
—

Other operating
5,626

 
2,979

 
3,961

 
 
 
 
 
 
TOTAL NONINTEREST EXPENSE
50,561

 
31,076

 
30,374

 
 
 
 
 
 
INCOME BEFORE PROVISION FOR INCOME TAXES
11,879

 
8,105

 
10,110

 
 
 
 
 
 
INCOME TAX EXPENSE
1,372

 
1,942

 
2,213

 
 
 
 
 
 
CONSOLIDATED NET INCOME
10,507

 
6,163

 
7,897

 
 
 
 
 
 
NONCONTROLLING INTEREST IN NET LOSS OF SUBSIDIARY
3,578

 
1,083

 
1,039

 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
14,085

 
$
7,246

 
$
8,936

 
 
 
 
 
 
Basic net income attributable to common shareholders, per share
$
1.24

 
$
0.89

 
$
1.18

Diluted net income attributable to common shareholders, per share
$
1.23

 
$
0.88

 
$
1.16

 
See accompanying notes to consolidated financial statements


F-6

RELIANT BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
 
 
 
2018
 
2017
 
2016
Consolidated net income
 
$
10,507

 
$
6,163

 
$
7,897

 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities, net of tax of $1,513, $(2,102) and $1,275 for the years ended December 31, 2018, 2017 and 2016, respectively
 
(4,277
)
 
3,384

 
(2,058
)
 
 
 
 
 
 
 
Net unrealized losses on interest rate swap derivatives, net of tax of $301 for the year ended December 31, 2018
 
(852
)
 
—

 
—

 
 
 
 
 
 
 
Reclassification adjustment for gains included in net income, net of tax of $11, $23 and $14 for the years ended December 31, 2018, 2017 and 2016, respectively
 
(32
)
 
(36
)
 
(22
)
 
 
 
 
 
 
 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
 
(5,161
)
 
3,348

 
(2,080
)
 
 
 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
 
$
5,346

 
$
9,511

 
$
5,817

 
See accompanying notes to consolidated financial statements

F-7

RELIANT BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
 
 
 
 
 
 
ADDITIONAL
 
 
 
ACCUMULATED
OTHER
 
 
 
 
 
 
COMMON STOCK
 
PAID-IN
 
RETAINED
 
COMPREHENSIVE
 
NONCONTROLLING
 
 
 
 
SHARES
 
AMOUNT
 
CAPITAL
 
EARNINGS
 
INCOME (LOSS)
 
INTEREST
 
TOTAL
BALANCE- JANUARY 1, 2016
 
7,279,620

 
$
7,280

 
$
84,520

 
$
4,987

 
$
(36
)
 
$
—

 
$
96,751

Stock based compensation expense
 
—

 
—

 
251

 
—

 
—

 
—

 
251

Exercise of stock options
 
476,889

 
477

 
4,295

 
—

 
—

 
—

 
4,772

Restricted stock awards
 
23,800

 
23

 
(23
)
 
—

 
—

 
—

 
—

Restricted stock forfeiture
 
(2,000
)
 
(2
)
 
2

 
—

 
—

 
—

 
—

Noncontrolling interest contributions
 
—

 
—

 
—

 
—

 
—

 
1,039

 
1,039

Cash dividend declared to common shareholders ($0.22 per share)
 
—

 
—

 
—

 
(1,711
)
 
—

 
—

 
(1,711
)
Net income (loss)
 
—

 
—

 
—

 
8,936

 
—

 
(1,039
)
 
7,897

Other comprehensive loss
 
—

 
—

 
—

 
—

 
(2,080
)
 
—

 
(2,080
)
BALANCE- DECEMBER 31, 2016
 
7,778,309

 
7,778

 
89,045

 
12,212

 
(2,116
)
 
—

 
106,919

Stock based compensation expense
 
—

 
—

 
616

 
—

 
—

 
—

 
616

Exercise of stock options
 
72,080

 
72

 
751

 
—

 
—

 
—

 
823

Restricted stock awards
 
50,050

 
50

 
(50
)
 
—

 
—

 
—

 
—

Restricted stock forfeiture
 
(3,000
)
 
(3
)
 
3

 
—

 
—

 
—

 
—

Common stock net of issuance cost of $1,805
 
1,137,000

 
1,137

 
22,072

 
—

 
—

 
—

 
23,209

Noncontrolling interest contributions
 
—

 
—

 
—

 
—

 
—

 
1,083

 
1,083

Cash dividend declared to common shareholders ($0.24 per share)
 
—

 
—

 
—

 
(2,024
)
 
—

 
—

 
(2,024
)
Net income (loss)
 
—

 
—

 
—

 
7,246

 
—

 
(1,083
)
 
6,163

Reclassification of federal income tax rate change
 
—

 
—

 
—

 
(245
)
 
245

 
—

 
—

Other comprehensive income
 
—

 
—

 
—

 
—

 
3,348

 
—

 
3,348

BALANCE- DECEMBER 31, 2017
 
9,034,439

 
9,034

 
112,437

 
17,189

 
1,477

 
—

 
140,137

Stock based compensation expense
 
—

 
—

 
923

 
—

 
—

 
—

 
923


F-8

Exercise of stock options
 
30,001

 
30

 
368

 
—

 
—

 
—

 
398

Restricted stock awards
 
51,710

 
52

 
(52
)
 
—

 
—

 
—

 
—

Restricted stock forfeiture
 
(1,550
)
 
(2
)
 
2

 
—

 
—

 
—

 
—

Conversion shares issued to shareholders' of Community First, Inc.
 
2,416,444

 
2,417

 
59,566

 
—

 
—

 
—

 
61,983

Shares acquired from dissenting shareholder
 
(234
)
 
—

 
(6
)
 
—

 
—

 
—

 
(6
)
Noncontrolling interest contributions
 
—

 
—

 
—

 
—

 
—

 
3,578

 
3,578

Cash dividend declared to common shareholders ($0.33 per share)
 
—

 
—

 
—

 
(3,945
)
 
—

 
—

 
(3,945
)
Net income (loss)
 
—

 
—

 
—

 
14,085

 
—

 
(3,578
)
 
10,507

Other comprehensive loss
 
—

 
—

 
—

 
—

 
(5,161
)
 
—

 
(5,161
)
BALANCE - DECEMBER 31, 2018
 
11,530,810

 
$
11,531

 
$
173,238

—

$
27,329

—

$
(3,684
)
—

$
—

 
$
208,414

 
See accompanying notes to consolidated financial statements


F-9

RELIANT BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
 
2018
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
 
Consolidated net income
$
10,507

 
$
6,163

 
$
7,897

Reclassification of federal income tax rate change
—

 
(245
)
 
—

Adjustments to reconcile consolidated net income to net cash provided by (used in) operating activities
 
 
 
 
 
Provision for loan losses
1,035

 
1,316

 
968

Provision to reflect lower of cost or market value of mortgage loans held for sale
—

 
(160
)
 
160

Deferred income taxes
380

 
504

 
235

Gain (loss) on disposal of premises and equipment
(13
)
 
52

 
—

Depreciation and amortization of premises and equipment
1,697

 
1,017

 
976

Net amortization of securities
3,182

 
2,030

 
1,551

Net realized gains on sales of securities
(43
)
 
(59
)
 
(36
)
Gains on mortgage loans sold, net
(4,418
)
 
(3,675
)
 
(6,317
)
Stock-based compensation expense
923

 
616

 
251

Realization of gain on other real estate
(259
)
 
(27
)
 
(301
)
Provision for losses on other real estate
—

 
—

 
70

Increase in cash surrender value of life insurance contracts
(1,186
)
 
(836
)
 
(750
)
Mortgage loans originated for resale
(141,783
)
 
(157,220
)
 
(158,617
)
Proceeds from sale of mortgage loans
176,610

 
127,564

 
208,036

Other accretion, net
(756
)
 
(377
)
 
(1,331
)
Change in
 
 
 
 
 
Accrued interest receivable
(1,305
)
 
(1,958
)
 
(690
)
Other assets
(372
)
 
4,371

 
(6,580
)
Accrued interest payable
326

 
198

 
52

Other liabilities
(2,260
)
 
403

 
1,501

 
 
 
 
 
 
TOTAL ADJUSTMENTS
31,758

 
(26,241
)
 
39,178

 
 
 
 
 
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
42,265

 
(20,323
)
 
47,075

 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
 
Cash received from merger
33,128

 
—

 
—

Activities in available for sale securities
 
 
 
 
 
Purchases
(106,893
)
 
(95,430
)
 
(59,332
)
Sales
100,737

 
18,688

 
31,782

Maturities, prepayments and calls
12,987

 
6,763

 
9,255

Purchases of restricted equity securities
(2,190
)
 
(641
)
 
(889
)
Loan originations and payments, net
(145,090
)
 
(105,478
)
 
(48,469
)
Purchase of buildings, leasehold improvements, and equipment
(4,342
)
 
(1,766
)
 
(873
)

F-10

Proceeds from sale of other real estate
1,947

 
—

 
1,313

Improvement of other real estate
—

 
—

 
(16
)
Purchase of life insurance contracts
—

 
(8,000
)
 
(4,000
)
 
 
 
 
 
 
NET CASH USED IN INVESTING ACTIVITIES
(109,716
)
 
(185,864
)
 
(71,229
)
 
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
 
Net change in deposits
121,960

 
119,685

 
124,006

Net change in federal funds purchased
—

 
(3,671
)
 
3,671

Net change in advances from Federal Home Loan Bank
(39,195
)
 
64,514

 
(103,418
)
Issuance of common stock
398

 
24,032

 
4,772

Shares acquired from dissenting shareholder
(6
)
 
—

 
—

Noncontrolling interest contributions received
2,255

 
1,245

 
285

Cash dividends paid on common stock
(3,451
)
 
(3,193
)
 
(1,489
)
 
 
 
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
81,961

 
202,612

 
27,827

 
 
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
14,510

 
(3,575
)
 
3,673

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
20,668

 
24,243

 
20,570

CASH AND CASH EQUIVALENTS - END OF PERIOD
$
35,178

 
$
20,668

 
$
24,243

 
See accompanying notes to consolidated financial statements

F-11

RELIANT BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
 
 
2018
 
2017
 
2016
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
 
Cash paid during the period for
 
 
 
 
 
Interest
$
14,638

 
$
5,473

 
$
3,311

Taxes
1,400

 
1,750

 
3,091

 
 
 
 
 
 
Non-cash investing and financing activities
 
 
 
 
 
Unrealized gain (loss) on securities available-for-sale
$
(6,295
)
 
$
5,380

 
$
(3,792
)
Unrealized gain (loss) on derivatives
(690
)
 
47

 
423

Change in due to/from noncontrolling interest
3,578

 
1,083

 
754

Foreclosures transferred from loans to other real estate
1,060

 
—

 
—

Dividends declared, not paid
1,036

 
542

 
1,711

 
See accompanying notes to consolidated financial statements


F-12

RELIANT BANCORP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2018, 2017 AND 2016
 
(Dollar amounts in thousands except per share amounts)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Operations
 
Reliant Bancorp, Inc. began organizational activities in 2005. The Company provides financial services through its offices in Williamson, Robertson, Davidson, Sumner, Rutherford, Maury, Hickman and Hamilton Counties in Tennessee. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential construction loans, commercial loans, installment loans and lines secured by home equity. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets, and consumer assets. Commercial loans are expected to be repaid from cash flow from operations of businesses. On January 1, 2018, Community First, Inc. a community banking organization headquartered in Columbia, Tennessee was merged with and into the Company. See Note 22.
 
Basis of Presentation
 
The accounting and reporting policies of Reliant Bancorp, Inc. conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following is a brief summary of the significant policies.

The consolidated financial statements as of and for the periods presented include the accounts of Reliant Bancorp Inc., Reliant Bank, Community First TRUPS Holding Company, which is wholly owned by Reliant Bancorp Inc., (“TRUPS”), Reliant Investment Holdings, LLC ("Holdings") which is 100% wholly owned by Reliant Bank, and Reliant Mortgage Ventures, LLC ("RMV"), of which Reliant Bank controls 51% of the governance rights. Reliant Bancorp Inc., Reliant Bank, TRUPS, Holdings and RMV, are collectively referred to herein as the “Company”. As described in the notes to our annual consolidated financial statements, all significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("U.S. GAAP") and to general practices in the banking industry.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
 
Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for loan losses, the valuation of other real estate, the valuation of debt and equity securities, the valuation of deferred tax assets and fair values of financial instruments.
 
Concentrations
 
At December 31, 2018, the Company had significant credit exposures to borrowers in real estate. If this industry experiences another economic slowdown and, as a result, the borrowers in this industry are unable to meet the obligations of their existing loan agreements, earnings could be negatively impacted. The Company is concentrated in the Tennessee regional market and the operating results are impacted by the economic conditions of that area.
 

F-13
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Cash and Cash Equivalents
 
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, deposits with other financial institutions with maturities less than 90 days, and federal funds sold. Generally, federal funds sold are purchased and sold for one-day periods. Net cash flows are reported for customer loan and deposit transactions, federal funds sold, and short-term Federal Home Loan Bank borrowings.
 
The Company maintains deposits in excess of the federal insurance amounts with other financial institutions. Management makes deposits only with financial institutions it considers financially sound.
 
Federal funds sold of $371 and $171 at December 31, 2018 and 2017, respectively, were invested in one financial institution. Such funds were unsecured and matured the next business day.
 
Securities
 
The Company classifies its securities in one of two categories: held to maturity and available for sale. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. Securities are classified as available for sale when they might be sold before maturity. The Company had no held to maturity securities at December 31, 2018 and 2017, or in the three year period ended December 31, 2018.
 
Interest income includes purchase premiums and discounts amortized or accreted over the life of the related security as an adjustment to the yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
 
When the fair value of a debt security has declined below the amortized cost at the measurement date, if an entity intends to sell a security or is more likely than not to sell the security before the recovery of the security’s cost basis, the entity must recognize the other-than-temporary impairment (“OTTI”) in earnings. For a debt security with a fair value below the amortized cost at the measurement date where it is more likely than not that an entity will not sell the security before the recovery of its cost basis, but an entity does not expect to recover the entire cost basis of the security, the security is classified as OTTI.
 
The related OTTI loss on the debt security will be recognized in earnings to the extent of the credit losses, with the remaining impairment loss recognized in accumulated other comprehensive income. In estimating OTTI losses, management considers: the length of time and extent that fair value of the security has been less than the cost of the security, the financial condition and near term prospects of the issuer, cash flow, stress testing analysis on securities, when applicable, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. 
 

F-14
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using a straight-line method without anticipating prepayments. This treatment does not materially differ from the level interest yield method. Past due status is determined based on the contractual terms of the note.

The accrual of interest is discontinued when a loan becomes 90 days past due according to the contractual terms of the note unless it is well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. When a loan is placed on non-accrual status, previously accrued and uncollected interest is charged against interest income on loans. When full collection of the remaining book balance is uncertain, interest payments received are applied to the principal balance outstanding. In some cases, when the remaining book balance of the loan is deemed fully collectible, payments are treated as interest income on a cash basis. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
The restructuring of a loan is considered a “troubled debt restructuring” if the borrower is experiencing financial difficulties and the Company has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

Allowance for Loan Losses
 
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using historical loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, current economic conditions (national and local), and other factors such as changes in interest rates, portfolio concentrations, changes in the experience, ability, and depth of the lending function, levels of and trends in charged-off loans, recoveries, past due loans and volume and severity of classified loans. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The entire allowance is available for any loan that, in management’s judgment, should be charged-off.

A loan is impaired when full payment under the loan terms is not expected. All classified loans and loans on non-accrual status are individually evaluated for impairment. Factors considered in determining if a loan is impaired include the borrower’s ability to repay amounts owed, collateral deficiencies, the risk rating of the loan and economic conditions affecting the borrower’s industry, among other things. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value (less estimated costs to sell) of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless the principal amount is deemed fully collectible, in which case interest is recognized on a cash basis. When recognition of interest income on a cash basis is appropriate, the amount of income recognized is limited to what would have been accrued on the remaining principal balance at the contractual rate. Cash payments received over this limit, and not applied to reduce the loans remaining principal balance, are recorded as recoveries of prior charge-offs until these charge-offs have been fully recovered.



F-15
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Mortgage Loans Held for Sale
 
Mortgage loans originated with the intent to sell to third party investors are classified as held for sale. Such loans are carried at the lower of aggregate cost or market value, as determined by pricing on an individual loan basis. These loans are typically marketed to potential investors prior to closing the loan with the borrower. Net unrealized losses, if any, are recorded through a valuation allowance and charged to operations. The valuation allowance of $160 established in the year ended December 31, 2016 was removed in the year ended December, 31, 2017.
 
Transfers of Financial Assets
 
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before maturity.
 
Premises and Equipment
 
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets or the terms of the related lease for leasehold improvements. The range of estimated useful lives for buildings is 30 to 40 years, for leasehold improvements is 3 to 25 years, which correlates with the applicable lease term, and for furniture, fixtures and equipment is 3 to 7 years. Gain or loss on items retired and otherwise disposed of is credited or charged to operations and the cost and related accumulated depreciation are removed from the asset and accumulated depreciation accounts.
 
Expenditures and improvements of premises and equipment are capitalized and those for maintenance and repairs are charged to earnings as incurred.
 
Restricted Equity Securities
 
Each member of the Federal Reserve is required to subscribe to Federal Reserve Bank (“FRB”) stock.
 
The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.
 
These stocks are carried at cost, classified as restricted equity securities, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Other Real Estate
 
Real estate acquired in the settlement of loans is initially recorded at estimated fair value, less estimated cost to sell, if less than the carrying value of the loan when acquired. Based on periodic evaluations by management, the carrying values are reduced by a direct charge to earnings when they exceed net realizable value. Costs relating to the development and improvement of the property are capitalized up to fair value less cost to sell, while holding costs of the property are charged to expense in the period incurred.


F-16
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  
Cash Surrender Value of Life Insurance Contracts
 
The Company is the owner and beneficiary of various life insurance policies on certain key employees. These policies are recorded at their cash surrender values.
 
Impairment of Long-Term Assets
 
Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to fair value, with a corresponding charge to earnings.
 
Goodwill
 
Goodwill represents that excess of the purchase price of over the fair value of assets and liabilities acquired in a 2018 business acquisition (see Note 22) , 2015 business acquisition and a 2009 business acquisition. Goodwill is evaluated for impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired.
 
Loan Commitments and Related Financial Instruments
 
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. 

Derivatives

At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company's intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation ("stand-alone derivative"). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.


 



F-17
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Derivatives, (Continued)

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivate is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is not longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Stock Based Compensation
 
Compensation cost recognized for stock options and restricted stock awards issued to employees is based on the fair value of these awards at the date of grant. A binomial model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period.
 
Additionally, during 2016, the Company elected to adopt the provisions of ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” in advance of the required application date of January 1, 2017. Our financial statements for 2016 are presented as if we adopted ASU 2016-09 on January 1, 2016 on a prospective basis and prior periods have not been restated. ASU 2016-09 requires that all income tax effects related to settlements of share-based payment awards be reported in earnings as an increase (or decrease) to income tax expense. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits recognized in earnings during the award's vesting period. The requirement to report those income tax effects in earnings has been applied to settlements occurring on or after January 1, 2016 and the impact of applying that guidance reduced reported income tax expense by $478, or approximately $0.06 per diluted common share for 2016.

F-18
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes
 
Income tax expense or benefit is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized.
 
Management performs an evaluation of all income tax positions taken or expected to be taken in the course of preparing the Company’s income tax returns to determine whether the income tax positions meet a “more likely than not” standard of being sustained under examination by the applicable taxing authorities. Management has performed its evaluation of all income tax positions taken on all open income tax returns and has determined that there were no positions taken that do not meet the “more likely than not” standard. Penalties and interest relating to income taxes are recognized in income tax expense.
 
The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company’s federal and states income tax returns for years prior to fiscal year 2015 are no longer open to examination. Certain returns from years in which net operating losses have occurred are still open for examination by the tax authorities.
 
Earnings Per Share
 
Earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding plus shares representing the dilutive effect of stock options outstanding.

Retirement Plan
 
The Company has a 401(k) retirement plan covering all employees who elect to participate, subject to certain eligibility requirements. The Plan allows employees to defer up to 100% of their salary, subject to regulatory limitations with the Company matching 100% of the first 6% contributed by the employee. The Company recognizes as expense the amount of matching contributions related to the 401(k) plan. Vesting within the plan is immediate for 100% of deferral and employer contributions.
 
Comprehensive Income
 
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and derivatives. These gains and losses are recognized as a separate component of stockholders’ equity.

Loss Contingencies
 
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements. 

F-19
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Restrictions on Cash
 
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. The Company did not have a reserve balance to maintain at December 31, 2018. At December 31, 2017, the Company's reserve requirement was $2,636.
 
Preferred Shares
 
Preferred shares have rights that can be set when issued as determined by the Board of Directors.
 
Dividend Restriction
 
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Company to shareholders.
 
Advertising Costs
 
Advertising costs are expensed as incurred and totaled $559, $264 and $684 for the years ended December 31, 2018, 2017 and 2016, respectively .

Fair Value Measurements
 
Financial accounting standards relating to fair value measurements establish a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2
Inputs to the valuation methodology include:

•
Quoted prices for similar assets or liabilities in active markets;
•
Quoted prices for identical or similar assets or liabilities in inactive markets;
•
Inputs other than quoted prices that are observable for the asset or liability;
•
Inputs that are derived principally from or corroborated by the observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3
Inputs to the valuation methodology are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

An asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques should maximize the use of observable inputs and minimize the use of unobservable inputs.

F-20
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurements (Continued)
 
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis:
 
Securities available for sale: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
 
The Company obtains fair value measurements for securities available for sale from an independent pricing service. The fair value measurements consider observable data that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, cash flows and reference data, including market research publications, among other things.
 
Interest rate swaps: The fair values of interest rate swaps are determined based on discounted future cash flows.

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis include the following:
 
Impaired loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of expected payments using the loan’s effective rate as the discount rate or recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Mortgage loans held for sale: Bid quotes are presently used for the fair value estimate of mortgage loans held for sale, while previously the Company used a model as developed and performed by an independent entity to value such loans.
 
Other real estate owned: The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company’s valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 
Fair Value of Financial Instruments
 
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 5. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

F-21
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Reclassifications
 
Certain reclassifications have been made in the 2017 and 2016 consolidated financial statements to conform to the 2018 presentation. These reclassifications had no effect on total assets, total liabilities or the results of operations previously reported.

Recent Authoritative Accounting Guidance
 
The following discusses new authoritative accounting guidance and the related impact on the Company.
 
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” implements a common revenue standard that clarifies the principles for recognizing revenue. The principle element of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for the Company on January 1, 2018; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2019. Revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company does not expect these changes to have a significant impact on the consolidated financial statements. The Company continues to evaluate the impact of ASU 2014-09 on other components of non-interest income.

ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 will be effective for us on January 1, 2019 and will not have a significant impact on our financial statements.


F-22
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Authoritative Accounting Guidance, (Continued)

ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 will 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 will be effective for us on January 1, 2020 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. We estimate that the effect of implementing this pronouncement will result in right to use assets of $13,583 and a corresponding liability, using the remaining contractual lease periods. We also estimate the impact on regulatory capital to be a reduction of eight basis points. Management is presently evaluating the planned renewals of existing leases. If management determines to utilize the renewals of leases then the right to use assets and corresponding liability will increase.
 
ASU 2016-05, “Derivatives and Hedging (Topic 815) Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 became effective for the Company on January 1, 2018 and did not have a significant impact on the consolidated financial statements.
 
ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share excludes the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-9 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The Company elected to adopt the provisions of ASU 2016-09 in 2016 in advance of the required application date of January 1, 2017. The adoption of this standard reduced reported income tax expense by $478, or approximately $0.06 per diluted common share, for 2016. The Company did not apply the provisions of this pronouncement retrospectively.
 
ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2021. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. We are currently developing an implementation plan to include assessment of processes, portfolio segmentation, model development, system requirements and the identification of data and resource needs, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of the ASU 2016-13. The adoption of the ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.


F-23
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Authoritative Accounting Guidance, (Continued)

ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2021, with earlier adoption permitted and is not currently expected to have a significant impact on the consolidated financial statements.
 
ASU 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting.” ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 became effective for the Company on January 1, 2018 and did not have a significant impact on the consolidated financial statements.
 
ASU 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” ASU 2017-12 amends the hedge accounting recognition and presentation requirements in ASC 815 to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities to better align the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting. ASU 2017-12 will be effective for us on January 1, 2020 and is not expected to have a significant impact on the consolidated financial statements.

ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income.” Under ASU 2018-02, entities may elect to reclassify certain
income tax effects related to the change in the U.S. statutory federal income tax rate under the Tax Cuts and Jobs Act,
which was enacted on December 22, 2017, from accumulated other comprehensive income to retained earnings. ASU 2018-02 also requires certain accounting policy disclosures. The Company elected to adopt this change in accounting principle in the fourth quarter of 2017, which resulted in a decrease to retained earnings and an increase to accumulated other comprehensive income of $245 in 2017 on the Company’s consolidated statement of changes in stockholders’ equity.

ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our consolidated financial statements. 



F-24
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES
 
The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 were as follows:
 
 
 
December 31, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
U. S. Treasury and other U. S. government agencies
 
$
568

 
$
—

 
$
(14
)
 
$
554

State and municipal
 
232,589
 
879

 
(4,170
)
 
229,298
Corporate bonds
 
3,130
 
—

 
(113
)
 
3,017
Mortgage backed securities
 
32,172
 
34
 
(248
)
 
31,958
Asset backed securities
 
28,635
 
—

 
(639
)
 
27,996
Time deposits
 
3,500

 
—

 
—

 
3,500

 
 
 
 
 
 
 
 
 
Total
 
$
300,594

 
$
913

 
$
(5,184
)
 
$
296,323

 
 
 
December 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
U. S. Treasury and other U. S. government agencies
 
$
586

 
$
—

 
$
(8
)
 
$
578

State and municipal
 
189,576
 
3,081

 
(905
)
 
191,752
Corporate bonds
 
1,500
 
5

 
(13
)
 
1,492
Mortgage backed securities
 
6,262
 
3
 
(96
)
 
6,169
Asset backed securities
 
16,753
 
45

 
(88
)
 
16,710
Time deposits
 
3,500

 
—

 
—

 
3,500

 
 
 
 
 
 
 
 
 
Total
 
$
218,177

 
$
3,134

 
$
(1,110
)
 
$
220,201



F-25
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)
 
There were no held to maturity securities as of December 31, 2018 and 2017.
 
The amortized cost and estimated fair value of available for sale securities at December 31, 2018 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
 
$
3,358

 
$
3,360

Due in one to five years
 
4,807

 
4,763

Due in five to ten years
 
13,576

 
13,376

Due after ten years
 
218,046

 
214,870

Mortgage backed securities
 
32,172

 
31,958

Asset backed securities
 
28,635

 
27,996

 
 
 
 
 
Total
 
$
300,594

 
$
296,323

 
 
The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31, 2018:
 
 
 
Less than 12 months
 
12 months or more
 
Total
 
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury and other U. S. government agencies
 
$
—

 
$
—

 
$
555

 
$
14

 
$
555

 
$
14

State and municipal
 
118,580
 
2,263
 
47,223
 
1,907
 
165,803
 
4,170
Corporate bonds
 
2,526
 
105
 
492
 
8
 
3,018
 
113
Mortgage backed securities
 
17,015
 
99
 
5,397
 
149
 
22,412
 
248
Asset backed securities
 
20,351

 
383

 
7,255

 
256

 
27,606

 
639

 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired
 
$
158,472

 
$
2,850

 
$
60,922

 
$
2,334

 
$
219,394

 
$
5,184

 
 

F-26
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 2 - SECURITIES (CONTINUED)
 
The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31, 2017:
 
 
 
Less than 12 months 
 
12 months or more 
 
Total 
 
 
Estimated
Fair Value 
 
Unrealized
Loss 
 
Estimated
Fair Value 
 
Unrealized
Loss 
 
Estimated
Fair Value 
 
Unrealized
Loss 

 
 
 
 
 
 
 
 
 
 
 
 
U. S. Treasury and other U.S. government agencies  
 
$
86

 
$
1

 
$
491

 
$
7

 
$
577

 
$
8

State and municipal
 
19,899
 
128
 
34,946
 
777
 
54,845
 
905
Corporate bonds
 
—

 
—

 
487
 
13
 
487
 
13
Mortgage backed securities
 
2,412
 
14
 
3,349
 
82
 
5,761
 
96
Asset backed securities
 
8,971

 
73

 
854

 
15

 
9,825

 
88

 
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired
 
$
31,368

 
$
216

 
40,127

 
894

 
$
71,495

 
$
1,110

 
At December 31, 2018, management had the intent and ability to hold all securities in a loss position for the foreseeable future, and the decline in fair value was largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 242 and 120 securities in an unrealized loss position as of December 31, 2018 and 2017, respectively.
 
During the years ended December 31, 2018, 2017 and 2016, gross realized gains on sales of securities were $82, $97 and $359, respectively, and gross realized losses were $39, $38 and $323, respectively.
 
Securities pledged at December 31, 2018 and 2017 had a market value of $70,097 and $78,220, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.
 
At December 31, 2018 and 2017, there were no holdings of securities of any one issuer, other than the U.S. government and it's agencies, in an amount greater than 10% of stockholders’ equity.


F-27
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES
 
Loans at December 31, 2018 and 2017 were comprised as follows:
 
 
 
December 31, 2018
 
December 31, 2017
Commercial, Industrial and Agricultural
 
$
213,850

 
$
138,706

Real Estate
 
 
 
 
    1-4 Family Residential
 
225,863
 
111,932
    1-4 Family HELOC
 
88,112
 
72,017
    Multi-family and Commercial
 
447,840
 
261,044
    Construction, Land Development and Farmland
 
220,801
 
156,452
Consumer
 
20,495
 
17,605
Other
 
14,106
 
14,694
Total
 
1,231,067
 
772,450
Less
 
 
 
 
    Deferred loan fees (costs)
 
(9
)
 
231
    Allowance for possible loan losses
 
10,892

 
9,731
 
 
 
 
 
Loans, net
 
$
1,220,184

 
$
762,488

 
At December 31, 2018 and 2017, loans are recorded net of purchase discounts of $4,525 and $272, respectively.
 
Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 2018:
 
 
 
Commercial Industrial and Agricultural
 
Multi-family and Commercial
Real Estate
 
Construction Land Development and Farmland
 
1-4 Family Residential Real Estate
Beginning balance
 
$
2,538

 
$
3,166

 
$
2,434

 
$
773

Charge-offs
 
(381
)
 
(76
)
 
(215
)
 
(36
)
Recoveries
 
590

 
221

 
44

 
12

Provision
 
(996
)
 
1,118

 
237

 
584

Ending balance
 
$
1,751

 
$
4,429

 
$
2,500

 
$
1,333

 
 
 
1-4 Family HELOC
 
Consumer
 
Other
 
Total
Beginning balance
 
$
595

 
$
183

 
$
42

 
$
9,731

Charge-offs
 
(6
)
 
(26
)
 
(47
)
 
(787
)
Recoveries
 
10

 
34

 
2

 
913

Provision
 
57

 
(7
)
 
42

 
1,035

Ending balance
 
$
656

 
$
184

 
$
39

 
$
10,892

 

F-28
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 2017:
 
 
 
Commercial Industrial and Agricultural
 
Multi-family and Commercial
Real Estate
 
Construction Land Development and Farmland
 
1-4 Family Residential Real Estate
Beginning balance
 
$
2,432

 
$
2,737

 
$
1,786

 
$
1,178

Charge-offs
 
(976
)
 
—

 
(45
)
 
(14
)
Recoveries
 
378

 
—

 
5

 
—

Provision
 
704

 
429

 
688

 
(391
)
Ending balance
 
$
2,538

 
$
3,166

 
$
2,434

 
$
773

 
 
 
1-4 Family HELOC
 
Consumer
 
Other
 
Total
Beginning balance
 
$
704

 
$
208

 
$
37

 
$
9,082

Charge-offs
 
—

 
(36
)
 
—

 
(1,071
)
Recoveries
 
19

 
2

 
—

 
404

Provision
 
(128
)
 
9

 
5

 
1,316

Ending balance
 
$
595

 
$
183

 
$
42

 
$
9,731


Activity in the allowance for loan losses by portfolio segment was as follows for the year ended December 31, 2016:
 
 
 
Commercial Industrial and Agricultural
 
Multi-family and Commercial
Real Estate
 
Construction Land Development and Farmland
 
1-4 Family Residential Real Estate
Beginning balance
 
$
2,198

 
$
2,591

 
$
894

 
$
1,214

Charge-offs
 
(84
)
 
—

 
—

 
(25
)
Recoveries
 
323

 
18

 
6

 
66

Provision
 
(5
)
 
128

 
886

 
(77
)
Ending balance
 
$
2,432

 
$
2,737

 
$
1,786

 
$
1,178

 
 
 
1-4 Family HELOC
 
Consumer
 
Other
 
Total
Beginning balance
 
$
699

 
$
192

 
$
35

 
$
7,823

Charge-offs
 
—

 
—

 
(36
)
 
(145
)
Recoveries
 
11

 
12

 
—

 
436

Provision
 
(6
)
 
4

 
38

 
968

Ending balance
 
$
704

 
$
208

 
$
37

 
$
9,082


 

F-29
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
 
The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2018 was as follows:
 
 
 
Commercial Industrial and Agricultural
 
Multi-family and Commercial
Real Estate
 
Construction Land Development and Farmland
 
1-4 Family Residential Real Estate
Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
38

 
$
—

 
$
17

 
$
—

Acquired with credit impairment
 
—

 
—

 
—

 
—

Collectively evaluated for impairment
 
1,713
 
4,429
 
2,483
 
1,333
Total
 
$
1,751

 
$
4,429

 
$
2,500

 
$
1,333

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
978

 
$
1,160

 
$
1,780

 
$
1,246

Acquired with credit impairment
 
40

 
232

 
1,751

 
262

Collectively evaluated for impairment
 
212,832
 
446,448
 
217,270
 
224,355
Total
 
$
213,850

 
$
447,840

 
$
220,801

 
$
225,863

 
 
 
1-4 Family HELOC
 
Consumer
 
Other
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
—

 
$
—

 
$
—

 
$
55

Acquired with credit impairment
 
—

 
—

 
—

 
—

Collectively evaluated for impairment
 
656
 
184
 
39
 
10,837
Total
 
$
656

 
$
184

 
$
39

 
$
10,892

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
—

 
$
12

 
$
—

 
$
5,176

Acquired with credit impairment
 
—

 
11

 
—

 
2,296

Collectively evaluated for impairment
 
88,112
 
20,472
 
14,106
 
1,223,595
Total
 
$
88,112

 
$
20,495

 
$
14,106

 
$
1,231,067

 

F-30
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2017 was as follows:
 
 
 
Commercial Industrial and Agricultural
 
Multi-family and Commercial
Real Estate
 
Construction Land Development and Farmland
 
1-4 Family Residential Real Estate
Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
606

 
$
—

 
$
57

 
$
—

Acquired with credit impairment
 
2

 
—

 
2

 
—

Collectively evaluated for impairment
 
1,930
 
3,166
 
2,375
 
773
Total
 
$
2,538

 
$
3,166

 
$
2,434

 
$
773

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
3,649

 
$
1,921

 
$
3,800

 
$
2,114

Acquired with credit impairment
 
276

 
1,157

 
1,436

 
45

Collectively evaluated for impairment
 
134,781
 
257,966
 
151,216
 
109,773
Total
 
$
138,706

 
$
261,044

 
$
156,452

 
$
111,932

 
 
 
1-4 Family HELOC
 
Consumer
 
Other
 
Total
Allowance for loan losses
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
—

 
$
—

 
$
—

 
$
663

Acquired with credit impairment
 
—

 
—

 
—

 
4

Collectively evaluated for impairment
 
595
 
183
 
42
 
9,064
Total
 
$
595

 
$
183

 
$
42

 
$
9,731

Loans
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
90

 
$
—

 
$
—

 
$
11,574

Acquired with credit impairment
 
—

 
—

 
—

 
2,914

Collectively evaluated for impairment
 
71,927
 
17,605
 
14,694
 
757,962
Total
 
$
72,017

 
$
17,605

 
$
14,694

 
$
772,450


Risk characteristics relevant to each portfolio segment are as follows:
 
Commercial and industrial: The commercial and industrial loan portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers’ business operations. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 

F-31
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Multi-family and commercial real estate: Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.
 
Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. The Company also utilizes third-party experts to provide insight and guidance about economic conditions and trends affecting the market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Non-owner occupied commercial real estate loans are loans secured by multifamily and commercial properties where the primary source of repayment is derived from rental income associated with the property (that is, loans for which 50 percent or more of the source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the sale, refinancing, or permanent financing of the property. These loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail properties. Owner-occupied commercial real estate loans are loans where the primary source of repayment is the cash flow from the ongoing operations and business activities conducted by the party, or affiliate of the party, who owns the property.

At December 31, 2018, approximately 27% of the outstanding principal balance of the Company’s commercial real estate loan portfolio was secured by owner-occupied properties.
 
Construction and land development: Loans for non-owner-occupied real estate construction or land development are generally repaid through cash flow related to the operation, sale or refinance of the property. The Company also finances construction loans for owner-occupied properties. A portion of the Company’s construction and land portfolio segment is comprised of loans secured by residential product types (residential land and single-family construction). With respect to construction loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction and land development loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, market sales activity, and financial analysis of the developers and property owners.
 
Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
 

F-32
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

1-4 family residential real estate: Residential real estate loans represent loans to consumers or investors to finance a residence. These loans are typically financed on 15 to 30 year amortization terms, but generally with shorter maturities of 5 to 15 years. Many of these loans are extended to borrowers to finance their primary or secondary residence. Loans to an investor secured by a 1-4 family residence will be repaid from either the rental income from the property or from the sale of the property. This loan segment also includes closed-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home. Loans in this portfolio segment are underwritten and approved based on a number of credit quality criteria including limits on maximum Loan-to-Value (LTV), minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values influence the depth of potential losses in this portfolio segment.

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values influence the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.
 
Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle, or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
 
Non-accrual loans by class of loan were as follows:
 
 
 
December 31, 2018
 
December 31, 2017
Commercial, Industrial and Agricultural
 
$
279

 
$
2,110

Multi-family and Commercial Real Estate
 
—

 
—

Construction, Land Development and Farmland
 
1,294

 
2,518

1-4 Family Residential Real Estate
 
2,556

 
533

1-4 Family HELOC
 
—

 
—

Consumer
 
65

 
—

 
 
 
 
 
Total
 
$
4,194

 
$
5,161

 
Performing non-accrual loans totaled $2,010 and $1,096 at December 31, 2018 and 2017, respectively.

F-33
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
 
Individually impaired loans by class of loans were as follows at December 31, 2018:
 
 
 
Unpaid
Principal
Balance
 
Recorded Investment with no Allowance Recorded
 
Recorded Investment with Allowance Recorded
 
Total Recorded
Investment
 
Related
Allowance
Commercial, Industrial and Agricultural
 
$
1,247

 
$
765

 
$
253

 
$
1,018

 
$
38

Multi-family and Commercial Real Estate
 
1,670

 
1,392

 
—

 
1,392

 
—

Construction, Land Development and Farmland
 
3,920

 
3,359

 
172

 
3,531

 
17

1-4 Family Residential Real Estate
 
2,243

 
1,508

 
—

 
1,508

 
—

1-4 Family HELOC
 
—

 
—

 
—

 
—

 
—

Consumer
 
29

 
23

 
—

 
23

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
9,109

 
$
7,047

 
$
425

 
$
7,472

 
$
55

 
Individually impaired loans by class of loans were as follows at December 31, 2017:
 
 
 
Unpaid
Principal
Balance
 
Recorded Investment with no Allowance Recorded
 
Recorded Investment with Allowance Recorded
 
Total Recorded
Investment
 
Related
Allowance
Commercial, Industrial and Agricultural
 
$
4,398

 
$
2,959

 
$
966

 
$
3,925

 
$
608

Multi-family and Commercial Real Estate
 
3,427

 
3,078

 
—

 
3,078

 
—

Construction, Land Development and Farmland
 
5,317

 
3,249

 
1,987

 
5,236

 
59

1-4 Family Residential Real Estate
 
2,857

 
2,159

 
—

 
2,159

 
—

1-4 Family HELOC
 
90

 
90

 
—

 
90

 
—

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
16,089

 
$
11,535

 
$
2,953

 
$
14,488

 
$
667

 

F-34
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Individually impaired loans by class of loans were as follows at December 31, 2016:
 
 
 
Unpaid
Principal
Balance
 
Recorded Investment with no Allowance Recorded
 
Recorded Investment with Allowance Recorded
 
Total Recorded
Investment
 
Related
Allowance
Commercial, Industrial and Agricultural
 
$
6,383

 
$
3,924

 
$
1,780

 
$
5,704

 
$
747

Multi-family and Commercial Real Estate
 
5,666

 
2,914

 
1,974

 
4,888

 
6

Construction, Land Development and Farmland
 
4,124

 
3,854

 
171

 
4,025

 
17

1-4 Family Residential Real Estate
 
2,422

 
2,035

 
27

 
2,062

 
27

1-4 Family HELOC
 
2,075

 
1,178

 
317

 
1,495

 
62

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
20,670

 
$
13,905

 
$
4,269

 
$
18,174

 
$
859


Interest income recognized on impaired loans totaled $583, $703 and $848 for the years ended December 31, 2018, 2017 and 2016, respectively.
 
The average recorded investment in impaired loans for the years ended December 31, 2018, 2017 and 2016, was as follows:
 
 
 
2018
 
2017
 
2016
Commercial, Industrial and Agricultural
 
$
2,333

 
$
5,225

 
$
6,055

Multi-family and Commercial Real Estate
 
2,366

 
4,138

 
5,837

Construction, Land Development and Farmland
 
4,571

 
4,502

 
3,243

1-4 Family Residential Real Estate
 
2,468

 
2,212

 
2,715

1-4 Family HELOC
 
72

 
784

 
1,854

Consumer
 
62

 
—

 
—

Total
 
$
11,872

 
$
16,861

 
$
19,704

 
The Company utilizes a risk grading system to monitor the credit quality of the Company’s commercial loan portfolio which consists of commercial and industrial, commercial real estate and construction loans. Loans are graded on a scale of 1 to 9. Grades 1 - 5 are pass credits, grade 6 is special mention, grade 7 is substandard, grade 8 is doubtful and grade 9 is loss. A description of the risk grades are as follows:
 
Grade 1 - Minimal Risk (Pass)
 
This grade includes loans to borrowers with a strong financial position and history of profits and cash flows sufficient to service the debt. These borrowers have well defined sources of primary/secondary repayment, conservatively leveraged balance sheets and the ability to access a wide range of financing alternatives. Collateral securing these loans is negotiable, of sufficient value and in possession of the Company. Risk of loss is unlikely.

F-35
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Grade 2 - High Quality (Pass)
 
This grade includes loans to borrowers with a strong financial condition reflecting dependable net profits and cash flows. The borrower has verifiable liquid net worth providing above average asset protection. An identifiable market exits for the collateral. Risk of loss is unlikely.

Grade 3 - Above Average (Pass)
 
This grade includes loans to borrowers with a balance sheet that reflects a comfortable degree of leverage and liquidity. Borrowers are profitable and have a sustained record of servicing debt. An identifiable market exits for the collateral, but liquidation could take up to one year. Risk of loss is unlikely.
 
Grade 4 - Average (Pass)
 
This grade includes loans to borrowers with a financial condition that is satisfactory and comparable to industry standards. The borrower has verifiable net worth, providing over time, average asset protection. Borrower cash flows are sufficient to satisfy debt service requirements. Risk of loss is below average.
 
Grade 5 - Acceptable (Management Attention) (Pass)
 
This grade includes loans to borrowers whose loans are performing, but sources of repayment are not documented by the current credit analysis. There are some declining trends in margins, ratios and/or cash flow. Guarantor(s) have strong net worth(s), but assets may be concentrated in real estate or other illiquid investments. Risk of loss is average.
 
Grade 6 - Special Mention
 
Special mention assets have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. The special mention rating is designed to identify a specific level of risk and concern about asset quality. Although a special mention asset has a higher probability of default than a pass asset, its default is not imminent.

Grade 7 - Substandard
 
A ‘‘substandard’’ extension of credit is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Extensions of credit so classified should have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard credits, does not have to exist in individual extensions of credit classified as substandard. Substandard assets have a high probability of payment default, or they have other well-defined weaknesses. They require supervision that is more intensive by Company management. Substandard assets are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigation.
 

F-36
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Grade 8 - Doubtful
 
An extension of credit classified ‘‘doubtful’’ has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans. Generally, the doubtful classification should not extend for a long period of time because in most cases the pending factors or events that warranted the doubtful classification should be resolved either positively or negatively in a reasonable period of time.
 
Grade 9 - Loss
 
Extensions of credit classified ‘‘loss’’ are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Amounts classified loss should be promptly charged off. The Company will not attempt long term recoveries while the credit remains on the Company’s books. Losses should be taken in the period in which they surface as uncollectible. With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest.

Consumer purpose loans are initially assigned a default loan grade of 99 (Pass) and are risk graded (Grade 6, 7, or 8) according to delinquency status when applicable.
 
Credit quality indicators by class of loan were as follows at December 31, 2018:
 
 
 
Pass
 
Special Mention
 
Substandard
 
Total
Commercial, Industrial and Agricultural
 
$
212,761

 
$
—

 
$
1,089

 
$
213,850

1-4 Family Residential Real Estate
 
221,546

 
1,125

 
3,192

 
225,863

1-4 Family HELOC
 
88,112

 
—

 
—

 
88,112

Multi-family and Commercial Real Estate
 
442,127

 
3,135

 
2,578

 
447,840

Construction, Land Development and Farmland
 
218,053

 
579

 
2,169

 
220,801

Consumer
 
20,236

 
—

 
259

 
20,495

Other
 
14,106

 
—

 
—

 
14,106

Total
 
$
1,216,941

 
$
4,839

 
$
9,287

 
$
1,231,067

 

F-37
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Credit quality indicators by class of loan were as follows at December 31, 2017:
 
 
 
Pass
 
Special
Mention
 
Substandard
 
Total
Commercial, Industrial and Agricultural
 
$
135,833

 
$
5

 
$
2,868

 
$
138,706

1-4 Family Residential Real Estate
 
108,426

 
1,392

 
2,114

 
111,932

1-4 Family HELOC
 
71,927

 
—

 
90

 
72,017

Multi-family and Commercial Real Estate
 
259,123

 
—

 
1,921

 
261,044

Construction, Land Development and Farmland
 
149,886

 
2,998

 
3,568

 
156,452

Consumer
 
17,605

 
—

 
—

 
17,605

Other
 
14,694

 
—

 
—

 
14,694

Total
 
$
757,494

 
$
4,395

 
$
10,561

 
$
772,450


Past due loan balances by class of loan were as follows at December 31, 2018:
 
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
Total
Past Due
 
Current
 
Total Loans
Commercial, Industrial and Agricultural
 
$
22

 
$
153

 
$
279

 
$
454

 
$
213,396

 
$
213,850

1-4 Family Residential Real Estate
 
1,104

 
335

 
1,203

 
2,642

 
223,221

 
225,863

1-4 Family HELOC
 
50

 
—

 
—

 
50

 
88,062

 
88,112

Multi-family and Commercial Real Estate
 
—

 
104

 
—

 
104

 
447,736

 
447,840

Construction, Land Development and Farmland
 
214

 
—

 
171

 
385

 
220,416

 
220,801

Consumer
 
11

 
30

 
46

 
87

 
20,408

 
20,495

Other
 
—

 
—

 
—

 
—

 
14,106

 
14,106

Total
 
$
1,401

 
$
622

 
$
1,699

 
$
3,722

 
$
1,227,345

 
$
1,231,067

 

F-38
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

Past due loan balances by class of loan were as follows at December 31, 2017:
 
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
Total
Past Due
 
Current
 
Total Loans
Commercial, Industrial and Agricultural
 
$
7

 
$
—

 
$
1,548

 
$
1,555

 
$
137,151

 
$
138,706

1-4 Family Residential Real Estate
 
617

 
—

 
—

 
617

 
111,315

 
111,932

1-4 Family HELOC
 
—

 
7

 
—

 
7

 
72,010

 
72,017

Multi-family and Commercial Real Estate
 
1,254

 
—

 
—

 
1,254

 
259,790

 
261,044

Construction, Land Development and Farmland
 
265

 
444

 
2,073

 
2,782

 
153,670

 
156,452

Consumer
 
14

 
—

 
—

 
14

 
17,591

 
17,605

Other
 
—

 
—

 
—

 
—

 
14,694

 
14,694

Total
 
$
2,157

 
$
451

 
$
3,621

 
$
6,229

 
$
766,221

 
$
772,450

 
At December 31, 2018, there were loans of $6 past due 90 days or more and still accruing interest. There were no loans past due 90 days or more and still accruing interest at December 31, 2017.

Troubled debt restructurings occurring during the year ended December 31, 2018 by class of loan were as follows:
 
 
 
Number of
Contracts
 
Pre-Modification
Oustanding
Recorded
Investments
 
Post-Modification
Oustanding
Recorded
Investments
1-4 Family Residential Estate
 
1

 
$
1,254

 
$
1,254

 Multi-family and Commercial Real Estate
 
1

 
661

 
585

Total
 
2

 
$
1,915

 
$
1,839

 
Troubled debt restructurings occurring during the year ended December 31, 2017 by class of loan were as follows:
 
 
 
Number of
Contracts
 
Pre-Modification
Oustanding
Recorded
Investments
 
Post-Modification
Oustanding
Recorded
Investments
Construction, Land Development and Farmland
 
2

 
$
2,110

 
$
1,640

Total
 
2

 
$
2,110

 
$
1,640

 
Troubled debt restructurings occurring during the year ended December 31, 2016 by class of loan were as follows:
 
 
 
Number of Contracts
 
Pre-Modification
Oustanding
Recorded
Investments
 
Post-Modification
Oustanding
Recorded
Investments
1-4 Family Residential Estate
 
1

 
$
1,712

 
$
1,712

Total
 
1

 
$
1,712

 
$
1,712


F-39
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

During the year ended December 31, 2018, one modification occurred that consisted of an interest only monthly payment restructure and had no effect on the allowance for loan losses or interested income. The other modification was a restructure of five loans, including purchased credit impaired loans, in which a charge off occurred of $76. The 1-4 Family Residential loan with a related balance of $1,254 was paid during 2018. During the year ended December 31, 2017, two loans were modified in a troubled debt restructuring. One modification consisted of a partial charge off totaling $470, and a payment restructure with the modification having no effect on interest income for the remaining balance of $308 at December 31, 2017. The other modification consisted of a temporary suspension of required monthly payments of a loan with a balance of $108 at December 31, 2017 and had no effect on the allowance for loan losses or interest income. There were no charge offs resulting from the modification during the year ended December 31, 2016. The modification consisted of changes in the amortization terms of the loans and payment modifications. The modification had no effect on the allowance for loan losses and interest income was not significantly affected.

There were no subsequent defaults on loans modified in troubled debt restructurings during the years ended December 31, 2018, 2017 and 2016.

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that not all contractually required payments would be collected. The carrying amount of those loans was as follows at December 31, 2018 and 2017, respectively:
 
 
 
2018
 
2017
Commercial, Industrial and Agricultural
 
$
63

 
$
298

Multi-family and Commercial Real Estate
 
233

 
1,217

Construction, Land Development and Farmland
 
1,958

 
1,508

1-4 Family Residential Real Estate
 
324

 
47

1-4 Family HELOC
 
—

 
—

Consumer
 
18

 
—

Total outstanding balance
 
2,596

 
3,070

Less remaining purchase discount
 
300

 
156

Allowance for loan losses
 
—

 
4

Carrying amount, net of allowance
 
$
2,296

 
$
2,910

 
During the the year ended December 31, 2018, loans with non-accretable purchase discounts totaling $146 were paid in full resulting in the recognition of the discounts in interest income. During the year ended December 31, 2017, a loan with non-accretable purchase discount totaling $354 was paid in full resulting in the recognition of the discounts in interest income. During the year ended December 31, 2016, a loan with non-accretable purchase discount totaling $708 was paid in full resulting in the recognition of the discount in interest income.
 
Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the years ended December 31, 2018, 2017 and 2016:
 
 
2018
 
2017
 
2016
Balance at January 1,
$
—

 
$
87

 
$
233

New loans purchased
260

 
—

 
—

Loan charge offs
(104
)
 
—

 
—

Accretion income
(46
)
 
(87
)
 
(146
)
Balance at December 31,
$
110

 
$
—

 
$
87

 

F-40
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)

The Company decreased the allowance for loan losses on purchased credit impaired loans by $4, $2 and $241 during the years ended December 31, 2018, 2017 and 2016, respectively.

In the normal course of business, the Company will enter into various credit arrangements with its executive officers, directors and their affiliates. These arrangements generally take the form of commercial lines of credit, personal lines of credit, mortgage loans, term loans or revolving arrangements secured by personal residences. An analysis of the activity with respect to loans to related parties for the years ended December 31, 2018, 2017 and 2016, is as follows:
 
 
 
2018
 
2017
 
2016
Balance - January 1,
 
$
8,581

 
$
11,935

 
$
10,484

New loans during the year
 
919

 
4,356

 
4,442

Repayments during the year
 
(2,106
)
 
(7,710
)
 
(2,991
)
 
 
 
 
 
 
 
Balance - December 31,
 
$
7,394

 
$
8,581

 
$
11,935

 
During the three year period ended December 31, 2018, none of these loans were restructured or charged off.
 

F-41
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)


NOTE 4 - OTHER REAL ESTATE

Other real estate activity for the years ended December 31, 2018, 2017 and 2016, was as follows:

 
2018
 
2017
 
2016
Beginning balance
$
—

 
$
—

 
$
1,149

Loans acquired in merger
1,650

 
—

 
—

Loans transferred to other real estate
1,060

 
—

 
—

Allowance to lower of cost or market
—

 
—

 
(70
)
Sales of other real estate
(1,710
)
 
—

 
(1,079
)
End of year
$
1,000

 
$
—

 
$
—


Activity in the valuation allowance for the years ended December 31, 2018, 2017 and 2016, was as follows:

 
2018
 
2017
 
2016
Beginning balance
$
—

 
$
—

 
$
—

Provisions/(recoveries) charged/(credited) to expense
—

 
—

 
70

Reductions from sales of other real estate
—

 
—

 
(70
)
Direct write-downs
—

 
—

 
—

End of year
$
—

 
$
—

 
$
—


Expenses related to foreclosed assets for the years ended December 31, 2018, 2017 and 2016, include:

 
2018
 
2017
 
2016
Net gain on sales
$
(259
)
 
$
(27
)
 
$
(301
)
Provision for unrealized losses
—

 
—

 
70

Operating expenses, net of rental income
50

 
7

 
22

Total
$
(209
)
 
$
(20
)
 
$
(209
)

In connection with the merger with Community First, the Company acquired three real estate parcels. The Company valued the properties at their estimated fair values less costs to sale which totaled $1,650.

At December 31, 2018, there was a 1-4 Family Residential loan in the process of foreclosure with a related balance of $1,048.



F-42
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES
 
The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of December 31, 2018 and 2017:
 
 
 
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
U. S. Treasury and other U. S. government agencies
 
$
554

 
$
—

 
$
554

 
$
—

State and municipal
 
229,298

 
—

 
229,298

 
—

Corporate bonds
 
3,017

 
—

 
3,017

 
—

Mortgage backed securities
 
31,958

 
—

 
31,958

 
—

Asset backed securities
 
27,996

 
—

 
27,996

 
—

Time deposits
 
3,500

 
3,500

 
—

 
—

Interest rate swap
 
467

 
—

 
467

 
—

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Interest rate swap
 
$
1,183

 
$
—

 
$
1,183

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
U. S. Treasury and other U. S. government agencies
 
$
578

 
$
—

 
$
578

 
$
—

State and municipal
 
191,752

 
—

 
191,752

 
—

Corporate bonds
 
1,492

 
—

 
1,492

 
—

Mortgage backed securities
 
6,169

 
—

 
6,169

 
—

Asset backed securities
 
16,710

 
—

 
16,710

 
—

Time deposits
 
3,500

 
3,500

 
—

 
—

Interest rate swap
 
155

 
—

 
155

 
—

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Interest rate swap
 
$
180

 
$
—

 
$
180

 
$
—



F-43
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a nonrecurring basis, by level within the fair value hierarchy, as of December 31, 2018 and 2017:
 
 
 
Fair Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
December 31, 2018
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Impaired loans
 
$
370

 
$
—

 
$
—

 
$
370

Other real estate owned
 
1,000

 
—

 
—

 
1,000

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Impaired loans
 
$
2,286

 
$
—

 
$
—

 
$
2,286

 
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at December 31, 2018 and 2017:
 
 
Valuation
 Techniques (1)
Significant Unobservable Inputs
Range
(Weighted Average)
Impaired loans
Appraisal
Estimated costs to sell
10%
Other real estate owned
Appraisal
Estimated costs to sell
10%
 
(1)
The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent. Estimated cash flows change and appraised values of the assets or collateral underlying the loans will be sensitive to changes.


F-44
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

Carrying amounts and estimated fair values of financial instruments, by level within the fair value hierarchy, at December 31, 2018 were as follows:
 
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
34,807

 
$
34,807

 
$
34,807

 
$
—

 
$
—

Federal funds sold
 
371

 
371

 
—

 
371

 
—

Loans, net
 
1,220,184

 
1,206,574

 
—

 
—

 
1,206,574

Mortgage loans held for sale
 
15,823

 
15,871

 
—

 
15,871

 
—

Accrued interest receivable
 
8,214

 
8,214

 
—

 
8,214

 
—

Restricted equity securities
 
11,690

 
11,690

 
—

 
11,690

 
—

Financial liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
1,437,903

 
$
1,434,652

 
$
—

 
$
—

 
$
1,434,652

Accrued interest payable
 
1,063

 
1,063

 
—

 
1,063

 
—

Subordinate debentures
 
11,603

 
11,522

 
—

 
—

 
11,522

Federal Home Loan Bank advances
 
57,498

 
57,434

 
—

 
—

 
57,434

 
Carrying amounts and estimated fair values of financial instruments, by level within the fair value hierarchy, at December 31, 2017 were as follows:
 
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial assets
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
20,497

 
$
20,497

 
$
20,497

 
$
—

 
$
—

Federal funds sold
 
171

 
171

 
—

 
171

 
—

Loans, net
 
762,488

 
762,574

 
—

 
—

 
762,574

Mortgage loans held for sale
 
45,322

 
46,467

 
—

 
46,467

 
—

Accrued interest receivable
 
5,744

 
5,744

 
—

 
5,744

 
—

Restricted equity securities
 
7,774

 
7,774

 
—

 
7,774

 
—

Financial liabilities
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
883,519

 
$
882,533

 
$
—

 
$
—

 
$
882,533

Accrued interest payable
 
305

 
305

 
—

 
305

 
—

Federal Home Loan Bank advances
 
96,747

 
96,754

 
—

 
—

 
96,754


F-45
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 5 - FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)
 
The methods and assumptions used to estimate fair value are described as follows:
 
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, restricted equity securities, demand deposits, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not considered material.
 
NOTE 6 - PREMISES AND EQUIPMENT
 
The detail of premises and equipment at December 31, 2018 and 2017 is as follows:
 
 
 
2018
 
2017
Land
 
$
6,049

 
$
1,211

Buildings
 
8,951

 
4,717

Construction in progress
 
—

 
284

Leasehold improvements
 
7,551

 
4,727

Furniture, fixtures and equipment
 
10,311

 
8,145

 
 
32,862

 
19,084

Less: accumulated depreciation
 
(10,829
)
 
(9,294
)
 
 
 
 
 
 
 
$
22,033

 
$
9,790

 
Depreciation and amortization expense was $1,697, $1,017 and $976 for the years ended December 31, 2018, 2017 and 2016, respectively.
 
NOTE 7 - RESTRICTED EQUITY SECURITIES
 
The Company owned the following restricted equity securities as of December 31, 2018 and 2017:
 
 
 
2018
 
2017
Federal Reserve Bank
 
$
5,735

 
$
3,546

Federal Home Loan Bank
 
5,955

 
4,228

 
 
 
 
 
Total
 
$
11,690

 
$
7,774



F-46
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 8 - GOODWILL AND CORE DEPOSIT INTANGIBLES
 
The following presents the balances as of December 31, 2018, and 2017, of intangible assets acquired in business acquisitions:
 
 
 
2018
 
2017
Goodwill
 
$
43,642

 
$
11,404

 
 
 
 
 
Amortized intangible assets:
 
 
 
 
    Core deposit intangibles
 
$
10,111

 
$
2,946

    Less accumulated amortization
 
(1,892
)
 
(1,666
)
 
 
$
8,219

 
$
1,280


Amortization expense was $949, $302 and $356 for the years ended December 31, 2018, 2017 and 2016, respectively.
 
Estimated future amortization expense by year as of December 31, 2018 is as follows:
 
2019
$
949

2020
949

2021
949

2022
949

2023
865

Thereafter
3,558

Total
$
8,219

 
NOTE 9 - DEPOSITS
 
Contractual maturities of time deposit accounts for the next five years at December 31, 2018 are as follows:

 
2019
$
588,815

2020
49,259

2021
9,934

2022
8,174

2023
9,258

 Total
$
665,440

 
The aggregate amount of overdrafts reclassified to loans receivable was $400 and $118 at December 31, 2018 and 2017, respectively.
 
At December 31, 2018 and 2017, time deposits in excess of $250 totaled $330,736 and $264,814 respectively.
 
Deposits from principal officers, directors, and their affiliates at December 31, 2018 and 2017 were $8,376 and $14,280, respectively.
 

F-47
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
 
At December 31, advances from the Federal Home Loan Bank were as follows: 
 
 
2018
 
2017
Maturities January 2019 through March 2024, fixed rates ranging from 1.22% to 2.86% ($54,000 is due in the year ending December 31, 2019)
 
$
57,498

 
$
96,747

 
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. At December 31, 2018, there was $4,407 of advances amortizing on a monthly basis. The weighted average rate of the total borrowings at December 31, 2018 and 2017 was 2.42% and 1.54%, respectively. The weighted average interest rate of the short-term borrowings outstanding at December 31, 2018 and 2017 was 2.46% and 1.43%, respectively. The advances were collateralized by $597,646 and $380,111 of real estate loans at December 31, 2018 and 2017, respectively. The Company’s additional borrowing capacity was $96,082 and $5,924 at December 31, 2018 and 2017, respectively.

Required future principal payments on Federal Home Loan Bank borrowings are as follows:
 
2019
$
53,857

2020
721

2021
963

2022
612

2023
1,117

Thereafter
228

Total
$
57,498

 
 
NOTE 11 - SUBORDINATED DEBENTURES

In 2002, Community First, Inc. issued $3,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a private offering of trust preferred securities. The securities mature on December 31, 2032; however, the Company can currently repay the securities at any time without penalty, subject to approval from the Federal Reserve Bank ("FRB"). The subordinated debentures bear interest at a floating rate equal to the New York Prime rate plus fifty basis points.The interest rate on the subordinated debentures as of December 31, 2018 was 6.00%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to twenty consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital (with certain limitations applicable) for regulatory capital purposes.

In 2005, Community First, Inc.issued $5,000 of floating rate mandatory redeemable subordinated debentures through a special purpose entity as part of a pool offering of trust preferred securities. These securities mature on September 15, 2035, however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The subordinated debentures bear interest at a floating rate equal to the three month London Interbank Offered Rate, ("LIBOR") plus 1.50%. The interest rate on the subordinated debentures as of December 31, 2018 was 4.288%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the debentures for up to twenty consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet but count as Tier 1 capital for regulatory purposes.


F-48
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 11 - SUBORDINATED DEBENTURES (CONTINUED)

In 2007, Community First, Inc. issued $15,000 of redeemable subordinated debentures through a special purpose entity as part of a pooled offering of trust preferred securities. These subordinated debentures mature in 2037; however, the Company can currently repay the securities at any time without penalty, subject to approval from the FRB. The interest rate on the subordinated debentures was 7.96% until December 15, 2012, and thereafter the subordinated debentures bear interest at a floating rate equal to the three month LIBOR plus 3.0%. At December 31, 2018, the interest rate was 5.788%. The Company has the right from time to time, without causing an event of default, to defer payments of interest on the junior debentures for up to twenty consecutive quarterly periods. These debentures are presented in liabilities on the balance sheet. On December 20, 2016, TRUPS acquired $10,000 in face amount of trust preferred capital securities issued by Community First Statutory Trust II. These capital securities were purchased from an unaffiliated investor and remain outstanding; however, the securities and the underlying subordinated debentures are eliminated in the Company's consolidated financial statements,

The portion of the subordinated debentures qualifying as Tier 1 capital is limited to 25% of total Tier 1 capital. Subordinated
debentures in excess of the Tier 1 capital limitation generally qualify as Tier 2 capital. Under the Dodd-Frank Act and the federal regulations issued implementing Basel III, these subordinated debentures will, subject to the limitations described in the preceding sentence, continue to qualify as Tier 1 capital. Distributions on the subordinated debentures are payable quarterly. As of December 31, 2018, the Company was current in the payment of all interest payments due on its subordinated debentures.

NOTE 12 - BENEFIT PLANS
 
401(k) Plan
The Company has a 401(k) benefit plan that allows employee contributions up to 100% of their compensation, subject to regulatory limitations. The Company matches 100% of the first 6% contributed by the employee. The Company recognized an expense for the years ended December 31, 2018, 2017 and 2016 of $805, $450, and $467, respectively.

Employee Stock Purchase Plan
In 2018, the Company adopted an employee stock purchase plan (“ESPP”) under which employees, through payroll deductions, are able to purchase shares of Company common stock. The purchase price is 85% of the lesser of the closing price of the common stock on the first trading date of the relevant offering period or the last trading day of the relevant offering period. The maximum number of shares issuable during any offering period is 200,000 shares and a participant may not purchase more than 2,500 shares during any offering period (and, in any event, no more than $25,000 worth of common stock in any calendar year). In 2018, there were no shares of common stock issued under the ESPP. As of December 31, 2018, there were 200,000 shares available for issuance under the ESPP.

NOTE 13 - INCOME TAXES
 
On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses.
 
The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax expense of $620 to deferred income taxes for the year ended December 31, 2017 . This expense resulted in the Company’s higher effective tax rate for that year. 

F-49
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 13 - INCOME TAXES (CONTINUED)

The income tax expense consists of the following for the years ended December 31:
 
 
 
2018
 
2017
 
2016
Income tax expense
 
 
 
 
 
 
Current
 
$
992

 
$
1,438

 
$
1,978

Deferred
 
380

 
504

 
235

Total provision for income tax expense
 
$
1,372

 
$
1,942

 
$
2,213


A reconciliation of the income tax expense for the years ended December 31, 2018, 2017 and 2016 from the “expected” tax expense computed by applying the statutory federal income tax rate of 21 percent for 2018 and 34 percent for 2017 and 2016 to income before income taxes is as follows:
 
 
 
2018
 
2017
 
2016
Computed “expected” tax expense
 
$
2,495

 
21
 %
 
$
2,756

 
34
 %
 
$
3,437

 
34
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase (decrease) in tax expense resulting from:
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax rate change
 
—

 
—
 %
 
620

 
8
 %
 
—

 
—
 %
State tax expense, net of federal tax effect
 
551

 
5
 %
 
331

 
4
 %
 
404

 
4
 %
Tax exempt interest
 
(1,422
)
 
(12
)%
 
(1,452
)
 
(18
)%
 
(923
)
 
(9
)%
Disallowed interest expense
 
290

 
2
 %
 
193

 
2
 %
 
56

 
1
 %
Incentive stock options
 
19

 
—
 %
 
33

 
—
 %
 
22

 
—
 %
Cash surrender value of life insurance contracts
 
(249
)
 
(2
)%
 
(285
)
 
(4
)%
 
(255
)
 
(3
)%
Officers life insurance expense
 
—

 
—
 %
 
—

 
—
 %
 
7

 
—
 %
Excess tax benefit from stock compensation
 
(88
)
 
(1
)%
 
(184
)
 
(2
)%
 
(478
)
 
(5
)%
Nondeductible merger expenses
 
12

 
—
 %
 
173

 
2
 %
 
—

 
—
 %
Federal and state tax credits
 
(1,102
)
 
(9
)%
 
(667
)
 
(8
)%
 
(499
)
 
(5
)%
Benefit of subsidiary net loss
 
—

 
—
 %
 
—

 
—
 %
 
—

 
—
 %
Subsidiary disregarded for federal taxes
 
763

 
6
 %
 
347

 
4
 %
 
378

 
4
 %
Others as a group
 
103

 
1
 %
 
77

 
1
 %
 
64

 
1
 %
Total income tax expense
 
$
1,372

 
11
 %
 
$
1,942

 
23
 %
 
$
2,213

 
22
 %
 
The Company files a separate Federal tax return for the operations of the mortgage banking and banking operations. The taxable income or losses of the mortgage banking operations are included in the respective returns of the Company and non-controlling members for Federal purposes.
 
The Company’s income tax filings from the years ending December 31, 2015 to present remain open to examination by tax jurisdictions.

F-50
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 13 - INCOME TAXES (CONTINUED)

Significant components of deferred tax assets as of December 31, 2018 and 2017 are as follows:
 
 
2018
 
2017
Organizational and start-up costs
 
$
68

 
$
98

Core deposit intangible
 
(2,046
)
 
(215
)
Acquisition fair value adjustments
 
817

 
30

Allowance for loan losses
 
2,577

 
1,876

Loan fees (costs)
 
(1
)
 
60

Other real estate
 
577

 
—

Premises and equipment
 
(791
)
 
(427
)
Unrealized (gain) loss on available for sale securities
 
1,115

 
(528
)
Unrealized loss on derivatives
 
187

 
7

Non-accrual loans
 
280

 
170

Acquired net operating losses
 
2,966

 
—

Acquired tax credits net of basis adjustments
 
1,005

 
—

Deferred compensation
 
443

 
—

Other
 
231

 
28

Total
 
$
7,428

 
$
1,099

 
 
 
 
 
State
 
$
688

 
$
114

Federal
 
6,740

 
985

Net deferred tax asset
 
$
7,428

 
$
1,099

 

In assessing the future realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management determined that as of December 31, 2018, it was more likely than not that all deferred tax assets would be realized.

At December 31, 2018, related to the merger with Community First, Inc., the Company has a federal net operating loss carryforward of $14,126, which begins expiring in 2031and the Company is limited to utilizing $1,215 annually.

The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 on December 22, 2017, which provides for a one-year measurement period that allows businesses time to evaluate the financial statement implications of the Tax Reform Act. Companies are required to disclose in financial filings whether their accounting for the income tax effects of the Tax Reform Act is complete, incomplete but reasonably estimated, or incomplete with no estimate provided. The measurement period allows businesses to gather the information necessary to prepare and analyze the income tax accounting effects of the Tax Reform Act on financial statements issued during the measurement period. During the measurement period, an entity may need to reflect adjustments to provisional amounts previously recorded after obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts. Such adjustments to provisional amounts included in an entity’s financial statements during the measurement period would be included in income from continuing operations as an adjustment to income tax expense or benefit in the reporting period the amounts are determined.




F-51
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 14 - STOCK-BASED COMPENSATION
 
The Company has two share based compensation plans as described below. Total compensation cost that has been charged against income for those plans was $923, $616 and $251 for 2018, 2017 and 2016, respectively. The excess income tax benefit was $88, $184 and $478 for 2018, 2017 and 2016, respectively.

Stock Option Plan
In 2006, the Board of Directors and shareholders of the Bank approved the Commerce Union Bank Stock Option Plan (the “Plan”). The Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options, for up to 625,000 shares of common stock to employees and organizers of the Company. As part of reorganization, all Commerce Union Bank options were replaced with Commerce Union Bancshares, Inc. options with no change in terms. On March 10, 2015, the shareholders of the Company approved the Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan that permits the grant of awards of up to 1,250,000 shares of the Company common stock in the form of stock options. As part of the merger with Reliant Bank, all outstanding stock options of Reliant Bank were converted to stock options of Commerce Union Bancshares, Inc. under this plan.
 
Under the Stock Option Plan, stock option awards may be granted in the form of incentive stock options or non-statutory stock options, and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than the fair market value of the common stock on the grant date.

A summary of the activity in the stock option plan for the periods ended December 31, 2018, 2017 and 2016, is as follows:
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
Outstanding at January 1, 2016
708,921
 
$
10.73

 

 

Granted
41,500

 
15.57
 

 

Exercised
(476,889
)
 
10.03
 

 

Forfeited or expired
(31,991
)
 
10.61
 

 

Outstanding at December 31, 2016
241,541

 
12.96
 
5.41 years
 
$
2,065

Exercisable at December 31, 2016
144,941
 
12.11
 
3.25 years
 
1,363
Vested and anticipated vesting shares as of December 31, 2016
238,643
 
12.89
 
5.41 years
 
2,003
Granted
15,500

 
23.55
 

 

Exercised
(72,080
)
 
11.42
 

 

Forfeited or expired
(14,200
)
 
14.06
 

 

Outstanding at December 31, 2017
170,761

 
14.48
 
5.73 years
 
1,905

Exercisable at December 31, 2017
95,861
 
13.00

 
3.75 years
 
1,212
Vested and anticipated vesting shares as of December 31, 2017
168,514
 
14.45
 
5.73 years
 
1,848
Granted
25,500

 
28.00

 
9.58 years
 

Exercised
(30,001
)
 
13.27

 
3.63 years
 

Forfeited or expired
(7,000
)
 
18.20

 
8.40 years
 

Outstanding at December 31, 2018
159,260
 
16.72

 
6.04 years
 
1,146

Exercisable at December 31, 2018
88,060
 
13.45

 
4.32 years
 
847

Vested and anticipated vesting shares as of December 31, 2018
157,124

 
$
16.67

 
6.01 years
 
$
1,002



NOTE 14 - STOCK-BASED COMPENSATION (CONTINUED)

F-52
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)


A summary of changes in the Company's non-vested options for the years ended December 31, 2018, 2017 and 2016 are as follows:
 
 
Shares
 
Weighted Average Grant-Date Fair Value
Non-vested options at January 1, 2016
 
84,160

 
$
2.90

Granted
 
41,500

 
3.89

Vested
 
(24,260
)
 
2.76

Forfeited
 
(4,800
)
 
2.92

Non-vested options at December 31, 2016
 
96,600

 
3.36

Granted
 
15,500

 
6.66

Vested
 
(23,000
)
 
6.95

Forfeited
 
(14,200
)
 
3.18

Non-vested options at December 31, 2017
 
74,900

 
4.14

Granted
 
25,500

 
7.10

Vested
 
(22,200
)
 
6.69

Forfeited
 
(7,000
)
 
4.77

Non-vested options at December 31, 2018
 
71,200

 
$
5.28


Information related to the stock option plan during each year follows and assumes a 3% forfeiture rate:
 
 
 
2018
 
2017
 
2016
Intrinsic value of options exercised
 
$
344

 
$
827

 
$
2,272

Cash received from option exercises
 
398

 
823

 
4,772

Tax benefit realized from option exercises
 
88

 
184

 
478

Weighted average fair value of options granted
 
7.10

 
6.66

 
3.89

 
As of December 31, 2018, there was $310 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.37 years.

The fair value of options granted during 2018 and 2017 was determined using the following assumptions as of the grant date, resulting in an estimated fair value per option of $6.89 and $6.46, respectively.
 
 
2018
 
2017
 
2016
Risk-free interest rate

 
2.95%
 

 
2.30%
 
—
 
2.45%
 
1.33%
 
—
 
2.45%
Expected term (in years)
6.5 years
 
6.5 years
 
6.5
 
—
 
10 years
Expected stock price volatility

 
23.50%
 

 
24%
 
—
 
29.90%
 
21%
 
—
 
24.00%
Dividend yield

 
1.14%
 

 
0.98%
 
—
 
1.02%
 
1.02%
 
—
 
1.57%

F-53
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 14 - STOCK-BASED COMPENSATION (CONTINUED)

Equity Incentive Plan
On June 18, 2015, the shareholders of Commerce Union approved the Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan, which provides for the issuance of up to 900,000 shares of common stock in the form of stock options, restricted stock grants or grants for performance-based compensation.

The following table shows the activity related to non-vested restricted stock for the periods ended December 2018, 2017 and 2016:
 
 
Shares
 
Weighted Average Grant-Date
Fair Value
Non-vested shares at January 1, 2016
 
30,500

 
$
13.65

Granted
 
23,800

 
15.24
Vested
 
(3,835
)
 
14.54
Forfeited
 
(2,000
)
 
13.65
Non-vested shares at December 31, 2016
 
48,465

 
14.36
Granted
 
50,050

 
23.65
Vested
 
(13,016
)
 
14.21
Forfeited
 
(3,000
)
 
14.18
Non-vested shares at December 31, 2017
 
82,499

 
20.03
Granted
 
51,710

 
27.55
Vested
 
(21,999
)
 
15.95
Forfeited
 
(1,550
)
 
25.17
Non-vested shares at December 31, 2018
 
110,660

 
$
24.28

 
The shares issued had a average market value of $25.14 per share in 2018, $23.65 per share in 2017 and $15.24 in 2016. The shares vest over periods ranging from one to three years. As of December 31, 2018, there was $1,704 of unrecognized compensation cost related to non-vested restricted share awards. The cost is expected to be charged over a weighted-average period of 1.6 years. In 2018, 2017 and 2016 , the fair value of share awards vested totaled $439, $368 and $60.
 


F-54
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 15 - CAPITAL
 
The Company and the Bank are subject to regulatory capital requirements administered by the federal and state banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes that as of December 31, 2018 and 2017 the Company and the Bank met all capital adequacy requirements to which they are subject.
 
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2018 and 2017, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the category.
 
Actual and required capital amounts and ratios are presented below as of December 31, 2018 and 2017.
 
 
 
Actual
Regulatory
Capital
 
Minimal Capital Adequacy
 
Minimum Required
Capital Including
Capital Conservation
Buffer
 
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
168,876

 
10.38
%
 
$
65,077

 
4.00
%
 
$
65,077

 
4.000
%
 
$
81,347

 
5.00
%
Common equity Tier 1
 
157,273

 
11.59
%
 
61,064

 
4.50
%
 
86,507

 
6.375
%
 
88,203

 
6.50
%
Tier I risk-based capital
 
168,876

 
12.44
%
 
81,451

 
6.00
%
 
106,905

 
7.875
%
 
108,602

 
8.00
%
Total risk-based capital
 
180,193

 
13.28
%
 
108,550

 
8.00
%
 
133,991

 
9.875
%
 
135,688

 
10.00
%
Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
165,308

 
10.17
%
 
$
65,018

 
4.00
%
 
$
65,018

 
4.000
%
 
$
81,272

 
5.00
%
Common equity Tier 1
 
165,308

 
12.19
%
 
61,024

 
4.50
%
 
86,451

 
6.375
%
 
88,146

 
6.50
%
Tier I risk-based capital
 
165,308

 
12.19
%
 
81,366

 
6.00
%
 
106,792

 
7.875
%
 
108,488

 
8.00
%
Total risk-based capital
 
176,625

 
13.02
%
 
108,525

 
8.00
%
 
133,961

 
9.875
%
 
135,657

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
126,234

 
11.89
%
 
$
42,467

 
4.00
%
 
$
42,467

 
4.000
%
 
$
53,084

 
5.00
%
Common equity Tier 1
 
126,234

 
13.90
%
 
40,867

 
4.50
%
 
52,219

 
5.750
%
 
59,030

 
6.50
%
Tier I risk-based capital
 
126,234

 
13.90
%
 
54,489

 
6.00
%
 
65,841

 
7.250
%
 
72,653

 
8.00
%
Total risk-based capital
 
135,965

 
14.97
%
 
72,660

 
8.00
%
 
84,013

 
9.250
%
 
90,825

 
10.00
%
Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier I leverage
 
$
123,862

 
11.68
%
 
$
42,418

 
4.00
%
 
$
42,418

 
4.000
%
 
$
53,023

 
5.00
%
Common equity Tier 1
 
123,862

 
13.67
%
 
40,774

 
4.50
%
 
52,100

 
5.750
%
 
58,896

 
6.50
%
Tier I risk-based capital
 
123,862

 
13.67
%
 
54,365

 
6.00
%
 
65,691

 
7.250
%
 
72,487

 
8.00
%
Total risk-based capital
 
133,593

 
14.74
%
 
72,506

 
8.00
%
 
83,835

 
9.250
%
 
90,633

 
10.00
%


F-55
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 15 - CAPITAL (CONTINUED)

In July 2013, the Bank’s regulators adopted revised regulatory capital requirements known as “Basel III”, which became effective January 1, 2015. Required capital ratios applicable to the Bank under these guidelines are presented in the preceding table. The new requirements also establish a "capital conservation buffer" of 2.5% that will be phased in over four years. If capital levels fall below the minimum requirement plus the capital conservation buffer, the Bank will be subject to restrictions related dividend payments, share repurchases, and certain employee bonuses.

On December 4, 2018, the Company authorized a stock repurchase plan pursuant to which the Company may purchase up to $12 million of shares of the Company’s outstanding common stock, par value $1.00 per share. Stock repurchases under the plan will be made from time to time in the open market or privately negotiated transactions, or otherwise, at the discretion of management of the Company and in accordance with applicable legal requirements. The timing and amount of share repurchases under the plan will depend on a number of factors, including the Company’s stock price performance, ongoing capital planning considerations, general market conditions, and applicable legal requirements. The Company currently anticipates the stock repurchase plan will remain in effect through December 31, 2019, unless the entire authorized amount of shares is sooner repurchased. The stock repurchase plan does not obligate the Company to repurchase any dollar amount or number of shares, and the plan may be extended, modified, amended, suspended, or discontinued at any time.

NOTE 16 - COMMITMENTS AND CONTINGENCIES
 
The Company has federal funds lines at other financial institutions with availability totaling $78,200 at December 31, 2018, and 2017. At December 31, 2018 and 2017, the Company did not have outstanding balances for these federal funds lines. The Company also has an unsecured line of credit at CDC Deposits Network with availability of $20,000. The Company did not have a balance outstanding related to this line at December 31, 2018. The Company had a balance outstanding under this line at December 31, 2017 of $2,000.The Company also may access borrowings utilizing the Federal Reserve bank discount window of $11,166 and $12,900 at December 31, 2018 and 2017, respectively. There were no funds advanced from the discount window at December 31, 2018 or 2017.
 
At December 31, 2018 and 2017, the Company has $310,454 and $208,829 in standby letters of credit with the Federal Home Loan Bank pledged to secure municipal deposits.
 
At December 31, 2018, the Company has employment agreements with certain executive officers. Upon the occurrence of an “Event of Termination” as defined by the agreements, the Company has an obligation to pay each of the executive officers as defined in the agreements.



F-56
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 17 - LEASES

A summary of the Company’s leased facilities (other than month-to-month agreements) follows:
 
 
 
Base Lease
 
Renewal
 
Escalation
 Property Description (In Tennesee unless noted)
 
 Expiration Date
 
Terms
 
 Clause
 1736 Carothers Parkway, Brentwood
 
February 28, 2025
 
15 years
 
 3% annually
 6005 Nolensville Road, Nashville
 
September 30, 2018
 
—
 
 3% annually
 5109 Peter Taylor Park Drive, Brentwood
 
July 31, 2016
 
10 years
 
 3% annually
 101 Creekstone Boulevard, Franklin
 
March 31, 2020
 
10 years
 
 2% annually
 105 Continental Place, Brentwood
 
December 31, 2020
 
—
 
 3% annually
 633 Chestnut St., Chattanooga
 
October 31, 2028
 
10 years
 
 2% annually
 6100 Tower Circle, Franklin
 
December 31, 2027
 
—
 
 2.5% annually
 1835 E. Northfield Blvd. Murfreesboro
 
September 30, 2027
 
5 years
 
3% annually
 1412 Trotwood Ave., Columbia
 
December 31, 2021
 
—
 
 None
 4108 Hillsboro Pike, Nashville
 
October 31, 2021
 
—
 
 10% after 5th year of initial term and 12% thereafter for renewals

The Company has classified all leases as operating lease agreements for office space, copiers, and an automobile. Future minimum rental payments required under the terms of the non-cancellable leases are as follows:
 
 Year Ending
 
 
 December 31,
 
 
2019
 
$
2,216

2020
 
2,254

2021
 
1,943

2022
 
1,649

2023
 
1,685

Thereafter
 
4,650

Total
 
$
14,397

 
Total rent expense under the leases amounted to $2,536, $2,055 and $1,954, respectively, during the years ended December 31, 2018, 2017 and 2016.



F-57
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
 
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection lines, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
 
The contractual amounts of financial instruments with off-balance-sheet risk at December 31, 2018 and 2017 were as follows:
 
 
2018
 
2017
Unused lines of credit
 
 
 
 
    Fixed
 
$
44,053

 
$
49,637

    Variable
 
209,898

 
135,951

Standby letters of credit
 
16,544

 
13,176

Total
 
$
270,496

 
$
198,764

 
NOTE 19 - DERIVATIVES
 
The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and other terms of the individual interest rate swap agreements.

Interest Rate Swaps Designated as Cash Flow Hedges
Interest rate swaps with notional amounts totaling $60,000 as of December 31, 2018, were designated as cash flow hedges of certain Federal Home Loan Bank borrowings and subordinated debentures which are fully effective. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining terms of the swap agreements.



F-58
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 19 - DERIVATIVES (CONTINUED)

Interest Rate Swaps Designated as Cash Flow Hedges, (Continued)
Summary information related to the interest rate swaps designated as cash flow hedges for the year ended December 31, 2018 is as follows:



Notional amounts
$
60,000

Weighted average pay rates
3.338
%
Weighted average receive rates
2.856
%
Weighted average maturity
4.47 years

Unrealized losses
$
1,153


Cash Flow Hedges
The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the years ended:
 
Amount of Gain (Loss) Recognized in OCI
(Effective Portion)

Amount of Gain (Loss) Reclassified from OCI to Interest Income

Amount of Gain (Loss) Recognized in Other Non-Interest Income (Ineffective Portion)
December 31, 2016





Interest rate contracts
$
—


$
—


$
—

December 31, 2017





Interest rate contracts
—


—


—

December 31, 2018





Interest rate contracts
$
(1,153
)

$
—


$
—


The following table reflects the cash flow hedges included in the Consolidated Balance Sheets as of December 31, 2018 and 2017:

2018

2017

Notional Amount

Fair Value

Notional Amount

Fair Value
Included in other assets:







Total included in other assets
$
—


$
—


$
—


$
—









Included in other liabilities:







Interest rate swaps related to







subordinate debentures
$
10,000


$
174


$
—


$
—









Interest rate swaps related to







Federal Home Loan Bank borrowings
50,000


979


—


—

Total included in other liabilities
$
60,000


$
1,153


$
—


$
—




F-59
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 19 - DERIVATIVES (CONTINUED)

Fair Value Hedges
The following table reflects the fair value hedges included in the Consolidated Statements of Operations as of December 31:

Interest rate contracts
Location

2018

2017

2016
Change in fair value on interest







rate swaps hedging investments
Interest income

$
462


$
47


$
422


The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of December 31:

 
2018
 
2017
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
Included in other assets:
 
 
 
 
 
 
 
Interest rate swaps related to investments
$
16,902

 
$
467

 
$
9,882

 
$
155

 
 
 
 
 
 
 
 
Total included in other assets
$
16,902

 
$
467

 
$
9,882

 
$
155

 
 
 
 
 
 
 
 
Included in other liabilities:
 
 
 
 
 
 
 
Interest rate swaps related to investments
$
4,203

 
$
30

 
$
11,623

 
$
180

 
 
 
 
 
 
 
 
Total included in other liabilities
$
4,203

 
$
30

 
$
11,623

 
$
180








F-60
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)


NOTE 20 - EARNINGS PER SHARE
 
The following is a summary of the components comprising basic and diluted earnings per common share of stock (EPS) for the years ended December 31,:
 
 
 
Year Ended
 
 
2018
 
2017
 
2016
Basic EPS Computation
 
 
 
 
 
 
Net income attributable to common shareholders
 
$
14,085

 
$
7,246

 
$
8,936

Weighted average common shares outstanding
 
11,389,122

 
8,151,492

 
7,586,993

Basic earnings per common share
 
$
1.24

 
$
0.89

 
$
1.18

Diluted EPS Computation
 
 
 
 
 
 
Net income attributable to common shareholders
 
$
14,085

 
$
7,246

 
$
8,936

Weighted average common shares outstanding
 
11,389,122

 
8,151,492

 
7,586,993

Dilutive effect of stock options and restricted shares
 
79,667

 
87,809

 
104,500

Adjusted weighted average common shares outstanding
 
11,468,789

 
8,239,301

 
7,691,493

 Diluted earnings per common share
 
$
1.23

 
$
0.88

 
$
1.16


Stock options for common stock and restricted shares totaling 62,910, 10,500 and 2,500 were not considered in computing diluted earnings per common share for 2018, 2017 and 2016, respectively, because they were antidilutive.
 
NOTE 21 - SEGMENT REPORTING
 
The Company has two reportable business segments: retail banking and residential mortgage banking. Segment information is derived from the internal reporting system utilized by management. Revenues and expenses for segments reflect those, which can be specifically identified and have been assigned based on internally developed allocation methods. Financial results have been presented, to the extent practicable, as if each segment operated on a stand-alone basis.
 
Retail Banking provides deposit and lending services to consumer and business customers within our primary geographic markets. Our customers are serviced through branch locations, ATMs, online banking, and mobile banking.
 
Residential Mortgage Banking originates traditional first lien residential mortgage loans and first lien home equity lines of credit throughout the United States. The traditional first lien residential mortgage loans are typically underwritten to government agency standards and sold to third party secondary market mortgage investors. The home equity lines of credit are typically underwritten to participating banks or other investor group standards.

F-61
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 21 - SEGMENT REPORTING (CONTINUED)
 
The following tables present summarized results of operations for the Company’s business segments:
 
 
 
Year Ended December 31, 2018
 
 
Retail Banking
 
Residential
Mortgage
Banking
 
Elimination
Entries
 
Consolidated
Net interest income
 
$
53,008

 
$
821

 
$
—

 
$
53,829

Provision for loan losses
 
1,035

 
—

 
—

 
1,035

Noninterest income
 
5,232

 
4,595

 
(181
)
 
9,646

Noninterest expense
 
41,512

 
9,049

 
—

 
50,561

Income tax expense (benefit)
 
1,608

 
(236
)
 
—

 
1,372

Net income (loss)
 
14,085

 
(3,397
)
 
(181
)
 
10,507

Noncontrolling interest in net loss of subsidiary
 
—

 
3,397

 
181

 
3,578

Net income attributable to common shareholders
 
$
14,085

 
$
—

 
$
—

 
$
14,085

 
 
 
Year Ended December 31, 2017
 
 
Retail Banking
 
Residential 
Mortgage
Banking
 
Elimination
Entries
 
Consolidated
Net interest income
 
$
33,761

 
$
726

 
$
—

 
$
34,487

Provision for loan losses
 
1,316

 
—

 
—

 
1,316

Noninterest income
 
2,333

 
3,805

 
(128
)
 
6,010

Noninterest expense
 
25,524

 
5,552

 
—

 
31,076

Income tax expense (benefit)
 
2,008

 
(66
)
 
—

 
1,942

Net income
 
7,246

 
(955
)
 
(128
)
 
6,163

Noncontrolling interest in net income of subsidiary
 
—

 
955

 
128

 
1,083

Net income attributable to common shareholders
 
$
7,246

 
$
—

 
$
—

 
$
7,246


 
 
Year Ended December 31, 2016
 
 
Retail Banking
 
Residential
Mortgage
Banking
 
Elimination
Entries
 
Consolidated
Net interest income
 
$
32,035

 
$
617

 
$
—

 
$
32,652

Provision for loan losses
 
968

 
—

 
—

 
968

Noninterest income
 
2,481

 
6,319

 
—

 
8,800

Noninterest expense
 
22,327

 
8,047

 
—

 
30,374

Income tax expense (benefit)
 
2,285

 
(72
)
 
—

 
2,213

Net income
 
8,936

 
(1,039
)
 
—

 
7,897

Noncontrolling interest in net income of subsidiary
 
—

 
1,039

 
—

 
1,039

Net income attributable to common shareholders
 
$
8,936

 
$
—

 
$
—

 
$
8,936



F-62
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 22 - BUSINESS COMBINATION
  
On January 1, 2018, pursuant to the Agreement and Plan of Merger, dated August 22, 2017, by and among Reliant Bancorp, Inc., Community First Inc., Pioneer Merger Sub, Inc., and Community First Bank & Trust, Community First, Inc. merged with and into the Reliant Bancorp, Inc. Immediately following the merger, Community First Bank & Trust merged with and into Reliant Bank, with Reliant Bank surviving. Pioneer Merger Sub, Inc. was formed to effect the merger and no longer exists.

Pursuant to the merger agreement, each outstanding share of Community First, Inc. common stock (except for excluded shares and dissenting shares) was converted into and cancelled in exchange for the right to receive 0.481 shares of Reliant Bancorp, Inc. common stock, together with cash in lieu of any fractional shares. This business combination results in expanded and more diversified market area for the Company.
 
The following table details the financial impact of the merger, including the calculation of the purchase price, the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:

Calculation of Purchase Price
 
 
 
Shares of Community First, Inc. common stock outstanding as of December 31, 2017
5,025,884

Exchange ratio for Reliant Bancorp, Inc. common stock
0.481

Share conversion
2,417,450

Reliant Bancorp, Inc. common stock shares issued
2,416,444

Reliant Bancorp, Inc. share price at December 29, 2017
$
25.64

Value of Reliant Bancorp, Inc. common stock shares issued
$
61,958

Value of fractional shares
$
25

Estimated fair value of Community First, Inc.
$
61,983



F-63
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 22 - BUSINESS COMBINATION (CONTINUED)
Allocation of Purchase Price
 
 
 
Total consideration above
$
61,983

 
 
Fair value of assets acquired and liabilities assumed
 
Cash and cash equivalents
(33,128
)
Time deposits in other financial institutions
(23,309
)
Investment securities available for sale
(69,078
)
Loans, net of unearned income
(313,040
)
Mortgage loans held for sale, net
(910
)
Accrued interest receivable
(1,165
)
Premises and equipment
(9,585
)
Restricted equity securities
(1,726
)
Cash surrender value of life insurance contracts
(10,664
)
Other real estate owned
(1,650
)
Deferred tax asset, net
(4,885
)
Core deposit intangible
(7,888
)
Other assets
(1,795
)
Deposits—noninterest-bearing
80,395

Deposits—interest-bearing
352,100

Other borrowings
11,522

Payables and other liabilities
5,061

Net liabilities assumed (net assets acquired)
(29,745
)
 
 
Goodwill
$
32,238


During 2018, as part of the system integration of Community First, Inc., the Company determined minor adjustments were appropriate to reduce other assets by $93 and increase payables and other liabilities by $85 effective as of the acquisition date.

Pro forma data for the years ended December 31, 2017 and 2016, in the table below presents information as if the merger occurred at the beginning of each year.
 
 
2017
 
2016
Net interest income
$
51,031

 
$
48,724

Net income attributable to common shareholders
$
6,387

 
$
17,660

 
 
 
 
Earnings per share - basic
$
0.60

 
$
1.84

Earnings per share - diluted
$
0.60

 
$
1.82


Supplemental pro forma earnings in the table above includes, net of tax, $564 in pro forma adjustments for both years ended December 31, 2018 and 2017. Supplemental pro forma earnings in the above table for the year ended December 31, 2017 includes $5,478 of nonrecurring costs with a related tax benefit of $536 from prior historical results. Supplemental pro forma earnings in the above table for the year ended December 31, 2016 includes $4,168 of nonrecurring income from prior historical results.

F-64
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 23 - QUARTERLY FINANCIAL RESULTS (UNAUDITED)
 
The following is a summary of consolidated quarterly financial results for the year ended December 31, 2018:
 
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income
 
$
16,362

 
$
16,830

 
$
17,570

 
$
18,463

Net interest income
 
13,382

 
13,404

 
13,466

 
13,577

Consolidated net income
 
3,277

 
1,202

 
3,240

 
2,788

Noncontrolling interest in net loss of subsidiary
 
464

 
937

 
842

 
1,335

Net income attributable to common shareholders
 
3,741

 
2,139

 
4,082

 
4,123

Basic earnings per share
 
$
0.33

 
$
0.19

 
$
0.36

 
$
0.36

Diluted earnings per share
 
$
0.33

 
$
0.19

 
$
0.36

 
$
0.36

 
The following is a summary of consolidated quarterly financial results for the year ended December 31, 2017:
 
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income
 
$
8,973

 
$
9,704

 
$
10,627

 
$
10,854

Net interest income
 
7,971

 
8,503

 
9,096

 
8,917

Consolidated net income
 
1,559

 
1,794

 
1,840

 
970

Noncontrolling interest in net loss of subsidiary
 
499

 
393

 
6

 
185

Net income attributable to common shareholders
 
2,058

 
2,187

 
1,846

 
1,155

Basic earnings per share
 
$
0.27

 
$
0.28

 
$
0.23

 
$
0.13

Diluted earnings per share
 
$
0.26

 
$
0.28

 
$
0.22

 
$
0.13

 
The following is a summary of consolidated quarterly financial results for the year ended December 31, 2016:
 
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Interest income
 
$
8,914

 
$
9,497

 
$
8,656

 
$
8,948

Net interest income
 
8,082

 
8,692

 
7,835

 
8,043

Consolidated net income
 
2,558

 
2,137

 
1,763

 
1,439

Noncontrolling interest in net (income) loss of subsidiary
 
(321
)
 
223

 
605

 
532

Net income attributable to common shareholders
 
2,237

 
2,360

 
2,368

 
1,971

Basic earnings per share
 
$
0.30

 
$
0.31

 
$
0.31

 
$
0.26

Diluted earnings per share
 
$
0.30

 
$
0.31

 
$
0.30

 
$
0.25

 

F-65
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 24 - MORTGAGE OPERATIONS
 
During 2011, the Company and VHC Fund 1, LLC organized Reliant Mortgage Ventures, LLC (the “Venture”) for the purpose of improving the Company’s mortgage operations. The Company holds 51% of the governance rights of the Venture (and therefore consolidates the results of its operations) and 30% of the Venture’s financial rights to net profits. VHC Fund 1, LLC holds 49% of the governance rights of the Venture and 70% of the related financial rights. VHC Fund 1, LLC is controlled by an immediate family member of a member of the Company’s board of directors. Under the related operating agreement, the non-controlling member receives 70% of the profits of the Venture, and the Company receives 30% of the profits once the non-controlling member recovers its cumulative losses. The non-controlling member is responsible for 100% of the mortgage venture’s operational and credit losses. The income and loss is included in the consolidated results of operations. The portion of the income and loss attributable to the non-controlling member (100% for 2018, 2017 and 2016) are included in non-controlling interest in net loss of subsidiary on the accompanying consolidated statements of operations. At December 31, 2018 and 2017, the Venture had a payable balance to the Company of $1,484 and $342, respectively.
 
Direct costs incurred by the Company attributable to the mortgage operations are allocated to the Venture as well as rent, personnel and core processing. As of December 31, 2018, the cumulative losses to date of the Venture totaled $8,058. The Venture will have to generate net income of this amount before the Company will participate in future earnings.
 
NOTE 25 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION

The following tables present parent company condensed financial statements for Reliant Bancorp, Inc.:

CONDENSED BALANCE SHEET
DECEMBER 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,985

 
$
1,709

Investment in subsidiaries
 
225,446

 
137,765

Other assets
 
3,447

 
1,841

Total assets
 
$
230,878

 
$
141,315

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Dividend payable
 
$
1,036

 
$
542

Accrued expenses and other liabilities
 
406

 
636

Subordinate debentures
 
21,022

 
—

Shareholders' equity
 
208,414

 
140,137

Total liabilities and shareholders' equity
 
$
230,878

 
$
141,315



F-66
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 25 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)

The following tables present parent company condensed financial statements for Reliant Bancorp, Inc.:
CONDENSED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
 
 
2018
 
2017
 
2016
Dividends from subsidiaries
 
$
7,521

 
$
2,141

 
$
3,161

Interest expense
 
1,277

 
—

 
—

Other expense
 
4,775

 
2,920

 
1,326

Income before income tax and undistributed income from subsidiaries
 
1,469

 
(779
)
 
1,835

Income tax expense (benefit)
 
(1,537
)
 
(922
)
 
(508
)
Equity in undistributed income from subsidiaries
 
11,079

 
7,103

 
6,593

Net income attributable to common shareholders
 
$
14,085

 
$
7,246

 
$
8,936


CONDENSED STATEMENT OF CASH FLOWS
 
 
 
 
YEARS ENDED DECEMBER 31,
 
 
 
 
 
 
2018
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
 
 
Net income attributable to common shareholders
 
$
14,085

 
$
7,246

 
$
8,936

Reclassification of federal income tax rate change
 
—

 
(245
)
 
—

Adjustments:
 
 
 
 
 
 
Equity in undistributed income from subsidiaries
 
(11,079
)
 
(7,103
)
 
(6,593
)
Accretion related to subordinated debentures
 
969

 
—

 
—

Change in other assets
 
(1,333
)
 
790

 
(219
)
Change in other liabilities
 
(230
)
 
595

 
(582
)
Net cash from operating activities
 
2,412

 
1,283

 
1,542

 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
Investment in subsidiary
 
—

 
(21,195
)
 
(4,772
)
Net cash used in investing activities
 
—

 
(21,195
)
 
(4,772
)
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
Dividends paid
 
(3,451
)
 
(3,193
)
 
(1,489
)
Redemption of common stock
 
(6
)
 
—

 
—

Proceeds from equity issuances, net
 
1,321

 
24,648

 
4,772

Net cash from (used in) financing activities
 
(2,136
)
 
21,455

 
3,283

 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
276

 
1,543

 
53

Beginning cash and cash equivalents
 
1,709

 
166

 
113

Ending cash and cash equivalents
 
$
1,985

 
$
1,709

 
$
166

 






F-67
RELIANT BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2018, 2017 AND 2016
(Dollar amounts in thousands except per share amounts)

NOTE 26 - SUBSEQUENT EVENT

RMV entered into a lease agreement for a facility located in Arkansas subsequent to December 31, 2018. This represents a new market location for the Company, with terms of the two year lease being $6 each month.



F-68