10-K 1 cubn20171231_10k.htm FORM 10-K cubn20171231_10k.htm
 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


  ☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

For the fiscal year ended December 31, 2017

 

  ☐

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     ☒  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    ☒ 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.     ☒Yes     ☐ No

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ☒   Yes    ☐   No

 

Indicate by check mark 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

       

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

       
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ☐  Yes    ☒    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 30, 2017 was $161,560,992 (computed on the basis of $23.87 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 15, 2018 was 11,475,387.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement for the annual meeting of shareholders, scheduled to be held May 17, 2018, are incorporated by reference into Part III of this Form 10-K.

 



 

 

 

TABLE OF CONTENTS

 

Item No.

Page No.

 

 

 

 

PART I

 

2

     

ITEM 1.

BUSINESS

2

ITEM 1A.

RISK FACTORS

14

ITEM 1B.

UNRESOLVED STAFF COMMENTS

27

ITEM 2.

PROPERTIES

27

ITEM 3.

LEGAL PROCEEDINGS

27

ITEM 4.

MINE SAFETY DISCLOSURES

27

     

PART II

 

28

     

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

28

ITEM 6.

SELECTED FINANCIAL DATA

30

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

32

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

60

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

60

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

60

ITEM 9A.

CONTROLS AND PROCEDURES

60

ITEM 9B.

OTHER INFORMATION

61

     

PART III

 

62

     

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

62

ITEM 11.

EXECUTIVE COMPENSATION

62

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

62

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

62

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

62

     

PART IV

 

63

     

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

63

 

 

 

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 21E of the Securities Exchange Act of 1934 (the Exchange Act). The words “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” “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 risk that the cost savings and any revenue synergies from our merger with Community First, Inc. (Community First) may not be realized or take longer than anticipated to be realized, (vi) the effect of the announcement or completion of the Community First merger on employee and customer relationships and operating results (including, without limitation, difficulties in maintaining relationships with employees and customers), (vii) the risk that integration of Community First’s operations with those of Reliant Bancorp will be materially delayed or will be more costly or difficult than expected, (viii) the amount of costs, fees, expenses, and charges related to the Community First merger, (ix) reputational risk and the reaction of the parties’ customers, suppliers, employees or other business partners to the Community First merger, (x) the dilution caused by Reliant Bancorp’s issuance of additional shares of its common stock in the Community First merger, and (xi) general competitive, economic, political and market conditions, including economic conditions in the local markets where we operate, (xii) the impact of negative developments in the financial industry and U.S. and global capital and credit markets, (xiii) our ability to retain the services of key personnel, (xiv) our ability to adapt to technological changes, (xv) risks associated with litigation, including the applicability of insurance coverage; (xvi) the vulnerability of Reliant Bank’s digital 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; (xvii) changes in state and federal legislation, regulations or policies applicable to banks, including regulatory or legislative developments; (xviii) 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 (xix) general competitive, economic, political and market conditions. 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.

BUSINESS

 

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 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. 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 services throughout the Middle Tennessee Region and the Nashville-Davidson-Murfreesboro-Franklin Metropolitan Statistical Area (the Nashville MSA). Based on the deposit market share data published by FDIC as of June 30, 2017, the latest available date, Reliant Bank is ranked the 14th largest bank in the Nashville MSA. Reliant Bank primarily markets its services to small businesses and residents of its markets. Reliant Bank operates its main office and seven branches in Davidson, Robertson, Sumner, and Williamson counties in Tennessee. Additionally, Reliant Bank operates mortgage production offices in Hendersonville, Tennessee, and Timonium, Maryland and loan and deposit production offices in Murfreesboro and Chattanooga, Tennessee. Following the Community First merger effective January 1, 2018, Reliant Bank added seven branches in Columbia, Mount Pleasant, Centerville, Lyles, and Thompson Station, Tennessee.

 

Employees

 

As of December 31, 2017, Reliant Bancorp and Reliant Bank had 168 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 the market area 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 (as well as other banking-related products and services) to businesses and individuals of 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 loans for consumers, commercial and real estate. 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 included but are not limited to business checking, deposit products and services, business loans, and lines of credit. Reliant Bank offers similar service to its consumers, including but not limited to personal loans, checking, 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.

 

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. 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 community.

 

Intellectual Property

 

Reliant Bank utilizes the ownership rights to two registered trademarks 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 domains of reliantbank.com. Reliant Bancorp also holds the rights to three registered trademarks 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.

 

 

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 within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Federal Reserve under the Bank Holding Company Act and the regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in Tennessee, we also are subject to the Tennessee Banking Act.

 

The Bank Holding Company Act, subject to certain exceptions, also 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.

 

As a bank 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 also examine Reliant Bancorp.

 

Bank holding companies are required to act as a source of financial strength to each subsidiary bank 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 or thrift subsidiary of Reliant Bancorp or related to FDIC assistance provided to a 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 persons to give the Federal Reserve 60 days’ prior written notice before acquiring control of a bank holding company. Under the regulation, control is defined as the ownership or control with the power to vote 25% or more of any class of voting securities of the bank 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, and if 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. The principal source of Reliant Bancorp’s cash flow, including cash flow to pay interest to its holders of trust preferred securities, and any dividends payable to common shareholders, are 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 such payment, 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 other factors, such as the maintenance of adequate capital for such subsidiary 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 (“TDFI”) also has authority to prohibit the payment of dividends by a Tennessee chartered bank when it determines such payment to be an unsafe and unsound banking practice. Should an insured member bank controlled by a bank holding company be “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 holding company. In addition, since our legal entity is 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 also subject to regulatory restrictions.

 

During the year ended December 31, 2017, Reliant Bancorp declared dividends throughout the year of $0.24 per share on outstanding shares of common stock for a total of $2,024,561 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 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 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 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, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended.

 

In approving acquisitions by bank holding companies of banks and companies engaged in the banking-related activities described above, 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 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 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

 

The Federal Reserve has issued risk-based capital guidelines for bank holding companies and member banks. Under the guidelines, the minimum ratio of capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8%. To be considered a “well-capitalized” bank or bank holding company under the guidelines, a bank or bank holding company must have a total risk-based capital ratio in excess of 10%. At least half of the total capital is to be comprised of common equity, retained earnings, and a limited amount of perpetual preferred stock, after subtracting goodwill and certain other adjustments (“Tier I capital”). The remainder may consist of perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, other preferred stock not qualifying for Tier I capital, and a limited amount of loan and lease loss reserves (“Tier II capital”). Reliant Bank is subject to these capital requirements. In addition, the Federal Reserve has adopted a minimum leverage ratio (Tier I capital to total assets) of 3%. Generally, banking organizations are expected to operate well above the minimum required capital level of 3% unless they meet certain specified criteria, including that they have the highest regulatory ratings. Most banking organizations are required to maintain a Tier 1 leverage capital ratio of 3%, plus an additional cushion of at least 1% to 2%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance upon intangible assets.

 

 

In July 2013, the federal banking regulators, in response to the statutory requirements of Dodd-Frank, 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. The new minimum capital to risk-weighted assets (“RWA”) requirements are 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%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%. The new rule also changes 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 new rule requires 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 RWA. Phase-in of the capital conservation buffer requirements began on January 1, 2016, and the requirements will be fully phased in on January 1, 2019. A banking organization with a buffer greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. The new rule 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. When the new rule is fully phased in, the minimum capital requirements plus the capital conservation buffer will exceed the current prompt corrective action (“PCA”) well-capitalized thresholds.

 

Under the new rule, MSAs and DTAs are subject to stricter limitations than those applicable under the current general risk-based capital rule. More specifically, 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 new rule increases the risk weights for past-due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors.

 

The new minimum capital requirements of Basel III took effect on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier 1 capital phase in over time. Similarly, non-qualifying capital instruments phase 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, will continue to count as regulatory capital.

 

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject a banking 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 banking laws of the State of Tennessee and is subject to the applicable provisions of those laws. Reliant Bank is subject to the supervision of the TDFI and to regular examination by that department. 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 Wall Street Reform and Consumer Protection Act of 2010 (“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 (“ESSA”) 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 the 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 the FDIC.

 

Tennessee statutes and the federal law regulate a variety of the banking activities of Reliant Bank, including required reserves, investments, loans, mergers and consolidations, 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. 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 could, depending upon our financial condition, be deemed to constitute such an unsafe or unsound practice. Also, without regulatory approval, a dividend only can be paid 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 (see above), and Reliant Bank is required to file annual reports and such additional information as the Tennessee Banking Act and Federal Reserve regulations require. We are 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 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. The operations 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, state banks are 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) we may make a loan to one person, firm or corporation of 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 (“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 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. Before the effective date of the merger, Reliant Bank earned the rating of “Satisfactory” in August of 2012 and Reliant Bank had earned a rating of “Outstanding” as of September 2012.

 

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 establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under applicable regulations, a 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 risk-adjusted Tier 1 capital ratio of at least 6%, 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 insured depository institution is defined to be adequately capitalized if it meets all of its minimum capital requirements as described above. In addition, an insured depository institution is considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if it fails to maintain a level of tangible equity equal to not less than 2% of total assets. 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 provision 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 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 payment of dividends) or paying any management fee to its bank holding company 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 bank 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 plan, it is treated as if it is significantly undercapitalized.

 

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, rollover 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”) ratified new powers for banks and bank holding companies, 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, and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction 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 our Bank. The regulations impose new obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The Treasury Department may issue additional regulations that will further clarify the USA PATRIOT Act’s requirements.

 

Under the USA PATRIOT Act all “financial institutions,” as 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, and an independent audit function to review and test the program.

 

 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)

 

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 the 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 our Bank either because of exemptions for institutions below a certain asset size or because of the nature of our Bank’s operations. Other provisions that impact Reliant Bank are:

 

 

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.

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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 holding companies.

 

 

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 holding companies and banks be well-capitalized and well managed in order to acquire banks located outside their home state.

 

 

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

 

 

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.

 

Many aspects of the Dodd-Frank Act are subject to continued rulemaking and will take effect over several years, and their impact on Reliant Bank or the financial industry is difficult to predict before such regulations are adopted. However, there is a significant possibility that the Dodd-Frank Act will, in the long run, increase regulatory burden, compliance costs, and 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 impact on consumer compliance regulation and increased costs, particularly for smaller depository institutions.

 

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 the threshold requiring companies to register to 2,000 shareholders from 500. Since the JOBS Act was signed, numerous banks or bank holding companies have filed to deregister their common stock.

 

 

 Other Regulations

 

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

 

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

 

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 community it serves;

 

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

 

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

 

The Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and

 

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

 

In addition, our bank subsidiary’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement this act, which governs 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 (“BIF”) and the Savings Association Insurance Fund (“SAIF”) 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 upon statutory factors that include the balance of insured deposits 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.

 

Effective April 1, 2009, the FDIC revised its 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 of 3 basis points the deposit assessment base rate, beginning January 1, 2011. Additional increases in premiums will impact Reliant Bank’s earnings adversely. 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 the 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

 

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, and the Dodd-Frank Act 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 our 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:

 

 

the duration of the credit;

 

 

credit risks of a particular customer;

 

 

changes in economic and industry conditions; and

 

 

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:

 

 

an ongoing review of the quality, mix, and size of our Bank’s overall loan portfolio;

 

 

Reliant Bank’s historical loan loss experience;

 

 

evaluation of economic conditions;

 

 

regular reviews of loan delinquencies and loan portfolio quality; and

 

 

the amount and quality of collateral, including guarantees, securing the loans.

 

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 real estate construction and development 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, commercial mortgage, and 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.

 

 

We are subject to extensive government regulation and supervision; compliance with new and existing legislation, regulation, 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 supervision and regulation will continue to expand in scope and complexity. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, 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 and regulation 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, an increase our deposit insurance assessment rate, in addition to related costs and restriction on acquisitions, new locations, new lines of business, or continued growth. Future changes in federal and state banking 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. And 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, 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 regulation and 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 and regulations.


Our recent acquisition and future expansion may result in additional risks.

 

Over the last three years we have completed the acquisitions of Community First and Legacy Reliant Bank. 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 merger activity, we may be unable to successfully:

 

 

maintain loan quality in the context of significant loan growth;

 

obtain regulatory and other approvals;

 

attract sufficient deposits and capital to fund anticipated loan growth;

 

maintain adequate common equity and regulatory capital;

 

avoid diversion or disruption of our existing operations or management as well as those of the acquired institution;

 

maintain adequate management personnel and systems to oversee and support such growth;

 

maintain adequate internal audit, loan review and compliance functions; and

 

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 these markets with the hiring of additional seasoned professionals with significant experience in that market. Our expenses could be further increased if we encounter delays in opening any of our 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 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 expansion 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.

 

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 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.

 

 

Integrating Community First Bank into Reliant Bank’s operations may be more difficult, costly, or time-consuming than anticipated.

 

We are still in the process of integrating Community First Bank’s business with that of Reliant Bank. A successful integration of Community First Bank’s business with ours will depend substantially on our ability to consolidate operations, corporate cultures, systems and procedures and to eliminate redundancies and costs. We may not be able to combine our business with Community Bank’s business without encountering difficulties, such as:

 

 

the loss of key employees;

 

 

disruption of operations and business;

 

 

inability to maintain and increase competitive presence;

 

 

loan and deposit attrition, customer loss and revenue loss, including as a result of any decision we may make to close one or more locations;

 

 

possible inconsistencies in standards, control procedures and policies;

 

 

unexpected problems with costs, operations, personnel, technology and credit; and/or

 

 

problems with the assimilation of new operations, sites or personnel, which could divert resources from regular banking operations.

 

Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of Community First’s business. Further, we acquired Community First with the expectation that the acquisition will result in various benefits including, among other things, benefits relating to enhanced revenues, a strengthened market position for the combined company, cross selling opportunities, technological efficiencies, cost savings and operating efficiencies. Achieving the anticipated benefits of this acquisition is subject to a number of uncertainties, including whether we integrate Community First’s business, including its organizational culture, operations, technologies, services and products, in an efficient and effective manner, our ability to achieve the estimated noninterest expense savings we believe we can achieve, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits on the anticipated timeframe, or at all, could result in a reduction in the price of our shares as well as in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially and adversely affect our business, results of operations and financial condition. Additionally, we made fair value estimates of certain assets and liabilities in recording our acquisition of Community First. Actual values of these assets and liabilities could differ from our estimates, which could result in our not achieving the anticipated benefits of the acquisition. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings.


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 three 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;

 

 

inaccuracies in the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution;

 

 

the time and costs of 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;

 

 

the diversion of our management’s attention to the negotiation of a transaction and integration of an acquired company’s operations with ours;

 

 

the incurrence of an impairment of goodwill associated with an acquisition and adverse effects on our results of operations;

 

 

entry into new markets where we have limited or no direct prior experience;

 

 

closing delays and increased expenses related to the resolution of lawsuits filed by our shareholders or shareholders of companies we may seek to acquire;

 

 

the inability to receive regulatory approvals timely or at all, including as a result of community objections, or such approvals being restrictively conditional; and

 

 

risks associated with integrating the operations, technologies and personnel of the 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 services 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.

 

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 Bancorp, 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, Tennessee 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 2016, 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 return of 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.

 

The banking business is highly competitive, and Reliant Bank experiences competition in its market 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 Bancorp’s primary market areas and elsewhere. Reliant Bancorp competes with these institutions both in attracting deposits and in making loans. In addition, Reliant Bancorp has to attract its customer base from other existing financial institutions and from new residents and businesses that have relocated to the Nashville, Tennessee, MSA. Many of Reliant Bancorp’s competitors are well-established, larger financial institutions. These institutions offer some services, such as extensive and established branch networks, that Reliant Bancorp does not provide. There is a risk that Reliant Bancorp will not be able to compete successfully with other financial institutions in Reliant Bancorp’s market, 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 Bancorp.

 

Reliant Bancorp’s deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect on its future earnings.

 

Deposits in Reliant Bank are insured by the FDIC up to $250,000 subject to applicable limitations. To offset the cost of this insurance, 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 an insured depository institution’s assets and liabilities. An institution’s assessment rate depends on the category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions paying lower assessments. Under the Dodd-Frank Act, the FDIC has adopted regulations that base deposit insurance assessments on total assets less capital rather than deposit liabilities and include off-balance sheet liabilities of institutions and their affiliates in risk-based assessments. In addition, the FDIC retains the authority to further increase Reliant Bank’s assessment rates and the FDIC has established a higher reserve ratio of 2% as a long-term goal which goes beyond what is required by statute. Continued increases in our FDIC insurance premiums could have an adverse effect on Reliant’s 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 a significant change in interest rates could have a material adverse effect on 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 Bancorp 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 the executive management team, loan officers, and other support personnel. Following the effective date of the merger, Reliant Bancorp has continued to be dependent on these officers and employees, in addition to the services of Reliant Bancorp’s executive team, including the president of Reliant Bancorp, the chief executive officer of Reliant Bancorp, and Reliant Bancorp’s chief financial officer. The loss of the services of any of these individuals could have a material adverse effect on the business of Reliant Bancorp and Reliant Bancorp, results of operations, and financial condition. Many of these key officers have important customer relationships, which are instrumental to the Bank’s operations. Changes in key personnel and their responsibilities may be disruptive to Reliant Bank’s business and could have a material adverse effect on Reliant Bank’s business, financial condition, and results of operations, either before or after the merger. Management believes that future results also will depend in part upon attracting and retaining highly skilled and qualified management, especially in the new market areas into which Reliant Bancorp may enter, as well as sales and marketing personnel. Competition for such personnel is intense, and management cannot be sure that Reliant Bancorp 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 complies with the greater obligations of public companies that are not emerging growth companies immediately after this offering, Reliant Bancorp may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as it 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 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 adopted 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 rules add a new common equity Tier 1 capital to risk-weighted assets ratio minimum of 4.5%, increase the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, and decrease the Tier 2 capital that may be included in calculating total risk-based capital from 4.0% to 2.0%. The final rules also introduce a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and total risk-based capital requirements. The required minimum ratio of total capital to risk-weighted assets will remain 8.0% and the minimum leverage ratio will remain 4.0%. The new risk-based capital requirements (except for the capital conservation buffer) became effective for Reliant Bancorp on January 1, 2015. The capital conservation buffer is being phased in over four years which began on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.

 

The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses and instruments that will no longer qualify as Tier 1 capital. The final rules also set forth certain changes for the calculation of risk-weighted assets that Reliant Bancorp was required to implement beginning January 1, 2015.

 

In addition to the updated capital requirements, the final rules also contain revisions to the prompt corrective action framework. Beginning January 1, 2015, the minimum ratios to be considered well-capitalized were updated to increase the minimum Tier 1 capital requirement from 6.0% to 8.0%, in addition to the requirement to maintain a common equity Tier 1 capital ratio of 6.5%.

 

In addition, in the current economic and regulatory environment, regulators of banks and bank holding companies have become more likely to impose capital requirements on bank holding companies and banks that are more stringent than those required by applicable existing regulations.

 

The application of more stringent capital requirements for Reliant Bancorp and 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 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 financial results also are affected by the risks generally incident to our mortgage banking business, including interest rate levels, the impact of government regulation on mortgage loan originations and servicing and the need to issue forward commitments to fund and sell mortgage loans. Our mortgage banking business also is affected by interest rate fluctuations. We also may experience market losses resulting from daily increases in interest rates to the extent we are unable to match interest rates and amounts on loans we have committed to originate with forward commitments from third parties to purchase such loans. Increases in interest rates may have a material adverse effect on our mortgage banking revenue, profitability, stock performance, ability to service our debt obligations and future cash flows. 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 on our sales, profitability, and stock performance.

 

 

If the underwriting quality of our mortgage originations is found to be deficient, our profit could decrease and we may incur losses.

 

We provide several different loan products to our customers to finance the purchase 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 investor for any losses incurred. This may result in losses that could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

 

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 concerning security breach notification, and we could be negatively impacted by them. For example, in the United States, certain of our businesses are subject to the Gramm-Leach-Bliley Act (GLBA”) and implementing regulations and guidance. Among other things, the 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 customers 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 banking regulatory agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach. Many of these requirements also apply broadly to our partners that accept our payment. 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 programs 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.

 

The new “ability-to-repay” and “qualified mortgage” rules could have a negative impact on our loan origination process and foreclosure proceedings.

 

The Consumer Financial Protection Bureau, created by the Dodd-Frank Act, has adopted rules that are likely to impact our residential mortgage lending practices, and the residential mortgage market generally including rules that implement the “ability-to-repay” requirement and provide protection from liability for “qualified mortgages,” as required by the Dodd-Frank Act. The ability-to-repay rule, which took effect on January 10, 2014, requires lenders to consider, among other things, income, employment status, assets, payment amounts, and credit history before approving a mortgage, and provides a compliance “safe harbor” for lenders that issue certain “qualified mortgages.” The rules define a “qualified mortgage” to have certain specified characteristics, and generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. The rule also establishes general underwriting criteria for qualified mortgages, including that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the borrower have a total debt-to-income ratio that is less than or equal to 43 percent. While “qualified mortgages” will generally be afforded safe harbor status, a rebuttable presumption of compliance will attach to mortgages that also meet the definition of a “higher priced mortgage” (which are generally subprime loans). Although the new “qualified mortgage” rules may provide better definition and more certainty regarding regulatory requirements, the rules may also increase our compliance burden and reduce our lending flexibility and discretion, which could negatively impact our ability to originate new loans and the cost of originating new loans. Any loans that we make outside of the “qualified mortgage” criteria could expose us to an increased risk of liability and reduce or delay our ability to foreclose on the underlying property. Additionally, qualified “higher priced mortgages” only provide a rebuttable presumption of compliance and thus may be more susceptible to challenges from borrowers. It is difficult to predict how the CFPB’s “qualified mortgage” rules will impact us, but any decreases in loan origination volume or increases in compliance and foreclosure costs could negatively affect our business, operating results 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 operations due to the merger with Reliant Bank. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also 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.

 

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 executes 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 upon 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.

 

The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital requirements, asset quality and overall financial condition. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect Reliant Bancorp’s ability to pay dividends or otherwise engage in capital distributions.

 

Reliant Bancorp’s ability to pay cash dividends may be limited by regulatory restrictions, by Reliant Bank’s ability to pay cash dividends to Reliant Bancorp and by Reliant Bancorp’s need to maintain sufficient capital to support Reliant Bancorp’s operations. A Tennessee chartered bank may, with the approval of the TDFI, 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 could, depending upon the financial condition of Reliant Bank, be deemed to constitute such an unsafe or unsound practice. Without regulatory approval, a dividend only can be paid 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.

 

If Reliant Bank is not permitted to pay cash dividends to Reliant Bancorp, it is unlikely that Reliant Bancorp would be able to pay cash dividends on Reliant Bancorp’s common stock. Moreover, holders of Reliant Bancorp’s common stock are entitled to receive dividends only when and if declared by Reliant Bancorp’s board of directors. Although Reliant Bancorp has paid cash dividends on its common stock in recent years, Reliant Bancorp is not required to do so, and Reliant Bancorp’s board of directors could reduce or eliminate Reliant Bancorp’s common stock dividend in the future. 

 

Reliant Bancorp’s stock price may fluctuate, which could result in losses to its 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 regulations, and other issues 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 its 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. 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.

 

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 the 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 any 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 the 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 Reliant Bancorp issues in connection with any such offering will increase the total number of shares and may dilute the economic and voting ownership interest of Reliant Bancorp’s existing shareholders.

 

A failure in or breach of Reliant Bancorp’s operational or security systems or infrastructure, or those of Reliant Bancorp’s third party vendors and other service providers or other third parties, including as a result of cyberattacks, could disrupt Reliant Bancorp’s businesses, result in the disclosure or misuse of confidential or proprietary information, damage its reputation, increase its costs, and cause losses.

 

Reliant Bancorp relies heavily on communications and information systems to conduct its business. Information security risks for financial institutions such as Reliant Bancorp have generally increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime (both domestic and international), hackers, terrorists, activists, and other external parties. As customer, public, and regulatory expectations regarding operational and information security have increased, Reliant Bancorp’s operating systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Reliant Bancorp’s business, financial, accounting, and data processing systems, or other operating systems and facilities, may stop operating properly or become disabled or damaged as a result of a number of factors, including events that are wholly or partially beyond Reliant Bancorp’s control. For example, there could be electrical or telecommunication outages; natural disasters such as earthquakes, tornadoes, and floods; disease pandemics; events arising from local or larger scale political or social matters, including terrorist acts; and as described below, cyberattacks.

 

As noted above, Reliant Bancorp’s business relies on its digital technologies, computer and e-mail systems, software and networks to conduct its operations. Although Reliant Bancorp has information security procedures and controls in place, Reliant Bancorp’s technologies, systems and networks and its customers’ devices may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of Reliant Bancorp’s or its customers’ or other third parties’ confidential information. Third parties with whom Reliant Bancorp does business or that facilitate Reliant Bancorp’s business activities, including financial intermediaries, or vendors that provide service or security solutions for Reliant Bancorp’s operations, and other unaffiliated third parties, could also be sources of operational and information security risk to Reliant Bancorp, including from breakdowns or failures of their own systems or capacity constraints.

 

 

While Reliant Bancorp has business continuity and other policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Reliant Bancorp’s risk and exposure to these matters remain heightened because of the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of Reliant Bancorp’s controls, processes, and practices designed to protect its systems, computers, software, data, and networks from attack, damage or unauthorized access remain a focus for Reliant Bancorp. As threats continue to evolve, Reliant Bancorp may be required to expend additional resources to continue to modify or enhance its protective measures or to investigate and remediate information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support Reliant Bancorp’s businesses and clients, or cyberattacks or security breaches of the networks, systems or devices that Reliant Bancorp’s clients use to access Reliant Bancorp’s products and services could result in client attrition, regulatory fines, penalties or intervention, reputation damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could have a material effect on Reliant Bancorp’s results of operations or financial condition.

 

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 and 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 of shares, and the sale of these shares may significantly dilute 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 shareholder ownership.

 

Holders of our subordinated debentures have rights that are senior to those of our shareholders.

 

In connection with the Community First merger, 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 merger 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 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

 

As of December 31, 2017, the main office of both Reliant Bancorp and Reliant Bank was located at 1736 Carothers Parkway, Suite 100, Brentwood, Tennessee. In addition, as of December 31, 2017, we operated (i) eight full-service offices located in the Tennessee counties of Davidson, Robertson, Sumner, and Williamson, (ii) mortgage production offices in Hendersonville, Tennessee, and Timonium, Maryland and (iii) loan and deposit production offices in Murfreesboro and Chattanooga, Tennessee.

 

All of these properties are leased by Reliant Bank except for three branches in Sumner and Robertson counties. Although the properties owned are generally considered adequate, we have a continuing program of modernization, expansion and, when necessary, occasional replacement of facilities.

 

Following the Community First merger effective January 1, 2018, Reliant Bank added seven branches in Columbia, Mount Pleasant, Centerville, Lyles, and Thompson Station, Tennessee.

 

ITEM 3.

LEGAL PROCEEDINGS

 

As of the end of 2017, neither Reliant Bancorp nor Reliant Bank was involved in any litigation that is expected to have a material impact on our financial position or results of operations. The Bank is periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Management believes that any claims pending against Reliant Bancorp or its subsidiaries are without merit or that the ultimate liability, if any, resulting from them will not materially affect Reliant Bank’s financial condition or Reliant Bancorp’s consolidated financial position.

 

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 5, 2018, there were 1,089 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

 

The following table sets forth dividends declared and/or paid to shareholders of Reliant Bancorp during the previous two fiscal years.

 

Date Paid

 

Total Value Issued

   

Per Share Value

 

01/22/2016

  $ 1,488,715.60     $ 0.20  

01/20/2017

  $ 1,711,227.98     $ 0.22  
07/21/2017   $ 940,910.00     $ 0.12  
10/20/2017   $ 541,584.60     $ 0.06  
01/20/2018   $ 687,605.82     $ 0.06  

 

 

Payment of dividends by Reliant Bancorp and Reliant Bank are subject to certain regulations that may limit or prevent the payment of dividends, and is further subject to the discretion of the board of directors of Reliant Bancorp and Reliant Bank.

 

Reliant Bancorp and Reliant Bank anticipate that earnings, if any, may be held for purposes of enhancing capital. No assurances can be given that any dividends on Reliant Bancorp’s common stock will be declared in the future or, if declared, what the amount of such dividends will be or whether such dividends will continue for future periods.

 

Market Price for Reliant Bancorp’s Stock

 

The following table shows for the indicated periods the high and low sales prices for Reliant Bancorp’s common stock. Previously, the Company’s stock traded under the symbol “CUBN,” and effective January 2, 2018, our common stock began trading under the symbol “RBNC.” The following prices may include retail markups, markdowns, or commissions.

 

RBNC (1)

 

High

   

Low

 

2016

               

First Quarter

  $ 16.74     $ 13.50  

Second Quarter

    16.50       14.93  

Third Quarter

    22.99       15.20  

Fourth Quarter

    21.51       19.00  

2017

               

First Quarter

    22.24       21.08  

Second Quarter

    26.04       21.47  

Third Quarter

    25.74       22.55  

Fourth Quarter

    25.77       22.12  

 

 

(1)

Prior to January 2, 2018, the Company’s stock traded under the symbol “CUBN.”

 

 

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, 2017, with (i) the Russell 2000 index, and (ii) the SNL Southeast Bank Index. This comparison assumes $100 was invested on the last trading day of 2012, 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, 2017, 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 2013 and 2014 have been obtained by using the closing prices reported on the last trading day through the over-the-counter system.

 

 

Recent Sales of Unregistered Securities

 

There were no sales of unregistered securities for the period ended December 31, 2017.

 

Issuer Purchases of Securities

 

There were no repurchases of the Company’s common stock for the period ended December 31, 2017.

 

 

ITEM 6.

SELECTED FINANCIAL DATA

 

RELIANT BANCORP, INC.

 

SELECTED FINANCIAL DATA

 

DECEMBER 31, 2017, 2016, 2015 AND 2014

 

(Dollar amounts in thousands except per share amounts)

 

The following selected historical consolidated financial data, as of and for the years ended December 31, 2017, 2016, 2015 and 2014, is derived from the audited consolidated financial statements of Reliant Bancorp, Inc. The financial data presented for the Company prior to the Merger in 2015 is derived from the historical financial statements of Reliant Bank.

 

   

2017

   

2016

   

2015

   

2014

 

SUMMARY OF OPERATIONS:

                               

Total interest income

  $ 40,158     $ 36,015     $ 29,888     $ 17,215  

Total interest expense

    5,671       3,363       2,718       1,629  

Net interest income

    34,487       32,652       27,170       15,586  

Provision for loan losses

    1,316       968       (270 )     (1,500 )

Net interest income after provision for loan losses

    33,171       31,684       27,440       17,086  

Noninterest income

    6,010       8,800       12,382       4,608  

Noninterest expense

    31,076       30,374       31,569       17,166  

Income before income taxes

    8,105       10,110       8,253       4,528  

Income tax expense

    1,942       2,213       2,271       1,816  

Consolidated net income

    6,163       7,897       5,982       2,712  

Noncontrolling interest in net (income) loss of subsidiary

    1,083       1,039       (407 )     1,184  

Net income attributable to common shareholders

    7,246       8,936       5,575       3,896  
                                 
                                 

PER COMMON SHARE DATA:

                               

Net income attributable to common shareholders, per share

                               

Basic

  $ 0.89     $ 1.18     $ 0.88     $ 0.98  

Diluted

  $ 0.88     $ 1.16     $ 0.86     $ 0.96  

Book value per common share

  $ 15.51     $ 13.75     $ 13.29     $ 11.13  

Tangible book value per common share

  $ 14.11     $ 12.08     $ 11.46     $ 10.84  

Dividends per common share

  $ 0.24     $ 0.22     $ 0.20     $ 0.20  

Preferred shares outstanding

    -       -       -       -  

Basic weighted average common shares

    8,151,492       7,586,993       6,329,316       3,993,206  

Diluted weighted average common shares

    8,239,301       7,691,493       6,478,952       4,053,804  

Common shares outstanding at period end

    9,034,439       7,778,309       7,279,620       3,910,191  
                                 

BALANCE SHEET DATA:

                               

Total assets

  $ 1,125,034     $ 911,984     $ 876,404     $ 449,731  

Mortgage loans held for sale, net

    45,322       11,831       55,093       26,640  

Total loans, net

    762,488       657,701       608,747       309,497  

Allowance for loan losses

    9,731       9,082       7,823       7,353  

Total securities

    220,201       146,813       133,825       77,245  

Other real estate, net

    -       -       1,149       1,204  

Goodwill and core deposit intagible

    12,684       12,986       13,342       1,110  

Total deposits

    883,519       763,834       640,008       334,365  

Federal Home Loan Bank advances

    96,747       32,287       135,759       63,500  

Dividends payable

    542       1,711       1,489       -  

Stockholders' equity

    140,137       106,919       96,751       43,516  

Average total assets

    995,436       885,074       733,651       417,050  

Average gross loans, excluding loans held for sale

    714,982       640,592       517,148       293,195  

Average interest earning assets

    939,947       835,337       694,135       401,487  

Average deposits

    823,088       664,844       543,341       323,466  

Average interest bearing deposits

    688,680       537,225       459,610       278,363  

Average interest bearing liabilities

    739,410       648,515       565,234       329,565  

Average total shareholders' equity

    117,780       104,216       80,122       41,525  

 

 

RELIANT BANCORP, INC.

 

SELECTED FINANCIAL DATA

 

DECEMBER 31, 2017, 2016, 2015 AND 2014

 

(Dollar amounts in thousands except per share amounts)

 

   

2017

   

2016

   

2015

   

2014

 

SELECTED FINANCIAL RATIOS:

                               

Return on average assets

    0.73 %     1.01 %     0.76 %     0.93 %

Return on average equity

    6.15 %     8.57 %     6.96 %     9.38 %

Average equity to average total assets

    11.83 %     11.77 %     10.92 %     9.96 %

Dividend payouts

    26.97 %     18.64 %     22.73 %     20.41 %

Efficiency ratio(1)

    76.74 %     73.28 %     79.82 %     85.01 %

Net interest margin(2)

    3.97 %     4.15 %     4.00 %     3.96 %

Net interest spread(3)

    3.81 %     4.04 %     3.91 %     3.88 %
                                 

CAPITAL RATIOS(5)

                               

Tier 1 leverage

    11.89 %     10.86 %     9.92 %     9.71 %

Common equity tier 1

    13.90 %     13.00 %     12.02 %     12.19 %

Tier 1 risk-based capital

    13.90 %     13.00 %     12.02 %     12.19 %

Total risk-based capital

    14.97 %     14.22 %     13.13 %     13.45 %
                                 

ASSET QUALITY RATIOS:

                               

Net charge-offs to average loans

    0.09 %     -0.05 %     -0.14 %     -0.11 %

Allowance to period end loans(4)

    1.26 %     1.36 %     1.27 %     2.32 %

Allowance for loan losses to non-performing loans

    132.74 %     105.76 %     116.59 %     83.40 %

Non-performing assets to total assets

    0.65 %     0.94 %     0.90 %     2.23 %
                                 

OTHER DATA:

                               

Banking locations

    8       7       9       4  

Loan production offices

    2       3       8       7  

Full-time equivalent employees

    167       143       226       138  

 

(1) Efficiency ratio is non-interest expense divided by the sum of net interest income plus non-interest income.

(2) Net interest margin is net interest income divided by total average earning assets.

(3) Net interest spread is the difference between the average yield on interest earning assets and the average yield on interest bearing liabilities.

(4) Period end loans exclude deferred fees and costs.

(5) Capital ratios calculated on consolidated financial statements for the Company.

 

 

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, 2017:

 

Effective December 31, 2017, Commerce Union Bancshares, Inc., changed its name to Reliant Bancorp, Inc.

Net income available to common shareholders totaled $7.2 million, or $0.88 per diluted common share, during the year ending December 31, 2017 compared to $8.9 million, or $1.16 per diluted common share, during same period in 2016.

Return on average assets was 0.73 percent for year ended December 31, 2017, compared to 1.01 percent for the same period in 2016.

Gross loan growth of $105.0 million for the year ended December 31, 2017.

Asset quality remains strong with nonperforming assets to total assets of just 0.65 percent.

Issued 1,137,000 shares of common stock in a private offering raising $23.2 million net of expenses.

Filed a Form S-3 for a $75,000,000 shelf registration to offer, issue, and sell from time to time one or more offerings any combination of (i) common stock, (ii) preferred stock, (iii) debt securities, (iv) depositary shares, (v) warrants, and (vi) units.

Prepared for January 1, 2018 acquisition of Community First, Inc., after which the Company will have assets in excess of $1.6 billion.

 

In the following section the terms “Company” means “Reliant Bancorp, Inc.” and “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, Inc., its wholly-owned subsidiary, Reliant Bank (the “Bank”), and the Bank’s 51% controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

 

 

During 2011, the Bank and another entity organized Reliant Mortgage Ventures. Under the related operating agreement, the non-controlling member receives 70% of the profits of the mortgage venture, 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, 2017, the cumulative losses to date totaled $4,352 prior to intercompany eliminations. Reliant Mortgage Ventures, LLC will have to generate net income of this amount before the Company will participate in future earnings.

 

 

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 reverse 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 reverse 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, 2017, 2016 AND 2015

 

Merger Between Commerce Union Bancshares, Inc. and Reliant Bank

 

On March 10, 2015, Commerce Union Bancshares, Inc. approved a merger with Reliant Bank which became effective on April 1, 2015 (“the Merger”). Each outstanding share and option to purchase a share of Reliant Bank common stock converted into the right to receive 1.0213 shares of Commerce Union Bancshares, Inc. common stock. After the Merger was completed, Commerce Union Bancshares, Inc.’s shareholders owned approximately 44.5% of the common stock of the Company and Reliant Bank’s shareholders owned approximately 55.5% of the common stock of the Company on a fully diluted basis.

 

The 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, Reliant Bank was considered to be acquiring Commerce Union Bancshares, Inc. in this transaction. As a result of the merger, the historical financial statements for the year ended December 31, 2015, of the Company include the historical financial statements of Reliant Bank for the three months ended March 31, 2015 and Commerce Union Bancshares, Inc. for the nine months ended December 31, 2015. The assets and liabilities of Commerce Union Bancshares, Inc. as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of Reliant Bank. Any excess of purchase price over the net estimated fair values of the acquired assets and assumed liabilities of Commerce Union Bancshares, Inc. were allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill.

 

In periods following the Merger, the comparative historical financial statements of the Company are those of Reliant Bank prior to the Merger. These consolidated financial statements include the results attributable to the operations of Commerce Union Bancshares, Inc. beginning on April 1, 2015.

 

Merger expenses totaled $82, $849 and $832, for the years ended December 31, 2016, 2015 and 2014, respectively. These expenses were related to various professional fees for legal, accounting and other consultants. These and other factors that contributed to the Company’s earnings results for the periods indicated are discussed in more detail below.

 

As of March 31, 2015, Commerce Union Bancshares, Inc., including its wholly-owned subsidiary Commerce Union Bank, had total assets of $305 million, total loans of $249 million and total deposits of $247 million. Commerce Union Bank held a loan portfolio that was primarily comprised of real estate loans. Immediately prior to the closing of the acquisition, for the three months ended March 31, 2015, Commerce Union Bank’s balance of nonperforming loans totaled 0.61% of total loans.

 

As a result of the Merger, the Company:

 

 

grew consolidated total assets from $474.4 million to $790.9 million as of April 1, 2015, after giving effect to purchase accounting;

 

 

increased total loans from $313.2 million to $561.4 million as of April 1, 2015;

 

 

increased total deposits from $376.6 million to $623.9 million as of April 1, 2015; and

 

 

expanded its employee base from 164 full time equivalent employees to 215 full time equivalent employees as of April 1, 2015.

 

 

Merger Between Reliant Bancorp, Inc. and Community First, Inc.

 

On December 15, 2017, Commerce Union Bancshares, Inc. approved a merger with Community First which became effective on January 1, 2018 (“the Merger”). Each outstanding share and option to purchase a share of Community First common stock converted into the right to receive .481 shares of Reliant Bancorp, Inc. common stock. After the Merger was completed, Reliant Bancorp, Inc.’s shareholders owned approximately 78.9% of the common stock of the Company and Community First’s shareholders owned approximately 21.1% of the common stock of the Company.

 

The assets and liabilities of Community First, Inc. 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 were allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill.

 

 

Merger expenses for the Company totaled $1,431 for the year ended December 31, 2017. These expenses were related to various professional fees for legal, accounting and other consultants. These and other factors that contributed to the Company’s earnings results for the periods indicated are discussed in more detail below.

 

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 2, 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 $1,316.0 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 $7,246, or $0.89 per basic share for the year ended December 31, 2017, compared to $8,936, or $1.18 per basic share for the same period in 2016 and $5,575 or $0.88 per basic share for the same period in 2015. Diluted net income attributable to shareholders per share was $0.88, $1.16 and $0.86 per diluted share for the years ended December 31, 2016, 2015 and 2014, respectively. The largest components of the decline from the year ended December 31, 2016 to the year ended December 31, 2017 include a 122.6% increase in audit, legal and consulting due to the merger with Community First compared to the same period in 2016. The largest components of the improvement from the year ended December 31, 2015 to the year ended December 31, 2016 include a 20.2% increase in net interest income of $5,482, and a decrease in non-interest expenses of $1,195 for the year ended December 31, 2016 compared to the same period in 2015. The largest factors offsetting the improvement was a decrease in non-interest income of $3,582 for the year ended December 31, 2016 compared to the same period in 2015.

 

 

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, 2017, 2016 and 2015 (dollars in thousands):

 

Average Balances – Yields and Rates

 

   

Year Ended December 31, 2017

   

Year Ended December 31, 2016

   

Year Ended December 31, 2015

 
   

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

  $ 714,982       4.59     $ 32,164     $ 640,592       4.78     $ 29,950     $ 517,148       4.78     $ 24,719  

Loan fees

    -       0.28       2,012       -       0.31       1,955       -       0.25       1,298  

Loans with fees

    714,982       4.87       34,176       640,592       5.09       31,905       517,148       5.03       26,017  

Mortgage loans held for sale

    19,016       4.56       868       21,064       3.67       773       38,284       3.98       1,523  

Deposits with banks

    15,177       0.71       107       20,240       0.35       70       21,715       0.18       39  

Investment securities - taxable

    31,557       2.19       691       40,463       1.79       724       46,393       1.90       881  

Investment securities - tax-exempt

    151,446       4.02       3,904       105,536       3.39       2,211       65,165       2.76       1,185  

Fed funds sold and other

    7,769       5.30       412       7,442       4.46       332       5,430       4.48       243  

Total earning assets

    939,947       4.58       40,158       835,337       4.56       36,015       694,135       4.39       29,888  

Nonearning assets

    55,489                       49,737                       39,516                  
    $ 995,436                     $ 885,074                     $ 733,651                  

Interest bearing liabilities

                                                                       

Interest bearing demand

  $ 84,171       0.21       173     $ 88,775       0.21       182     $ 88,857       0.21       190  

Savings and money market

    196,939       0.38       748       186,473       0.34       632       158,670       0.29       466  

Time deposits - retail

    319,456       0.98       3,126       159,351       0.70       1,116       116,364       0.76       883  

Time deposits - wholesale

    88,114       1.10       969       102,626       0.70       719       95,719       0.56       533  

Total interest bearing deposits

    688,680       0.73       5,016       537,225       0.49       2,649       459,610       0.45       2,072  

Federal Home Loan Bank advances

    50,730       1.29       655       111,290       0.64       714       105,624       0.61       646  

Total borrowed funds

    50,730       1.29       655       111,290       0.64       714       105,624       0.61       646  

Total interest-bearing liabilities

    739,410       0.77       5,671       648,515       0.52       3,363       565,234       0.48       2,718  

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

            3.81     $ 34,487               4.04     $ 32,652               3.91     $ 27,170  

Non-interest bearing deposits

    134,408       (0.12 )             127,619       (0.09 )             83,731       (0.07 )        

Other non-interest bearing liabilities

    3,838                       4,724                       4,564                  

Stockholder's equity

    117,780                       104,216                       80,122                  
    $ 995,436                     $ 885,074                     $ 733,651                  

Cost of funds

            0.65                       0.43                       0.41          

Net interest margin

            3.97                       4.15                       4.00          

 

Table AssumptionsAverage 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.

 

 

Analysis of Changes in Interest Income and Expense

 

   

Change for Year Ended

December 31, 2017 to 2016

   

Change for Year Ended

December 31, 2016 to 2015

 
   

 

Due to

Volume

   

Due to

Rate

   

Total

   

Due to

Volume

   

Due to

Rate

   

Total

 

Interest earning assets

                                               

Loans

  $ 3,463     $ (1,249 )   $ 2,214     $ 5,231     $ -     $ 5,231  

Loan fees

    57       -       57       657       -       657  

Loans with fees

    3,520       (1,249 )     2,271       5,888       -       5,888  

Mortgage loans held for sale

    (80 )     175       95       (639 )     (111 )     (750 )

Deposits with banks

    (22 )     59       37       (3 )     34       31  

Investment securities - taxable

    (177 )     144       (33 )     (108 )     (49 )     (157 )

Investment securities - tax-exempt

    1,186       507       1,693       749       277       1,026  

Fed funds sold and other

    15       65       80       92       (3 )     89  

Total earning assets

    4,442       (299 )     4,143       5,979       148       6,127  
                                                 
                                                 

Interest bearing liabilities

                                               

Interest bearing demand

    (9 )     -       (9 )     (8 )     -       (8 )

Savings and money market

    38       78       116       84       82       166  

Time deposits - retail

    1,438       572       2,010       307       (74 )     233  

Time deposits - wholesale

    (114 )     364       250       42       144       186  

Total interest bearing deposits

    1,353       1,014       2,367       425       152       577  

Federal Home Loan Bank advances

    (526 )     467       (59 )     36       32       68  

Total borrowed funds

    (526 )     467       (59 )     36       32       68  

Total interest-bearing liabilities

    827       1,481       2,308       461       184       645  

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

  $ 3,615     $ (1,780 )   $ 1,835     $ 5,518     $ (36 )   $ 5,482  

 

 

AnalysisFor 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 (net interest income divided by the average balance of interest earning assets) of 4.15%. For the year ended December 31, 2015, we recorded net interest income of approximately $27.2 million, which resulted in a net interest margin of 4.00%. For the year ended December 31, 2017, 2016 and 2015, our net interest spread was 3.81%, 4.04% and 3.91%, respectively. During the years ended December 31, 2017 and 2016, a contributing factor to the increase in our net interest income was the payoff of loans previously carried as purchase credit impaired. These payoffs resulted in $354 and $708 increase in our net interest income for the periods, respectively.

 

Our year-over-year average loan volume increased by approximately 11.6% from 2016 to 2017 and 23.9% from 2015 to 2016. Our combined loan and loan fee yield decreased from 5.09% to 4.87% for 2017 compared to 2016, respectively, and increased from 5.03% to 5.09% for 2016 compared to 2015, respectively.

 

 

Our cost of funds increased from 0.43% to 0.65% for 2017 compared to the same period in 2016 and from 0.41% to 0.43% for 2016 compared to the same period in 2015. Our cost of interest-bearing liabilities increased from 0.52% at December 31, 2016 to 0.77% at December 31, 2017 and from 0.48% at December 31, 2015 to 0.52% at December 31, 2016. Contributing factors in the increase cost of funds and cost of interest-bearing liabilities include the increase in the rates for FHLB advances which doubled from 2016 to 2017, the 40 basis points increase in wholesale time deposits, and the 28 basis points increase in retail time deposits. We also experienced 5.3% and 52.4% increases in our average non-interest bearing deposits from the year ended December 31, 2017 and 2016 and for the year ended December 31, 2016 and 2015, respectively. The increase from 2015 to 2016 was primarily the result of the Merger that occurred on April 1, 2015, but also a result of our continuing initiative to grow low cost core deposits. The lower increase in non-interest bearing deposits in 2017 compared to other interest bearing liabilities had a negative impact on our cost of funds.

 

We continue to deploy various asset and liability management strategies to manage our risk to interest rate fluctuations. We believe margin expansion over both the short and the long term will be challenging due to continued pressure on earning asset yields during this extended period of low interest rates. Loan pricing for creditworthy borrowers is very competitive in our markets and has limited our ability to increase pricing on new and renewed loans over the last several quarters.

 

 

Provision for Loan Losses

 

The provision for loan losses represents a charge (or in the case of the years ended December 31, 2015, a recovery) 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, 2017. 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 $1,316 and $968 for the years ended December 31, 2017 and 2016, respectively, and a negative provision for loan losses of $270 for the year ended December 31, 2015. Our provision increase was primarily the result of loan growth that we have experienced. The lower provision for loan losses (including the negative provision) experienced in the prior years was due to the continued improvement of credit-quality factors in our loan portfolio, continued recoveries and low charge-offs.

 

 

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, 2017, 2016 and 2015 (dollars in thousands):

 

   

Years Ended December 31,

   

Dollar

Increase

   

Percent Increase

   

Year Ended December 31,

   

Dollar

Increase

   

Percent Increase

 
   

2017

   

2016

    (Decrease)     (Decrease)    

2015

    (Decrease)     (Decrease)  

Non-interest income

                                                       

Service charges on deposit accounts

  $ 1,251     $ 1,239     $ 12       1.0 %   $ 958     $ 281       29.3 %

Gains (loss) on securities transactions, net

    59       36       23       63.9 %     (388 )     424       -109.3 %

Gains on mortgage loans sold, net

    3,675       6,317       (2,642 )     -41.8 %     10,999       (4,682 )     -42.6 %

Gain on sale of other real estate

    27       301       (274 )     -91.0 %     6       295       4916.7 %

Loss on disposal of premises and equipment

    (52 )     -       (52 )     -100.0 %     -       -       0.0 %

Other noninterest income:

                                                       

Bank-owned life insurance

    836       750       86       11.5 %     541       209       38.6 %

Brokerage revenue

    116       89       27       30.3 %     93       (4 )     -4.3 %

Rental income

    -       2       (2 )     -100.0 %     6       (4 )     -66.7 %

Miscellaneous noninterest income, net

    98       66       32       48.5 %     167       (101 )     -60.5 %

Total other non-interest income

    1,050       907       143       15.8 %     807       100       12.4 %

Total non-interest income

  $ 6,010     $ 8,800     $ (2,790 )     -31.7 %   $ 12,382     $ (3,582 )     -28.9 %

 

The most significant reason for the decrease during the years ended December 31, 2017 and 2016 compared to the same periods in 2016 and 2015, related 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, 2017 compared to the same period in 2016 and the year ended December 31, 2016 compared to the same period in 2015.

 

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, 2017, the Company sold securities classified as available for available for sale totaling $18,688 and recognized a gain of $59. During the year ended December 31, 2016, the Company sold securities classified as available for sale totaling $31,782 and recognized a net gain of $36. Proceeds from sales during 2016 were primarily reinvested in higher yielding securities with comparable interest rate and credit risk. During the year ended December 31, 2015, the Company sold securities classified as available for sale and held to maturity totaling $27,258 and recognized a net loss of $388. During the first quarter of 2015, the Bank sold securities that were previously classified as held to maturity and recognized a loss on sale of $396, which is included in the net loss above. All other securities classified as held to maturity were transferred to available-for-sale during the first quarter of 2015.

 

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 $3,675, $6,317 and $10,999, for the years ended December 31, 2017, 2016 and 2015, 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, 2017 and 2016 was directly attributable to the transition. We did notice an increase in gains on mortgage loans sold during the second half of 2017 was influenced by our new first-lien HELOC program.

 

 

During the year ended December 31, 2017, we recognized a gain of $27 due to the recognition of a previously deferred gain from a payoff of a loan. During the year ended December 31, 2016, we recognized a gain on sale of other real estate of $301 when we sold the remaining two properties in our other real estate portfolio and recognized a gain previously deferred related to the payoff of a loan financing a previous other real estate sale.

 

Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $836, $750 and $541 for the years ended December 31, 2017, 2016 and 2015, respectively. Primarily, the increases in earnings on these bank-owned life insurance policies resulted from an additional purchased $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies, and during 2016, and an additional $8.0 million of bank-owned life insurance 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 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.

 

Rental income relates to rent received on foreclosed properties and is minimal for the periods presented. 

 

Non-Interest Expense

 

The following is a summary of our non-interest expense for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):

 

   

Years Ended December 31,

   

Dollar Increase

   

Percent Increase

   

Year Ended

December 31,

   

Dollar Increase

   

Percent Increase

 
   

2017

   

2016

    (Decrease)     (Decrease)    

2015

    (Decrease)     (Decrease)  

Non-interest expense

                                                       

Salaries and employee benefits

  $ 18,432     $ 18,256     $ 176       1.0 %   $ 18,657     $ (401 )     -2.1 %

Occupancy

    3,353       3,174       179       5.6 %     3,387       (213 )     -6.3 %

Information technology

    2,715       2,486       229       9.2 %     2,479       7       0.3 %

Advertising and public relations

    264       702       (438 )     -62.4 %     1,213       (511 )     -42.1 %

Audit, legal and consulting

    2,865       1,287       1,578       122.6 %     1,892       (605 )     -32.0 %

Federal deposit insurance

    399       438       (39 )     -8.9 %     383       55       14.4 %

Provision for losses on other real estate

    -       70       (70 )     -100.0 %     110       (40 )     -36.4 %

Other operating

    3,048       3,961       (913 )     -23.0 %     3,448       513       14.9 %

Total non-interest expense

  $ 31,076     $ 30,374     $ 702       2.3 %   $ 31,569     $ (1,195 )     -3.8 %

 

The most significant reason for the changes during the years ended December 31, 2017 and 2016 relate to the consulting cost from the Merger between Reliant Bancorp Inc. and Community First Inc. that was effective January 1, 2018. Following is a description of certain components of non-interest expense and additional reasons for fluctuations during the years ended December 31, 2017, 2016 and 2015.

 

Salaries and employee benefits increased for the year ended December 31, 2017 compared to the same period in 2016 and decreased for the year ended December 31, 2016 compared to the same period in 2015. 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. The decrease from 2015 to 2016 was primarily a result of a decrease in compensation from transitioning several of our out-of-market mortgage offices to another bank and was partially offset from general increases in compensation of our staff.

 

 

Certain of our facilities are leased while there are others that we own. Occupancy costs increased during the year ended December 31, 2017 compared to the same period in 2016. This increase is due to the depreciation for the Green Hills location, Chattanooga location, and Mortgage office in Brentwood. Additionally, the Chattanooga location and the Mortgage office in Brentwood were both new leases in 2017. Occupancy costs decreased during the year ended December 31, 2016 compared to the same period in 2015. This decrease is due to transitioning several of our out-of-market mortgage offices to another bank.

 

Information technology costs increased for the year ended December 31, 2017 when comparing to the comparable periods in 2016 and 2015. This increase is mainly attributable to projects implemented in 2017.

 

Advertising and public relations costs decreased when comparing the year ended December 31, 2017 to the similar period in 2016, by $438. The decrease was substantially attributable to a decline in our direct-mail advertising and related consultation expenditures and partially offset by the recently completed marketing campaign to increase core deposits. Additional customer acquisition strategies are being evaluated by the Company. Advertising and public relations costs decreased when comparing the year ended December 31, 2016 to the similar period in 2015, by $511. The decrease is primarily due to transitioning several of our out-of-market mortgage offices to another bank. These decreases have been partially offset by cost increases attributable to our current customer acquisition strategy.

 

Audit, legal and consulting costs increased $1,578 when comparing the year ended December 31, 2017 compared to the similar period in 2016 due to an increase in merger-related expenses. The decrease from 2015 to 2016 of $605 was due to merger-related expenses and partially offset by the costs associated with being a public company.

 

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 decreased $39 for year ended December 31, 2017, compared to the same period in 2016 and increased $55 for the year ended December 31, 2016 compared to the same period in 2015. 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. The increase in 2016 relates to our increase in average liabilities which is the base for determining our premiums. The costs associated with the increase in average liabilities.

 

We recorded a provision for losses on other real estate of $70 and $110 during the years ended December 31, 2016, 2015 compared to none in 2017. The provision recorded for 2016 related to a property held in our other real estate portfolio while the provision recorded for 2015 related to a different property held in our other real estate portfolio.

 

Other operating expenses decreased by $913 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. Other operating expenses increased $513 for the year ended December 31, 2016, compared to the same period in 2015 mainly due to the Merger effective April 1, 2015. These increases from 2015 compared to 2016 were partially offset by 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. We also recorded a provision for unfunded commitments of $85 and $323 during the years ended December 31, 2016 and 2015, respectively. This provision was recorded to provide for estimated losses in our unfunded loan commitments.

 

Income Taxes

 

During the years ended December 31, 2017, 2016 and 2015 we recorded income tax expense of $1,942, $2,213 and $2,271, 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. During the third quarter of 2015, the Company began consolidating the results of the Bank and the mortgage banking operations in its tax filings with the State of Tennessee. At that time, we recognized a cumulative benefit of $159 relating to 2014 and prior tax losses of the mortgage banking operations that were available to offset a portion of the income of the Bank. Results of the mortgage banking operations were previously reported on the individual state returns of the Bank and mortgage banking operation’s non-controlling members.

 

 

Our income tax expense for the year ended December 31, 2017, reflects an effective income tax rate of 21.7% (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) compared to 20.4% (exclusive of a tax benefit from our mortgage banking operations of $72 on pre-tax loss of $1,111) for the comparable period of 2016. During the year ended December 31, 2017 and 2016, the Company recognized excess tax benefits of $184 and $478 related to the exercise of stock options, respectively, thereby reducing our effective tax rate as compared to the year ended December 31, 2015. Also, during the year ended December 31, 2016, the Bank entered into an interest-free loan agreement and recognizes a state tax credit in the amount of $650 for 2016 and 2017. Our income tax expense was also positively affected by our increase in income earned on tax-exempt securities in 2017 and 2016. Our effective tax rate represents our blended federal and state rate of 38.29% 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.  In 2018, our effective tax rate before temporary and permanent difference will decrease to 26.135% due to the change in rate by the newly enacted Tax Cuts and Jobs Act that reduced the federal corporate tax rate from 35% to 21%.

 

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 $1,083 for the year ended December 31, 2017, net loss of $1,039 for the year ended December 31, 2016 and a net income of $407 for the year ended December 31, 2015. The net loss for the year ended December 31, 2017, results in a cumulative net loss from the venture of $4,352. 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, 2017, 2016 and 2015:

 

   

2017

   

2016

   

2015

 
                         

Return on assets

    0.73 %     1.01 %     0.76 %

(Net income divided by average total assets)

                       

Return on equity

    6.15 %     8.57 %     6.96 %

(Net income divided by average equity)

                       

Dividend payout ratio

    26.97 %     18.64 %     22.73 %

(Dividends declared per share divided by net income per share)

                       

Equity to assets ratio

    11.83 %     11.77 %     10.92 %

(Average eq