Reliant Bancorp, Inc. - FORM 10-Q

Reliant Bancorp, Inc. - FORM 10-Q - August 12, 2016

Attached files

Attached files

Reliant Bancorp, Inc. Reports

file	filename
EX-32.2 - EX-32.2 - Reliant Bancorp, Inc.	d245118dex322.htm
EX-32.1 - EX-32.1 - Reliant Bancorp, Inc.	d245118dex321.htm
EX-31.2 - EX-31.2 - Reliant Bancorp, Inc.	d245118dex312.htm
EX-31.1 - EX-31.1 - Reliant Bancorp, Inc.	d245118dex311.htm
EX-10.1 - EX-10.1 - Reliant Bancorp, Inc.	d245118dex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

¨	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

COMMERCE UNION BANCSHARES, 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)

(615) 221-2020
(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s common stock, par value $1.00 per share, as of August 10, 2016 was 7,701,070.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited).	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	43
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	67
Item 4.	Controls and Procedures.	67

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.	68
Item 1A.	Risk Factors.	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	68
Item 3.	Defaults Upon Senior Securities.	68
Item 4.	Mine Safety Disclosures.	68
Item 5.	Other Information.	68
Item 6.	Exhibits.	68

SIGNATURES		69

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of Commerce Union Bancshares, Inc. (“we,” “our,” or “us” on a consolidated basis) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements include projections, predictions, expectations or statements as to beliefs or future events or results or refer to other matters that are not historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements contained in this quarterly report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by words like “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of those words and other comparable words. You should be aware that those statements reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if any one or more of our material underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated, or projected. You should bear this in mind when reading this quarterly report and not place undue reliance on these forward-looking statements. Commerce Union’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Factors that might cause such differences include, but are not limited to:

•

The possibility that our asset quality would decline or that we experience greater loan losses than anticipated;

•

Increased levels of other real estate, primarily as a result of foreclosures;

•

The impact of liquidity needs on our results of operations and financial condition;

•

Competition from financial institutions and other financial service providers;

•

Economic conditions in the local markets where we operate;

•

The impact of the merger of Commerce Union Bank and legacy Reliant Bank effective on April 1, 2015;

•

Our ability to recognize planned cost-savings as a result of the merger and to successfully integrate the two institutions;

•

The negative impact on profitability imposed on us by a compressed net interest margin on loans and other extensions of credit, which affects our ability to lend profitably and to price loans effectively in the face of competitive pressures;

•

The effect of legislative or regulatory developments, including changes in laws concerning banking, securities, taxes, insurance, and other aspects of the financial services industry;

•

Our ability to attract, develop, and retain qualified banking professionals;

•

A significant number of our customers failing to perform under their loans and other terms of credit agreements;

•

The growing concern on the impact of a future rise in interest rates, affecting both our pricing of credit and our investments;

•

Failure to attract or retain stable deposits at reasonable cost that is competitive with the larger international, national, and regional financial service providers with which we compete;

•

International, national, and local disasters such as terrorist attacks, natural disasters, or the effects of pandemic flu, or other pandemic illness;

•

Incorrect responses to, or assumptions based on, experiences and circumstances, such as responses to known or perceived changes in the economy;

•

Volatility and disruption in financial, credit, and securities markets;

•

Deterioration in the financial markets that may result in other-than-temporary impairment charges relating to securities owned by the Reliant Bank;

•

The effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board, and other regulatory agencies; and

•

The effect of fiscal and governmental policies of the United States federal government.

You should also consider carefully the risk factors discussed in Item 1A of Part II of this Form 10-Q referencing Item 1A of Part I of our most recent Form 10-K, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition. The risks discussed in this quarterly report are factors that, individually or in the aggregate, management believes could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties. Factors not here or there listed may develop or, if currently extant, we may not have yet recognized them.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

PART I – FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements (Unaudited).

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)


	June 30, 2016		December 31, 2015
ASSETS
Cash and due from banks	$	16,571	$	20,289
Federal funds sold		69		281

Total cash and cash equivalents		16,640		20,570
Securities available for sale		147,675		133,825
Loans, net		640,589		608,747
Mortgage loans held for sale		14,961		55,093
Accrued interest receivable		3,179		3,096
Premises and equipment, net		9,088		9,196
Restricted equity securities, at cost		7,060		6,244
Other real estate, net		475		1,149
Cash surrender value of life insurance contracts		24,439		20,077
Deferred tax assets, net		1,708		2,383
Goodwill		11,404		11,404
Core deposit intangibles		1,760		1,938
Other assets		4,226		2,682

TOTAL ASSETS	$	883,204	$	876,404

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits
Demand	$	134,515	$	111,309
Interest-bearing demand		86,090		95,397
Savings and money market deposit accounts		186,009		181,316
Time		241,237		251,986

Total deposits		647,851		640,008
Accrued interest payable		127		55
Federal Home Loan Bank advances		124,871		135,759
Dividends payable		—		1,489
Other liabilities		4,331		2,342

TOTAL LIABILITIES		777,180		779,653

STOCKHOLDERS’ EQUITY
Common stock, $1 par value; 10,000,000 shares authorized; 7,627,777 and 7,279,620 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		7,628		7,280
Additional paid-in capital		87,736		84,520
Retained earnings		9,584		4,987
Accumulated other comprehensive income (loss)		1,076		(36	)

TOTAL STOCKHOLDERS’ EQUITY		106,024		96,751

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	883,204	$	876,404

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

(Unaudited)


	Three Months Ended					Six Months Ended
	June 30, 2016		June 30, 2015			June 30, 2016			June 30, 2015
INTEREST INCOME
Interest and fees on loans	$	8,698	$	7,551		$	16,836		$	11,587
Interest on investment securities, taxable		216		218			452			421
Interest on investment securities, nontaxable		490		299			928			481
Federal funds sold and other		93		67			195			119

TOTAL INTEREST INCOME		9,497		8,135			18,411			12,608

INTEREST EXPENSE
Deposits
Demand		47		57			91			79
Savings and money market deposit accounts		163		124			329			189
Time		407		393			830			617
Federal Home Loan Bank advances and other		188		169			387			262

TOTAL INTEREST EXPENSE		805		743			1,637			1,147

NET INTEREST INCOME		8,692		7,392			16,774			11,461
PROVISION FOR LOAN LOSSES		450		(500	)		615			(500	)

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,242		7,892			16,159			11,961

NONINTEREST INCOME
Service charges on deposit accounts		321		341			606			488
Gains on mortgage loans sold, net		1,782		2,756			5,124			4,533
Gain (loss) on securities transactions, net (reclassified from other comprehensive income)		60		—			60			(396	)
Gain on sale of other real estate		156		—			156			—
Other		191		187			410			293

TOTAL NONINTEREST INCOME		2,510		3,284			6,356			4,918

NONINTEREST EXPENSE
Salaries and employee benefits		4,883		5,075			10,277			7,914
Occupancy		810		906			1,639			1,606
Information technology		636		633			1,263			1,041
Advertising and public relations		160		289			425			498
Audit, legal and consulting		384		520			665			744
Federal deposit insurance		126		113			240			183
Provision for losses on other real estate		27		90			53			110
Other operating		1,001		1,078			2,102			1,586

TOTAL NONINTEREST EXPENSE		8,027		8,704			16,664			13,682

INCOME BEFORE PROVISION FOR INCOME TAXES		2,725		2,472			5,851			3,197
INCOME TAX EXPENSE		588		902			1,156			1,086

CONSOLIDATED NET INCOME		2,137		1,570			4,695			2,111

NONCONTROLLING INTEREST IN NET (INCOME) LOSS OF SUBSIDIARY		223		32			(98	)		103

NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	2,360	$	1,602		$	4,597		$	2,214

Basic net income attributable to common shareholders, per share	$	0.31	$	0.23		$	0.61		$	0.40

Diluted net income attributable to common shareholders, per share	$	0.31	$	0.22		$	0.60		$	0.39

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Consolidated net income	$	2,137		$	1,570		$	4,695		$	2,111
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities, net of tax of $604 and $(599) for the three months ended June 30, 2016 and 2015, respectively, and $713 and $(795) for the six months ended June 30, 2016 and 2015, respectively		974			(966	)		1,149			(1,279	)
Reclassification adjustment for (gains) losses included in net income, net of tax of $(23) for the three months ended June 30, 2016, and $(23) and $152 for the six months ended June 30, 2016 and 2015, respectively		(37	)		—			(37	)		244

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		937			(966	)		1,112			(1,035	)

TOTAL COMPREHENSIVE INCOME	$	3,074		$	604		$	5,807		$	1,076

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

(Unaudited)


					ADDITIONAL PAID-IN CAPITAL			RETAINED EARNINGS		ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			NONCONTROLLING INTEREST			TOTAL
	COMMON STOCK
	SHARES		AMOUNT
BALANCE—JANUARY 1, 2015		3,910,191	$	3,910	$	38,955		$	901	$	(250	)	$	—		$	43,516
Stock based compensation expense		—		—		26			—		—			—			26
Shares retained by shareholders of Commerce Union Bancshares, Inc., net of stock issuance costs of $741		3,069,030		3,069		44,091			—		—			—			47,160
Conversion shares issued to shareholders of Reliant Bank		83,015		83		(83	)		—		—			—			—
Exercise of stock options		8,585		9		74			—		—			—			83
Stock issuance costs		—		—		(111	)		—		—			—			(111	)
Noncontrolling interest contributions		—		—		—			—		—			103			103
Net income (loss)		—		—		—			2,214		—			(103	)		2,111
Other comprehensive loss		—		—		—			—		(1,035	)		—			(1,035	)

BALANCE—JUNE 30, 2015		7,070,821	$	7,071	$	82,952		$	3,115	$	(1,285	)	$	—		$	91,853

BALANCE—JANUARY 1, 2016		7,279,620	$	7,280	$	84,520		$	4,987	$	(36	)	$	—			96,751
Stock based compensation expense		—		—		99			—		—			—			99
Exercise of stock options		348,157		348		3,117			—		—			—			3,465
Distribution to noncontrolling interest		—		—		—			—		—			(98	)		(98	)
Net income		—		—		—			4,597		—			98			4,695
Other comprehensive income		—		—		—			—		1,112			—			1,112

BALANCE—JUNE 30, 2016		7,627,777	$	7,628	$	87,736		$	9,584	$	1,076		$	—		$	106,024

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

(Unaudited)


	June 30, 2016			June 30, 2015
OPERATING ACTIVITIES
Consolidated net income	$	4,695		$	2,111
Adjustments to reconcile consolidated net income to net cash used in operating activities
Provision for loan losses		615			(500	)
Deferred income tax expense		(15	)		544
Depreciation and amortization of premises and equipment		476			388
Net amortization of securities		725			469
Net realized (gains) losses on sales of securities		(60	)		396
Gains on mortgage loans sold, net		(5,124	)		(4,533	)
Stock-based compensation expense		99			26
Gain on sale of other real estate		(156	)		—
Provision for losses on other real estate		53			110
Increase in cash surrender value of life insurance contracts		(362	)		(216	)
Mortgage loans originated for resale		(115,703	)		(109,175	)
Proceeds from sale of mortgage loans		160,959			98,633
Amortization of core deposit intangible		178			121
Change in
Accrued interest receivable		(83	)		(39	)
Other assets		(1,642	)		(594	)
Accrued interest payable		72			(50	)
Other liabilities		796			(680	)

TOTAL ADJUSTMENTS		40,828			(15,100	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		45,523			(12,989	)

INVESTING ACTIVITIES
Activities in available for sale securities
Purchases		(15,991	)		(32,223	)
Sales		1,058			709
Maturities, prepayments and calls		3,494			2,699
Activities in held to maturity securities
Sales		—			20,649
Purchases of restricted equity securities		(816	)		(89	)
Loan originations and payments, net		(32,457	)		(8,503	)
Purchase of buildings, leasehold improvements, and equipment		(368	)		(201	)
Proceeds from sale of other real estate		712			—
Improvement of other real estate		(16	)		—
Purchase of life insurance contracts		(4,000	)		(4,000	)
Cash received in merger		—			12,378

NET CASH USED IN INVESTING ACTIVITIES		(48,384	)		(8,581	)

FINANCING ACTIVITIES
Net change in deposits		7,843			20,343
Net change in federal funds purchased		—			(6,651	)
Payments on Federal Home Loan Bank advances, net		(10,888	)		18,498
Issuance of common stock		3,465			83
Stock issuance costs		—			(111	)
Noncontrolling interest contributions		—			225
Cash dividends paid on common stock		(1,489	)		—

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(1,069	)		32,387

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(3,930	)		10,817
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR		20,570			11,147

CASH AND CASH EQUIVALENTS—END OF YEAR	$	16,640		$	21,964

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollar amounts in thousands except per share amounts)

(Unaudited)


	June 30, 2016			June 30, 2015
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest	$	1,565		$	1,114
Taxes		2,048			2,155
Non-cash investing and financing activities
Unrealized gain (loss) on securities available-for-sale	$	3,076		$	(2,291	)
Unrealized gain (loss) on derivatives		(1,274	)		316
Change in due to/from noncontrolling interest		(98	)		(122	)

See accompanying notes to consolidated financial statements

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 1—BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Commerce Union Bancshares, Inc, its wholly owned subsidiary, Reliant Bank (the “Bank”), the Bank’s wholly-owned subsidiaries, Commerce Union Mortgage Services, Inc. (inactive) and Reliant Investments, LLC (inactive), and the Bank’s majority controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). As described in the notes to our annual financial statements, Reliant Mortgage Ventures, LLC is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices in the banking industry.

The consolidated financial statements as of June 30, 2016, and for the three and six months ended June 30, 2016 and 2015, included herein have not been audited. See Note 11 related to the business combination occurring during 2015 and the related financial presentation. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures made are adequate to make the information not misleading. These financial statements should be read in conjunction with the Company’s 2015 audited consolidated financial statements. The accompanying consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. Such adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 2—SECURITIES

The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) at June 30, 2016 and December 31, 2015 were as follows:


	June 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Treasury and other U. S. government agencies	$	4,410	$	25	$	(1	)	$	4,434
State and municipal		99,245		3,239		(31	)		102,453
Corporate bonds		2,000		8		(28	)		1,980
Mortgage backed securities		35,258		345		(45	)		35,558
Time deposits		3,250		—		—			3,250

Total	$	144,163	$	3,617	$	(105	)	$	147,675


	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U. S. Treasury and other U. S. government agencies	$	4,918	$	1	$	(83	)	$	4,836
State and municipal		86,604		1,262		(271	)		87,595
Corporate bonds		2,000		5		(26	)		1,979
Mortgage backed securities		36,617		63		(515	)		36,165
Time deposits		3,250		—		—			3,250

Total	$	133,389	$	1,331	$	(895	)	$	133,825

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 2—SECURITIES (CONTINUED)

On January 16, 2015, the Company sold $20,806 of securities that were classified as held to maturity and recognized a loss on sale of $396. Subsequent to the sale, all other securities classified as held to maturity were transferred to available for sale.

Securities pledged at June 30, 2016 and December 31, 2015 had a carrying amount of $55,857 and $39,815, respectively, and were pledged to collateralize Federal Home Loan Bank advances, Federal Reserve advances and municipal deposits.

At June 30, 2016 and December 31, 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies or U.S. Government sponsored entities, in an amount greater than 10% of stockholders’ equity.

The fair value of available for sale debt securities at June 30, 2016 by contractual maturity are provided below. Securities not due at a single maturity date, primarily mortgage backed securities, are shown separately.


	Amortized Cost		Estimated Fair Value
Due within one year	$	1,273	$	1,278
Due in one to five years		18,758		18,957
Due in five to ten years		13,429		13,808
Due after ten years		75,445		78,074
Mortgage backed securities		35,258		35,558

	$	144,163	$	147,675

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 2—SECURITIES (CONTINUED)

The following table shows available for sale securities with unrealized losses and their estimated fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2016:


	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Description of Securities
U. S. Treasury and other U. S. government agencies	$	996	$	1	$	—	$	—	$	996	$	1
State and municipal		2,969		17		1,414		14		4,383		31
Corporate bonds		—		—		972		28		972		28
Mortgage backed securities		1,462		6		3,851		39		5,313		45

Total temporarily impaired	$	5,427	$	24	$	6,237	$	81	$	11,664	$	105


	Less than 12 months				12 months or more				Total
	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Description of Securities
U. S. Treasury and other U. S. government agencies	$	2,002	$	14	$	2,421	$	69	$	4,423	$	83
State and municipal		18,619		226		3,760		45		22,379		271
Corporate bonds		974		26		—		—		974		26
Mortgage backed securities		28,547		367		4,009		148		32,556		515

Total temporarily impaired	$	50,142	$	633	$	10,190	$	262	$	60,332	$	895

Management has the intent and ability to hold all securities in an unrealized loss position for the foreseeable future, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. There were 30 and 105 securities in an unrealized loss position as of June 30, 2016 and December 31, 2015, respectively.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 3—LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans at June 30, 2016 and December 31, 2015 were comprised as follows:


	June 30,		December 31,
	2016		2015
Commercial, Industrial and Agricultural	$	136,478	$	143,770
Real Estate
1-4 Family Residential		109,788		110,736
1-4 Family HELOC		52,250		49,665
Multifamily and Commercial		207,426		202,736
Construction, Land Development and Farmland		114,391		89,763
Consumer		15,525		15,271
Other		14,288		5,556

		650,146		617,497
Less
Deferred loan fees		869		927
Allowance for possible loan losses		8,688		7,823

Loans, net	$	640,589	$	608,747

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Activity in the allowance for loan losses by portfolio segment was as follows for the six months ended June 30, 2016:


	Commercial Industrial and Agricultural			Multi Family and Commercial Real Estate			Construction Land Development and Farmland			1-4 Family Residential Real Estate
Beginning balance	$	2,198		$	2,591		$	894		$	1,214
Charge-offs		(17	)		—			—			—
Recoveries		184			2			3			66
Provision		272			(147	)		742			(201	)

Ending balance	$	2,637		$	2,446		$	1,639		$	1,079


	1-4 Family HELOC			Consumer			Other			Total
Beginning balance	$	699		$	192		$	35		$	7,823
Charge-offs		—			—			(7	)		(24	)
Recoveries		6			13			—			274
Provision		(53	)		(10	)		12			615

Ending balance	$	652		$	195		$	40		$	8,688

Activity in the allowance for loan losses by portfolio segment was as follows for the six months ended June 30, 2015:


	Commercial Industrial and Agricultural			Multi Family and Commercial Real Estate			Construction Land Development and Farmland			1-4 Family Residential Real Estate
Beginning balance	$	2,184		$	2,070		$	742		$	642
Charge-offs		—			—			—			—
Recoveries		159			385			3			8
Provision		(76	)		(576	)		(14	)		155

Ending balance	$	2,267		$	1,879		$	731		$	805


	1-4 Family HELOC			Consumer			Other		Unallocated		Total
Beginning balance	$	854		$	181		$	2	$	678	$	7,353
Charge-offs		—			(5	)		—		—		(5	)
Recoveries		21			—			—		—		576
Provision		(162	)		(24	)		4		193		(500	)

Ending balance	$	713		$	152		$	6	$	871	$	7,424

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2016 was as follows:


	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate
Allowance for loan losses
Individually evaluated for impairment	$	933	$	—	$	23	$	—
Acquired with credit impairment		211		6		—		—
Collectively evaluated for impairment		1,493		2,440		1,616		1,079

Total	$	2,637	$	2,446	$	1,639	$	1,079

Loans
Individually evaluated for impairment	$	7,256	$	2,120	$	2,615	$	2,193
Acquired with credit impairment		339		3,926		1,480		306
Collectively evaluated for impairment		128,883		201,380		110,296		107,289

Total	$	136,478	$	207,426	$	114,391	$	109,788


	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	149	$	—	$	—	$	1,105
Acquired with credit impairment		—		—		—		217
Collectively evaluated for impairment		503		195		40		7,366

Total	$	652	$	195	$	40	$	8,688

Loans
Individually evaluated for impairment	$	1,813	$	—	$	—	$	15,997
Acquired with credit impairment		17		—		—		6,068
Collectively evaluated for impairment		50,420		15,525		14,288		628,081

Total	$	52,250	$	15,525	$	14,288	$	650,146

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

The allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2015 was as follows:


	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland		1-4 Family Residential Real Estate
Allowance for loan losses
Individually evaluated for impairment	$	479	$	11	$	22	$	—
Acquired with credit impairment		6		—		—		241
Collectively evaluated for impairment		1,713		2,580		872		973

Total	$	2,198	$	2,591	$	894	$	1,214

Loans
Individually evaluated for impairment	$	2,438	$	2,196	$	224	$	2,646
Acquired with credit impairment		888		3,968		1,496		735
Collectively evaluated for impairment		140,444		196,572		88,043		107,355

Total	$	143,770	$	202,736	$	89,763	$	110,736


	1-4 Family HELOC		Consumer		Other		Total
Allowance for loan losses
Individually evaluated for impairment	$	190	$	—	$	—	$	702
Acquired with credit impairment		—		—		—		247
Collectively evaluated for impairment		509		192		35		6,874

Total	$	699	$	192	$	35	$	7,823

Loans
Individually evaluated for impairment	$	2,236	$	—	$	—	$	9,740
Acquired with credit impairment		19		—		—		7,106
Collectively evaluated for impairment		47,410		15,271		5,556		600,651

Total	$	49,665	$	15,271	$	5,556	$	617,497

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Risk characteristics relevant to each portfolio segment are as follows:

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

Multi-family and commercial real estate: Multi-family and commercial real estate and multi-family loans are subject to underwriting standards and processes similar to commercial, industrial and agricultural loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

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

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

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

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

1-4 family HELOC: This loan segment includes open-end home equity loans that are secured by a first or second mortgage on the borrower’s residence. This allows customers to borrow against the equity in their home utilizing a revolving line of credit. These loans are underwritten and approved based on a number of credit quality criteria including limits on maximum LTV, minimum credit scores, and maximum debt to income. Real estate market values as of the time the loan is made directly affect the amount of credit extended and, in addition, changes in these residential property values impact the depth of potential losses in this portfolio segment. Because of the revolving nature of these loans as well as the fact that many represent second mortgages, this portfolio segment can contain more risk than the amortizing 1-4 family residential real estate loans.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Consumer: The consumer loan portfolio segment includes non-real estate secured direct loans to consumers for household, family, and other personal expenditures. Consumer loans may be secured or unsecured and are usually structured with short or medium term maturities. These loans are underwritten and approved based on a number of consumer credit quality criteria including limits on maximum LTV on secured consumer loans, minimum credit scores, and maximum debt to income. Many traditional forms of consumer installment credit have standard monthly payments and fixed repayment schedules of one to five years. These loans are made with either fixed or variable interest rates that are based on specific indices. Installment loans fill a variety of needs, such as financing the purchase of an automobile, a boat, a recreational vehicle, or other large personal items, or for consolidating debt. These loans may be unsecured or secured by an assignment of title, as in an automobile loan, or by money in a bank account. In addition to consumer installment loans, this portfolio segment also includes secured and unsecured personal lines of credit as well as overdraft protection lines. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Non-accrual loans by class of loan were as follows at June 30, 2016 and December 31, 2015:


	June 30, 2016		December 31, 2015
Commercial, Industrial and Agricultural	$	639	$	947
Multi Family and Commercial Real Estate		682		713
Construction, Land Development and Farmland		117		158
1-4 Family Residential Real Estate		1,569		2,109
1-4 Family HELOC		870		1,077

Total	$	3,877	$	5,004

Individually impaired loans by class of loans were as follows at June 30, 2016:


	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance
Commercial, Industrial and Agricultural	$	8,371	$	4,806	$	2,789	$	7,595	$	1,144
Multi Family and Commercial Real Estate		6,891		4,711		1,335		6,046		6
Construction, Land Development and Farmland		4,199		3,871		224		4,095		23
1-4 Family Residential Real Estate		2,870		2,499		—		2,499		—
1-4 Family HELOC		2,402		1,147		683		1,830		149

Total	$	24,733	$	17,034	$	5,031	$	22,065	$	1,322

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Individually impaired loans by class of loans were as follows at December 31, 2015:


	Unpaid Principal Balance		Recorded Investment with no Allowance Recorded		Recorded Investment with Allowance Recorded		Total Recorded Investment		Related Allowance
Commercial, Industrial and Agricultural	$	4,047	$	2,145	$	1,180	$	3,325	$	485
Multi Family and Commercial Real Estate		6,958		5,452		713		6,165		11
Construction, Land Development and Farmland		1,831		1,496		224		1,720		22
1-4 Family Residential Real Estate		3,763		3,009		372		3,381		241
1-4 Family HELOC		2,363		1,309		946		2,255		190

Total	$	18,962	$	13,411	$	3,435	$	16,846	$	949

The average balances of impaired loans for the six months ended June 30, 2016 and 2015 were as follows:


	2016		2015
Commercial, Industrial and Agricultural	$	5,674	$	2,911
Multi Family and Commercial Real Estate		6,108		2,443
Construction, Land Development and Farmland		2,720		587
1-4 Family Residential Real Estate		3,122		3,777
1-4 Family HELOC		2,040		2,081

Total	$	19,664	$	11,799

The Company utilizes a risk grading system to monitor the credit quality of the Company’s commercial loan portfolio which consists of commercial, industrial and agricultural, commercial real estate and construction loans. Loans are graded on a scale of 1 to 9. Grades 1 - 5 are pass credits, grade 6 is special mention, grade 7 is substandard, grade 8 is doubtful and grade 9 is loss. A description of the risk grades are as follows:

Grade 1—Minimal Risk (Pass)

This grade includes loans to borrowers with a strong financial position and history of profits and cash flows sufficient to service the debt. These borrowers have well defined sources of primary/secondary repayment, conservatively leveraged balance sheets and the ability to access a wide range of financing alternatives. Collateral securing these loans is negotiable, of sufficient value and in possession of the Company. Risk of loss is unlikely.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Grade 2—High Quality (Pass)

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

Grade 3—Above Average (Pass)

This grade includes loans to borrowers with a balance sheet that reflects a comfortable degree of leverage and liquidity. Borrowers are profitable and have a sustained record of servicing debt. An identifiable market exists for the collateral, but liquidation could take up to one year. Risk of loss is unlikely.

Grade 4—Average (Pass)

This grade includes loans to borrowers with a financial condition that is satisfactory and comparable to industry standards. The borrower has verifiable net worth, providing over time, average asset protection. Borrower cash flows are sufficient to satisfy debt service requirements. Risk of loss is below average.

Grade 5—Acceptable (Management Attention) (Pass)

This grade includes loans to borrowers whose loans are performing, but sources of repayment are not documented by the current credit analysis. There are some declining trends in margins, ratios and/or cash flow. Guarantor(s) have strong net worth(s), but assets may be concentrated in real estate or other illiquid investments. Risk of loss is average.

Grade 6—Special Mention

Special mention assets have potential weaknesses that may, if not checked or corrected, weaken the asset or inadequately protect the Company’s position at some future date. These assets pose elevated risk, but their weakness does not yet justify a substandard classification. Borrowers may be experiencing adverse operating trends (declining revenues or margins) or an ill proportioned balance sheet (e.g., increasing inventory without an increase in sales, high leverage, tight liquidity). Adverse economic or market conditions, such as interest rate increases or the entry of a new competitor, may also support a special mention rating. Nonfinancial reasons for rating a credit exposure special mention include management problems, pending litigation, an ineffective loan agreement or other material structural weakness, and any other significant deviation from prudent lending practices. The special mention rating is designed to identify a specific level of risk and concern about asset quality. Although a special mention asset has a higher probability of default than a pass asset, its default is not imminent.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Grade 7—Substandard

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

Grade 8—Doubtful

An extension of credit classified “doubtful” has all the weaknesses inherent in one classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage of and strengthen the credit, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceedings, capital injection, perfecting liens on additional collateral, or refinancing plans. Generally, the doubtful classification should not extend for a long period of time because in most cases the pending factors or events that warranted the doubtful classification should be resolved either positively or negatively in a reasonable period of time.

Grade 9—Loss

Extensions of credit classified “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the credit has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Amounts classified loss should be promptly charged off. The Company will not attempt long term recoveries while the credit remains on the Company’s books. Losses should be taken in the period in which they surface as uncollectible. With loss assets, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified loss, there is little prospect of collecting either its principal or interest.

Non-commercial purpose loans are initially assigned a default loan grade of 99 (Pass) and are risk graded (Grade 6, 7, or 8) according to delinquency status when applicable.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Credit quality indicators by class of loan were as follows at June 30, 2016:


	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland
Pass (grades 1-5)	$	129,612	$	203,599	$	110,127
Special Mention		1,241		—		1,636
Substandard		5,625		3,827		2,628

Total	$	136,478	$	207,426	$	114,391


	Consumer and Other		1-4 Family Residential Real Estate		1-4 Family HELOC		Total
Pass (grades 1-5)	$	29,813	$	106,148	$	50,437	$	629,736
Special Mention		—		1,441		—		4,318
Substandard		—		2,199		1,813		16,092

Total	$	29,813	$	109,788	$	52,250	$	650,146

Credit quality indicators by class of loan were as follows at December 31, 2015:


	Commercial Industrial and Agricultural		Multi Family and Commercial Real Estate		Construction Land Development and Farmland
Pass (grades 1-5)	$	141,119	$	198,143	$	89,521
Special Mention		1,415		2,397		—
Substandard		1,236		2,196		242

Total	$	143,770	$	202,736	$	89,763


	Consumer and Other		1-4 Family Residential Real Estate		1-4 Family HELOC		Total
Pass (grades 1-5)	$	20,827	$	107,331	$	47,504	$	604,445
Special Mention		—		—		—		3,812
Substandard		—		3,405		2,161		9,240

Total	$	20,827	$	110,736	$	49,665	$	617,497

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Past due and accrual status by class of loan was as follows at June 30, 2016:


	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing Greater than 90 Days		Accruing Total Past Due
Commercial, Industrial and Agricultural	$	286	$	—	$	—	$	286
Multi family and Commercial Real Estate		—		—		—		—
Construction, Land Development and Farmland		509		434		—		943
1-4 Family Residential Real Estate		1,342		—		—		1,342
1-4 Family HELOC		—		—		—		—
Consumer		—		—		—		—
Other		—		—		—		—

Total	$	2,137	$	434	$	—	$	2,571


	Current		Accruing Total Past Due		Non Accrual Current Loans		Non Accrual Past Due Loans		Total Loans
Commercial, Industrial and Agricultural	$	135,553	$	286	$	409	$	230	$	136,478
Multi family and Commercial Real Estate		206,744		—		682		—		207,426
Construction, Land Development and Farmland		113,331		943		—		117		114,391
1-4 Family Residential Real Estate		106,877		1,342		1,569		—		109,788
1-4 Family HELOC		51,380		—		870		—		52,250
Consumer		15,525		—		—		—		15,525
Other		14,288		—		—		—		14,288

Total	$	643,698	$	2,571	$	3,530	$	347	$	650,146

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

Past due and accrual status by class of loan was as follows at December 31, 2015:


	Accruing 30-59 Days Past Due		Accruing 60-89 Days Past Due		Accruing Greater than 90 Days		Accruing Total Past Due
Commercial, Industrial and Agricultural	$	1	$	148	$	—	$	149
Multi family and Commercial Real Estate		—		—		—		—
Construction, Land Development and Farmland		—		—		—		—
1-4 Family Residential Real Estate		579		—		—		579
1-4 Family HELOC		—		—		—		—
Consumer		11		—		—		11
Other		—		—		—		—

Total	$	591	$	148	$	—	$	739


	Current		Accruing Total Past Due		Non Accrual Current Loans		Non Accrual Past Due Loans		Total Loans
Commercial, Industrial and Agricultural	$	142,674	$	149	$	504	$	443	$	143,770
Multi family and Commercial Real Estate		202,023		—		—		713		202,736
Construction, Land Development and Farmland		89,605		—		—		158		89,763
1-4 Family Residential Real Estate		108,048		579		415		1,694		110,736
1-4 Family HELOC		48,588		—		879		198		49,665
Consumer		15,260		11		—		—		15,271
Other		5,556		—		—		—		5,556

Total	$	611,754	$	739	$	1,798	$	3,206	$	617,497

There were no loans past due 90 days or more and still accruing interest at June 30, 2016 or December 31, 2015.

During the six months ended June 30, 2016, loans totaling approximately $1,900 were modified in troubled debt restructurings. The modifications consisted of changes in payment terms and extension of maturity dates. The modifications had no effect on the allowance for loan losses or interest income.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

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

The Company has acquired loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance and carrying amount of the loans was as follows at June 30, 2016:


Commercial, Industrial and Agricultural	$	399
Multi Family and Commercial Real Estate		4,482
Construction, Land Development and Farmland		1,574
1-4 Family Residential Real Estate		477
1-4 Family HELOC		38

Total outstanding balance		6,970
Less remaining purchase discount		902

		6,068
Allowance for loan losses		217

Carrying amount, net of allowance	$	5,851

During the six months ended June 30, 2016, the allowance for loan losses related to purchased credit impaired loans decreased by $30.

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the six months ended June 30, 2016:


Balance at January 1, 2016	$	233
Accretion income		(61	)

Balance at June 30, 2016	$	172

During the six months ended June 30, 2016, loans with non-accretable purchase discounts totaling $708 were paid in full resulting in the recognition of the discounts in interest income.

Purchased credit impaired loans acquired during the six months ended June 30, 2015 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:


Contractually required payments receivable of loans purchased	$	10,201
Cash flows expected to be collected at acquisition	$	8,564
Fair value at acquisition	$	7,346

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 4—FAIR VALUES OF ASSETS AND LIABILITIES

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

Level 1

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

Level 2

Inputs to the valuation methodology include:

•

Quoted prices for similar assets or liabilities in active markets;

•

Quoted prices for identical or similar assets or liabilities in inactive markets;

•

Inputs other than quoted prices that are observable for the asset or liability;

•

Inputs that are derived principally from or corroborated by the observable market data by correlation or other means.

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

Level 3

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

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

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis:

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

Interest rate swaps: The fair values of interest rate swaps are determined based on discounted future cash flows.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 4—FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis include the following:

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on the present value of expected payments using the loan’s effective rate as the discount rate or recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Other real estate owned: The fair value of other real estate owned is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

There were no changes in valuation methodologies used during the six months ended June 30, 2016.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company’s valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Fair value 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.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 4—FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy, as of June 30, 2016 and December 31, 2015:


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
Assets
U. S. Treasury and other U. S. government agencies	$	4,434	$	—	$	4,434	$	—
State and municipal		102,453		—		102,453		—
Corporate bonds		1,980		—		1,980		—
Mortgage backed securities		35,558		—		35,558		—
Time deposits		3,250		3,250		—		—
Liabilities
Interest rate swap	$	1,769	$	—	$	1,769	$	—

December 31, 2015
Assets
U. S. Treasury and other U. S. government agencies	$	4,836	$	—	$	4,836	$	—
State and municipal		87,595		—		87,595		—
Corporate bonds		1,979		—		1,979		—
Mortgage backed securities		36,165		—		36,165		—
Time deposits		3,250		3,250		—		—
Interest rate swap		77		—		77		—
Liabilities
Interest rate swap	$	572	$	—	$	572	$	—

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 4—FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

The following table sets forth the Company’s major categories of assets and liabilities measured at fair value on a nonrecurring basis, by level within the fair value hierarchy, as of June 30, 2016 and December 31, 2015:


	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2016
Assets
Impaired loans	$	3,709	$	—	$	—	$	3,709
Other real estate owned		475		—		—		475

December 31, 2015
Assets
Impaired loans	$	2,486	$	—	$	—	$	2,486
Other real estate owned		1,149		—		—		1,149

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2016 and December 31, 2015:


	Valuation Techniques (1)	Significant Unobservable Inputs		Range (Weighted Average)
Impaired loans	Appraisal		Estimated costs to sell		10	%
Other real estate owned	Appraisal		Estimated costs to sell		10	%

(1)	The fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 4—FAIR VALUES OF ASSETS AND LIABILITIES (CONTINUED)

Carrying amounts and estimated fair values of financial instruments at June 30, 2016 were as follows:


	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and due from banks	$	16,571	$	16,571	$	16,571	$	—	$	—
Federal funds sold		69		69		69		—		—
Loans, net		640,589		642,255		—		—		642,255
Mortgage loans held for sale		14,961		14,961		—		—		14,961
Accrued interest receivable		3,179		3,179		—		3,179		—
Restricted equity securities		7,060		7,060		—		7,060		—
Financial liabilities
Deposits		647,851		648,399		—		—		648,399
Accrued interest payable		127		127		—		127		—
Federal Home Loan Bank advances		124,871		125,386		—		125,386		—

Carrying amounts and estimated fair values of financial instruments at December 31, 2015 were as follows:


	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets
Cash and due from banks	$	20,289	$	20,289	$	20,289	$	—	$	—
Federal funds sold		281		281		281		—		—
Loans, net		608,747		611,628		—		—		611,628
Mortgage loans held for sale		55,093		55,093		—		—		55,093
Accrued interest receivable		3,096		3,096		—		3,096		—
Restricted equity securities		6,244		6,244		—		6,244		—
Financial liabilities
Deposits		640,008		639,746		—		—		639,746
Accrued interest payable		55		55		—		55		—
Federal Home Loan Bank advances		135,759		136,138		—		136,138		—

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, restricted equity securities, demand deposits, and variable rate loans or deposits that re-price frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent re-pricing or re-pricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on discounted cash flows using current rates for similar financing.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 5—STOCK-BASED COMPENSATION

In 2006, the Board of Directors and shareholders of the Bank approved the Commerce Union Bank Stock Option Plan (the “Plan”). The Plan provides for the granting of stock options, and authorizes the issuance of common stock upon the exercise of such options, for up to 625,000 shares of common stock to employees and organizers of the Company. As part of a reorganization, all Commerce Union Bank options were replaced with Commerce Union Bancshares, Inc. options with no change in terms. On March 10, 2015, the shareholders of the Company approved the Commerce Union Bancshares, Inc. Amended and Restated Stock Option Plan that permits the grant of awards of up to 1,250,000 shares of the Company common stock in the form of stock options. As part of the merger with Reliant Bank, all outstanding stock options of Reliant Bank were converted to stock options of Commerce Union Bancshares, Inc. under this plan.

Under the Stock Option Plan, stock option awards may be granted in the form of incentive stock options or non-statutory stock options, and are generally exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than the fair market value of the common stock on the grant date.

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

A summary of the activity in the stock option plans for the six months ended June 30, 2016 is as follows:


	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2016		708,921		$	10.73
Granted		15,000			15.03
Exercised		(348,157	)		10.00
Forfeited or expired		(27,192	)		9.89

Outstanding at June 30, 2016		348,572			11.71		3.85	$	1,251

Exercisable at June 30, 2016		262,772			11.07		2.18	$	1,113


	Shares			Weighted Average Grant-Date Fair Value
Non-vested options at January 1, 2016		84,160		$	2.90
Granted		15,000			3.62
Vested		(13,360	)		2.36
Forfeited		—			—

Non-vested options at June 30, 2016		85,800			3.11

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 5—STOCK-BASED COMPENSATION (CONTINUED)

The fair values of stock options granted during the six months ended June 30, 2016 were determined using the following assumptions as of the grant date, resulting in a weighted average grant date fair value per stock option of $3.62.


Risk-free interest rate		1.75% - 1.94%
Expected term		10 years
Expected stock price volatility		21.00%
Dividend yield		1.40% - 1.50%

NOTE 6—REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to regulatory capital requirements administered by the federal and state banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2016 and December 31, 2015, the Bank meets all capital adequacy requirements to which it is subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2016 and December 31, 2015, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

In July 2013, the FDIC approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Framework for More Resilient Banks and Banking Systems” (Basel III) and changes required by the Dodd-Frank Act.

Under these rules, the leverage and risk-based capital ratios of bank holding companies may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The final rules implementing Basel III became effective on January 1, 2015, and include new minimum risk-based capital and leverage ratios and a new common equity tier 1 ratio. In addition, these rules refine the definition of what constitutes capital for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 6—REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

Basel III establishes a “capital conservation buffer” of 2.5% which began phasing in on January 1, 2016, at a rate of .625% per year. The buffer becomes fully phased in on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer.

Actual and required capital amounts and ratios are presented below as of June 30, 2016 and December 31, 2015.


	Actual Regulatory Capital					Minimum Required Capital Including Capital Conservation Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016
Company
Tier I leverage	$	92,488		10.66	%	$	34,705		4.000	%		N/A		N/A
Common equity tier 1		92,488		12.56	%		37,739		5.125	%		N/A		N/A
Tier I risk-based capital		92,488		12.56	%		48,784		6.625	%		N/A		N/A
Total risk-based capital		101,176		13.74	%		63,511		8.625	%		N/A		N/A
Bank
Tier I leverage	$	91,834		10.59	%	$	34,687		4.000	%	$	43,359		5.00	%
Common equity tier 1		91,834		12.49	%		37,682		5.125	%		47,792		6.50	%
Tier I risk-based capital		91,834		12.49	%		48,711		6.625	%		58,821		8.00	%
Total risk-based capital		100,522		13.67	%		63,424		8.625	%		73,535		10.00	%
December 31, 2015
Company
Tier I leverage	$	84,608		9.92	%	$	34,116		4.000	%		N/A		N/A
Common equity tier 1		84,608		12.02	%		31,675		4.500	%		N/A		N/A
Tier I risk-based capital		84,608		12.02	%		42,234		6.000	%		N/A		N/A
Total risk-based capital		92,431		13.13	%		56,317		8.000	%		N/A		N/A
Bank
Tier I leverage	$	84,196		9.88	%	$	34,087		4.000	%	$	42,609		5.00	%
Common equity tier 1		84,196		11.97	%		31,653		4.500	%		45,720		6.50	%
Tier I risk-based capital		84,196		11.97	%		42,204		6.000	%		56,271		8.00	%
Total risk-based capital		92,019		13.08	%		56,281		8.000	%		70,351		10.00	%

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 7—EARNINGS PER SHARE

The following is a summary of the components comprising basic and diluted earnings per common share of stock (EPS):


	Three Months Ended				Six Months Ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Basic EPS Computation
Net income attributable to common shareholders	$	2,360	$	1,602	$	4,597	$	2,214
Weighted average common shares outstanding		7,560,503		7,063,771		7,505,451		5,536,971

Basic earnings per common share	$	0.31	$	0.23	$	0.61	$	0.40

Diluted EPS Computation
Net income attributable to common shareholders	$	2,360	$	1,602	$	4,597	$	2,214
Weighted average common shares outstanding		7,560,503		7,063,771		7,505,451		5,536,971
Dilutive effect of stock options		118,005		244,897		105,839		172,476

Adjusted weighted average common shares outstanding		7,678,508		7,308,668		7,611,290		5,709,447

Diluted earnings per common share	$	0.31	$	0.22	$	0.60	$	0.39

NOTE 8—SEGMENT REPORTING

The Company has two reportable business segments: retail banking and residential mortgage banking. Segment information is derived from the internal reporting system utilized by management. Revenues and expenses for segments reflect those, which can be specifically identified and have been assigned based on internally developed allocation methods. Financial results have been presented, to the extent practicable, as if each segment operated on a stand-alone basis.

Retail Banking provides deposit and lending services to consumer and business customers within our primary geographic markets. Our customers are serviced through branch locations, ATMs, online banking, and mobile banking.

Residential Mortgage Banking originates first lien residential mortgage loans throughout the United States. These loans are typically underwritten to government agency standards and sold to third party secondary market mortgage investors.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 8—SEGMENT REPORTING (CONTINUED)

The following presents summarized results of operations for the Company’s business segments for the periods indicated:


	Three Months Ended June 30, 2016
	Retail Banking			Residential Mortgage Banking			Consolidated
Net interest income	$	8,545		$	147		$	8,692
Provision for loan losses		450			—			450
Noninterest income		728			1,782			2,510
Noninterest expense		5,859			2,168			8,027
Income tax expense (benefit)		604			(16	)		588

Consolidated net income		2,360			(223	)		2,137
Noncontrolling interest in net loss of subsidiary		—			223			223

Net income attributable to common shareholders	$	2,360		$	—		$	2,360


	Three Months Ended June 30, 2015
	Retail Banking			Residential Mortgage Banking			Consolidated
Net interest income	$	7,109		$	283		$	7,392
Provision for loan losses		(500	)		—			(500	)
Noninterest income		528			2,756			3,284
Noninterest expense		5,633			3,071			8,704
Income tax expense		902			—			902

Consolidated net income		1,602			(32	)		1,570
Noncontrolling interest in net loss of subsidiary		—			32			32

Net income attributable to common shareholders	$	1,602		$	—		$	1,602

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 8—SEGMENT REPORTING (CONTINUED)


	Six Months Ended June 30, 2016
	Retail Banking			Residential Mortgage Banking			Consolidated
Net interest income	$	16,332		$	442		$	16,774
Provision for loan losses		615			—			615
Noninterest income		1,229			5,127			6,356
Noninterest expense		11,200			5,464			16,664
Income tax expense		1,149			7			1,156

Consolidated net income		4,597			98			4,695
Noncontrolling interest in net income of subsidiary		—			(98	)		(98	)

Net income attributable to common shareholders	$	4,597		$	—		$	4,597


	Six Months Ended June 30, 2015
	Retail Banking			Residential Mortgage Banking			Consolidated
Net interest income	$	10,969		$	492		$	11,461
Provision for loan losses		(500	)		—			(500	)
Noninterest income		385			4,533			4,918
Noninterest expense		8,554			5,128			13,682
Income tax expense		1,086			—			1,086

Consolidated net income		2,214			(103	)		2,111
Noncontrolling interest in net loss of subsidiary		—			103			103

Net income attributable to common shareholders	$	2,214		$	—		$	2,214

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 9—DERIVATIVES

During the six months ended June 30, 2015, the Company entered into swap agreements totaling $6,300 to effectively convert fixed municipal security yields to floating rates. This hedge is intended to reduce the interest rate risk associated with the underlying hedged item by mitigating the risk of changes in fair value based on fluctuations in interest rates.

The total notional amount of swap agreements was $21,505 million at June 30, 2016 and December 31, 2015. At June 30, 2016, the contracts had fair values totaling $1,769 recorded in other liabilities. At December 31, 2015, the contracts had fair values totaling $77 recorded in other assets and $572 recorded in other liabilities.

The derivative instruments held by the Company are designated and qualify as fair value hedges. Accordingly, the gain or loss on the derivatives as well as the offsetting gain or loss on the available-for-sale securities attributable to the hedged risk are recognized in current earnings. At June 30, 2016, the Company’s fair value hedges are effective and are not expected to have a significant impact on net income over the next twelve months.

NOTE 10—RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis” implements changes to both the variable interest consolidation model and the voting interest consolidation model. ASU 2015-02 (1) eliminates certain criteria that must be met when determining when fees paid to a decision maker or service provider do not represent a variable interest, (2) amends the criteria for determining whether a limited partnership is a variable interest entity and (3) eliminates the presumption that a general partner controls a limited partnership in the voting model. ASU 2015-02 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.

ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs” requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.

ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” adds SEC paragraphs pursuant to an SEC Staff Announcement that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 10—RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments” requires that adjustments to provisional amounts that are identified during the measurement period of a business combination be recognized in the reporting period in which the adjustment amounts are determined. Furthermore, the income statement effects of such adjustments, if any, must be calculated as if the accounting had been completed at the acquisition date. The portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. Under previous guidance, adjustments to provisional amounts identified during the measurement period are to be recognized retrospectively. ASU 2015-16 became effective for the Company on January 1, 2016 and did not have a significant impact on the consolidated financial statements.

ASU 2016-1, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 will be effective for the Company beginning on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU 2016-02,“Leases (Topic 842)” requires lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors. ASU 2016-1 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is evaluating the potential impact of ASU 2016-02 on the consolidated financial statements.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 10—RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” requires that all excess tax benefits and tax deficiencies related to share-based payment awards be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such excess tax benefits were recorded as additional paid-in capital, and tax deficiencies were charged to additional paid in capital to the extent of prior excess tax benefits. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. ASU 2016-09 is effective on January 1, 2017 with early adoption permitted. The Company has elected early adoption of this update and as a result recognized in income tax expense an excess tax benefit of approximately $425 related to the exercise of stock options during the six months ended June 30, 2016.

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective beginning on January 1, 2020. We are currently evaluating the potential impact of ASU 2016-13 on our financial statements.

NOTE 11—BUSINESS COMBINATION

On March 10, 2015, the shareholders of Commerce Union Bancshares, Inc. (“Commerce Union”) approved a merger between Commerce Union Bank and Reliant Bank (“Reliant”) which became effective on April 1, 2015 (“the Merger”). At the effective time of the Merger, each outstanding share and option to purchase a share of Reliant common stock converted into the right to receive 1.0213 shares of Commerce Union common stock. After the Merger was completed, Commerce Union’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 was considered to have acquired Commerce Union in this transaction.

As a result, the historical financial statements of the Company prior to April 1, 2015 are the historical financial statements of Reliant. The assets and liabilities of Commerce Union as of the effective date of the Merger were recorded at their respective estimated fair values and added to those of Reliant. Any excess of purchase price over the net estimate fair values of the acquired assets and assumed liabilities of Commerce Union was allocated to all identifiable intangibles assets. Any remaining excess was then allocated to goodwill. Goodwill arising from the acquisition consists primarily of synergies of the combined operations. The goodwill resulting from this business combination is not deductible for tax purposes.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 11—BUSINESS COMBINATION (CONTINUED)

The following table details the financial impact of the merger, including the calculation of the purchase price, the allocation of the purchase price to the fair values of net assets assumed and goodwill recognized:


Calculation of Purchase Price
Shares of CUB common stock outstanding as of March 31, 2015		3,069,030
Estimated market price of CUB common stock on April 1, 2015	$	14.95

Estimated fair value of CUB common stock		45,882
Estimated fair value of CUB stock options		2,019

Total consideration	$	47,901

Allocation of Purchase Price
Total consideration above	$	47,901

Fair value of assets acquired and liabilities assumed
Cash and cash equivalents	$	12,378
Investment securities available for sale		29,487
Loans		248,122
Premises and equipment		5,807
Deferred tax asset, net		549
Bank owned life insurance		4,181
Core deposit intangible		1,901
Prepaid and other assets		4,229
Deposits		(247,307	)
Securities sold under repurchase agreements		(488	)
Other borrowings		(20,856	)
Payables and other liabilities		(733	)

Total fair value of net assets acquired		37,270

Goodwill	$	10,631

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 11—BUSINESS COMBINATION (CONTINUED)

Actual data for the six months ended June 30, 2016 and comparative proforma data for the six months ended June 30, 2015 in the table below presents information as if the merger occurred on January 1, 2015.


	Six Months Ended June 30,
	2016		2015
Net interest income	$	16,774	$	14,549
Net income attributable to common shareholders		4,597		2,860
Earnings per share—basic		0.61		0.40
Earnings per share—diluted		0.60		0.39

Proforma information for the six months ended June 30, 2015 includes $565 of nonrecurring merger related costs.

NOTE 12—MORTGAGE OPERATIONS

During the six months ended June 30, 2016, the Company began transitioning most of its out-of-market branches to another bank and closed its Florida office. On April 5, 2016, the Bank entered into an agreement with BBMC Mortgage, LLC (“BBMC”), a wholly owned subsidiary of Bridgeview Bank Group. Under this agreement, the Bank ceased operations of its mortgage lending offices in Illinois, Ohio and Kentucky, and a support office in Brentwood, Tennessee. Employees of the Bank in these locations became employees of BBMC, and BBMC assumed certain lease obligations of the Bank in connection with these locations. The employees who transitioned from the Bank to BBMC did not have non-compete agreements with the Bank and were released from any existing non-solicitation agreements, provided that no customers for whom the Bank has funded residential mortgage loans will be refinanced by BBMC for a minimum period of 180 days from funding. Furthermore, BBMC will not solicit any Bank employees other than the employees at these locations. The transition of these offices and related personnel was completed on April 30, 2016. The Company received no consideration in connection with the agreement.

NOTE 13—SUBSEQUENT EVENTS

In July 2016, the Company granted 20,000 stock options to employees and 21,250 restricted stock grants to employees and directors under the Commerce Union Bancshares, Inc. 2015 Equity Incentive Plan. The stock options vest over five years, have a contractual term of ten years and an exercise price of $15.24 per share. The restricted stock grants vest over periods ranging from one to three years.

In July of 2016 the Company executed a strategy to improve the performance of a portion of its investment securities portfolio. In connection with this strategy the Company sold approximately $19,600 of mortgage-backed securities and recognized a gain of $286. The proceeds were used to purchase approximately the same amount of collateralized mortgage obligations and municipal securities.

COMMERCE UNION BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

JUNE 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015

(Dollar amounts in thousands except per share amounts)

NOTE 13 – SUBSEQUENT EVENTS (CONTINUED)

On July 31, 2016, the Company entered into an amended lease agreement to extend the term of its Maryland Farms branch lease located at 5109 Peter Taylor Park Drive, Brentwood, TN. The lease extension is effective for five years beginning August 1, 2016 and calls for total lease payments of approximately $503 over the lease term.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In the following section the terms “Company” means “Commerce Union Bancshares, Inc.” and “Bank” means “Reliant Bank.” The following discussion and analysis is intended to assist in the understanding and assessment of significant changes and trends related to our financial position and operating results. This discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes included elsewhere herein along with our 10-K filed March 28, 2016. 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 throughout this document which includes the consolidated financial statements. 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 three and six months ended June 30, 2016, and the three months ended June 30, 2015, include the accounts of Commerce Union Bancshares, Inc., its wholly-owned subsidiary, Reliant Bank, the “Bank”, along with its wholly-owned subsidiary, Commerce Union Mortgage Services, Inc. (inactive), the Bank’s wholly-owned subsidiary, Reliant Investments, LLC, and the Bank’s 51% controlled subsidiary, Reliant Mortgage Ventures, LLC, collectively (the “Company”). The consolidated financial statements for the six months ended June 30, 2015 include the accounts of the Company after the reverse merger described below for the three months ended June 30, 2015 and the accounts of Reliant Bank only, with its wholly-owned subsidiary Reliant Investments, LLC and it’s 51% controlled subsidiary Reliant Mortgage Ventures, LLC, for the three months ended March 31, 2015. As described in the notes to our consolidated financial statements, Reliant Mortgage Ventures, LLC is considered a variable interest entity for which the Bank is deemed to be the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

During 2011, the Bank and another entity organized Reliant Mortgage Ventures, LLC referred to above for the purpose of improving the Bank’s mortgage operations. 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 June 30, 2016, the cumulative losses to date totaled $2,135. 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 THREE AND SIX MONTHS ENDED

JUNE 30, 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 six months ended June 30, 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 three months ended June 30, 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 $22 and $61 for the three and six months ended June 30, 2016, respectively, compared to $194 and $417 for the three and six months ended June 30, 2015, 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.

Earnings

Net income attributable to shareholders amounted to $2,360 and $4,597, or $0.31 and $0.61 per basic share for the three and six months ended June 30, 2016, respectively, compared to $1,602 and $2,214, or $0.23 and $0.40 per basic share for the same periods in 2015. Diluted net income attributable to shareholders per share was $0.31 and $0.22 per basic share and $0.60 and $0.39 per diluted share for the three and six months ended June 30, 2016, and 2015, respectively. The largest components of the improvement from the previous three and six months include a 17.6% and 46.4%, respectively, increase in net interest income of $1,300 and $5,313, respectively, an increase in non-interest income of $1,438, for the six months ended June 30, 2016 compared to the same period in 2015 and a decrease in non-interest expenses of $677 for the three months ended June 30, 2016 compared to the same period in 2015. The largest factors offsetting the improvement was a decrease in non-interest income of $774 for the three months ended June 30, 2016, and an increase in non-interest expense of $2,982 for the six months ended June 30, 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 table sets 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 three and six months ended June 30, 2016, and 2015 (dollars in thousands):


	Three Months Ended June 30, 2016							Three Months Ended June 30, 2015							Change
	Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
Interest earning assets
Loans	$	637,787		5.06		$	8,018	$	564,056		4.83		$	6,790	$	900		$	328		$	1,228
Loan fees		—		0.31			494		—		0.29			410		84			—			84

Loans with fees		637,787		5.37			8,512		564,056		5.12			7,200		984			328			1,312
Mortgage loans held for sale		20,733		3.61			186		36,408		3.87			351		(143	)		(22	)		(165	)
Federal funds sold		356		1.13			1		542		2.22			3		(1	)		(1	)		(2	)
Deposits with banks		20,357		0.32			16		26,171		0.17			11		(15	)		20			5
Investment securities—taxable		48,754		1.78			216		48,712		1.80			218		2			(4	)		(2	)
Investment securities—tax-exempt		95,590		3.12			490		64,698		2.81			299		155			36			191
Other		6,924		4.41			76		5,312		4.00			53		17			6			23

Total earning assets		830,501		4.72			9,497		745,899		4.46			8,135		999			363			1,362

Nonearning assets		50,156							43,230

	$	880,657						$	789,129

Interest bearing liabilities
Interest bearing demand		89,385		0.21			47		103,615		0.22			57		(8	)		(2	)		(10	)
Savings and money market		191,630		0.34			163		173,093		0.29			124		15			24			39
Time deposits—retail		143,953		0.67			240		141,164		0.76			268		32			(60	)		(28	)
Time deposits—wholesale		105,560		0.64			167		93,030		0.54			125		18			24			42

Total interest bearing deposits		530,528		0.47			617		510,902		0.45			574		57			(14	)		43
Federal Home Loan Bank advances		115,855		0.65			188		94,360		0.72			169		106			(87	)		19

Total interest-bearing liabilities		646,383		0.50			805		605,262		0.49			743		163			(101	)		62

Net interest rate spread (%) / Net Interest Income ($)				4.22		$	8,692				3.97		$	7,392	$	836		$	464		$	1,300

Non-interest bearing deposits		126,175		(0.08	)				90,073		(0.06	)
Other non-interest bearing liabilities		4,802							2,458
Stockholder’s equity		103,297							91,336

	$	880,657						$	789,129

Cost of funds				0.42							0.43

Net interest margin				4.33							4.06


	Six Months Ended June 30, 2016							Six Months Ended June 30, 2015							Change
	Average Balances		Rates / Yields (%)			Interest Income / Expense		Average Balances		Rates / Yields (%)			Interest Income / Expense		Due to Volume			Due to Rate			Total
Interest earning assets
Loans	$	627,694		4.91		$	15,326	$	441,558		4.74		$	10,376	$	4,562		$	388		$	4,950
Loan fees		—		0.31			956		—		0.28			609		347			—			347

Loans with fees		627,694		5.22			16,282		441,558		5.02			10,985		4,909			388			5,297
Mortgage loans held for sale		30,124		3.70			554		29,209		4.16			602		49			(97	)		(48	)
Federal funds sold		333		0.60			1		597		1.35			4		(1	)		(2	)		(3	)
Deposits with banks		20,750		0.34			35		20,633		0.17			17		—			18			18
Investment securities—taxable		49,004		1.85			452		43,401		1.96			421		88			(57	)		31
Investment securities—tax-exempt		92,116		3.07			928		54,026		2.72			481		378			69			447
Other		6,584		4.86			159		4,322		4.57			98		54			7			61

Total earning assets		826,605		4.60			18,411		593,746		4.37			12,608		5,477			326			5,803

Nonearning assets		49,704							29,566

	$	876,309						$	623,312

Interest bearing liabilities
Interest bearing demand		89,620		0.20			91		77,275		0.21			79		21			(9	)		12
Savings and money market		192,673		0.34			329		142,320		0.27			189		81			59			140
Time deposits—retail		142,231		0.68			484		91,091		0.80			363		268			(147	)		121
Time deposits—wholesale		110,663		0.63			346		97,853		0.52			254		35			57			92

Total interest bearing deposits		535,187		0.47			1,250		408,539		0.44			885		405			(40	)		365
Federal Home Loan Bank advances and other		116,540		0.67			387		75,707		0.70			262		158			(33	)		125

Total interest-bearing liabilities		651,727		0.51			1,637		484,246		0.48			1,147		563			(73	)		490

Net interest rate spread (%) / Net Interest Income ($)				4.09		$	16,774				3.89		$	11,461	$	4,914		$	399		$	5,313

Non-interest bearing deposits		118,118		(0.08	)				69,754		(0.06	)
Other non-interest bearing liabilities		5,197							1,873
Stockholder’s equity		101,267							67,439

	$	876,309						$	623,312

Cost of funds				0.43							0.42

Net interest margin				4.20							3.98

Table Assumptions—Average loan balances are inclusive of nonperforming loans. Tax exempt investment security yields are shown on a fully 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—For the three and six months ended June 30, 2016, we recorded net interest income of approximately $8.7 million and $16.8 million, respectively, which resulted in a net interest margin (net interest income divided by the average balance of interest earning assets) of 4.33% and 4.20%, respectively. For the three and six months ended June 30, 2015, we recorded net interest income of approximately $7.4 million and $11.5 million, respectively, which resulted in a net interest margin of 4.06% and 3.98%, respectively. For the three and six months ended June 30, 2016 and 2015, our net interest spread was 4.22% and 3.97%, respectively and 4.09% and 3.89%, respectively. During the three and six months ended June 30, 2016, a contributing factor to the increase in our net interest income was due to the payoff of a loan previously carried as purchase credit impaired. This resulted in a $619 increase in our net interest income for the periods.

Our year-over-year average loan volume increased by approximately 42.2% from the first six months of 2015 to the first six months of 2016. Our combined loan and loan fee yield increased from 5.02% to 5.22% for the first six months of 2015 compared to 2016, respectively, while our combined loan and loan fee yield increased from 5.12% to 5.37% for the three months ended June 30, 2015 to 2016, respectively.

Our cost of funds increased from 0.42% to 0.43% for the six months ended June 30, 2015 compared to the same period in 2016, respectively. Our cost of funds declined from 0.43% to 0.42% for the three months ended June 30, 2015 compared to the same period in 2016. Management has continued to lower rates paid on interest bearing liabilities and has somewhat shifted toward lower-cost alternative funding sources such as wholesale time deposits and low-cost Federal Home Loan Bank advances. We also experienced a 40.1% increase in our average non-interest bearing deposits from the three months ended June 30, 2015 to 2016, and a 69.3% increase in our average non-interest bearing deposits from the six months ended June 30, 2015 to 2016. These increases were the result of the Merger that occurred on April 1, 2015 and our continuing initiative to grow low cost core deposits.

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 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 June 30, 2016. 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 $450 and $615, respectively, for the three and six months ended June 30, 2016, compared to a negative provision for loan losses of $500 for both the three and six months ended June 30, 2015, respectively. Our provision increase was primarily the result of loan growth that we experienced in the second quarter of 2016. Our negative provision for the six months ended June 30, 2015 was primarily the result of the Merger that occurred on April 1, 2015 and a net recovery position.

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 three and six months ended June 30, 2016 and 2015 (dollars in thousands):


	Three Months Ended June 30,				Dollar Increase (Decrease)			Percent Increase (Decrease)
	2016		2015		Dollar Increase (Decrease)			Percent Increase (Decrease)
Non-Interest Income
Service charges and fees	$	321	$	341	$	(20	)		-5.9	%
Securities gains (losses), net		60		—		60			100.0	%
Gains on mortgage loans sold, net		1,782		2,756		(974	)		-35.3	%
Gain (loss) on sale of other real estate		156		—		156			100.0	%
Other noninterest income:
Bank-owned life insurance		193		123		70			56.9	%
Brokerage revenue		13		5		8			160.0	%
Rental income		—		6		(6	)		-100.0	%
Miscellaneous noninterest income (expense), net		-15		53		(68	)		-128.3	%

Total other non-interest income		191		187		4			2.1	%

Total non-interest income	$	2,510	$	3,284	$	(774	)		-23.6	%


	Six Months Ended June 30,					Dollar Increase (Decrease)			Percent Increase (Decrease)
	2016		2015			Dollar Increase (Decrease)			Percent Increase (Decrease)
Non-Interest Income
Service charges and fees	$	606	$	488		$	118			24.2	%
Securities gains (losses), net		60		(396	)		456			-115.2	%
Gains on mortgage loans sold, net		5,124		4,533			591			13.0	%
Gain (loss) on sale of other real estate		156		—			156			100.0	%
Other noninterest income:
Bank-owned life insurance		363		216			147			68.1	%
Brokerage revenue		27		8			19			237.5	%
Rental income		2		6			(4	)		-66.7	%
Miscellaneous noninterest income (expense), net		18		63			(45	)		-71.4	%

Total other non-interest income		410		293			117			39.9	%

Total non-interest income	$	6,356	$	4,918		$	1,438			29.2	%

The most significant reason for the increases during the six months ended June 30, 2016 compared to 2015 relate to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015. Following is a description of certain components of non-interest income and additional reasons for fluctuations during the three and six months ended June 30, 2016 compared to the same periods 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 three and six months ended June 30, 2016, the Company sold securities classified as available for sale totaling $1,058 and recognized a gain on sale of $60. During the six months ended June 30, 2015, the Bank sold securities that were previously classified as held to maturity and recognized a loss on sale of $396. 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 from quarter to quarter as the rate environment changes and as changes occur to our mortgage operations. Gains on mortgage loans sold, net, amounted to $1,782 and $5,124 for the three and six months ended June 30, 2016, compared to $2,756 and $4,533 for the same periods in the prior year. 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 three months ended June 30, 2016 to better focus our marketing and resources in our core Middle Tennessee markets. The decline in gains on mortgage loans sold during the six month period ended June 30, 2016 was directly attributable to the transition.

During the three months ended June 30, 2016, we recognized a gain of $156 on the sale of a property that was in our other real estate portfolio and recognized a gain previously deferred due to the payoff of a loan.

Noninterest income also includes appreciation in the cash surrender value of bank-owned life insurance which was $193 and $363 for the three and six months ended June 30, 2016, compared to $123 and $216 for the three and six months ended June 30, 2015. For the six months ended June 30, 2016 compared to the same period in 2015, the increase in earnings on these bank-owned life insurance policies primarily resulted from the Merger effective April 1, 2015. At the end of June 2015, an additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies. Also, during the six months ended June 30, 2016, an additional $4.0 million of bank-owned life insurance was purchased with terms similar to our existing policies. 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 three and six months ended June 30, 2016 and 2015 (dollars in thousands):


	Three Months Ended June 30,				Dollar Increase (Decrease)			Percent Increase (Decrease)
	2016		2015		Dollar Increase (Decrease)			Percent Increase (Decrease)
Non-Interest Expense
Salaries and employee benefits	$	4,883	$	5,075	$	(192	)		-3.8	%
Occupancy		810		906		(96	)		-10.6	%
Information technology		636		633		3			0.5	%
Advertising and public relations		160		289		(129	)		-44.6	%
Audit, legal and consulting		384		520		(136	)		-26.2	%
Federal deposit insurance		126		113		13			11.5	%
Provision for losses on other real estate		27		90		(63	)		-70.0	%
Other operating		1,001		1,078		(77	)		-7.1	%

Total non-interest expense	$	8,027	$	8,704	$	(677	)		-7.8	%


	Six Months Ended June 30,				Dollar Increase (Decrease)			Percent Increase (Decrease)
	2016		2015		Dollar Increase (Decrease)			Percent Increase (Decrease)
Non-Interest Expense
Salaries and employee benefits	$	10,277	$	7,914	$	2,363			29.9	%
Occupancy		1,639		1,606		33			2.1	%
Information technology		1,263		1,041		222			21.3	%
Advertising and public relations		425		498		(73	)		-14.7	%
Audit, legal and consulting		665		744		(79	)		-10.6	%
Federal deposit insurance		240		183		57			31.1	%
Provision for losses on other real estate		53		110		(57	)		-51.8	%
Other operating		2,102		1,586		516			32.5	%

Total non-interest expense	$	16,664	$	13,682	$	2,982			21.8	%

The most significant reason for the changes during the six months ended June 30, 2016 and 2015 relate to the Merger between Commerce Union Bancshares, Inc. and Reliant Bank that was effective April 1, 2015. Following is a description of certain components of non-interest expense and additional reasons for fluctuations during the three and six months ended June 30, 2016 compared to the same periods in 2015.

Salaries and employee benefits decreased for the three months ended June 30, 2016 compared to the same period in 2015 and increased for the six months ended June 30, 2016 compared to the same period in 2015. The primary reason for the change during the six month period ended June 30, 2016 compared to the same period in 2015 was a result of the Merger effective April 1, 2015. The decrease during the three months ended June 30, 2016 compared to the same period in 2015 was a result of a decrease in compensation due to transitioning several of our out-of-market mortgage offices to another bank. The decrease was partially offset by general increases in compensation for our other staff.

Certain of our facilities are leased while there are others that we own. Primarily, occupancy costs increased during the six months ended June 30, 2016 compared to the same period in 2015 due to the Merger effective April 1, 2015. During the three months ended June 30, 2016 compared to the same period in 2015, occupancy costs decreased due to transitioning several of our out-of-market mortgage offices to another bank. This decrease was partially offset by inflationary increases in the lease of our Franklin operations center as well as increases in rent for other mortgage loan production offices.

Information technology costs increased when comparing the six months ended June 30, 2016 to the similar period of 2015, substantially due to the Merger effective April 1, 2015. The Company operated on two core data processing systems until mid-November 2015 when the conversion to one core system occurred. Since November 2015, costs have declined as a result of this conversion. This decline was partially offset by purchases of other information technology products and services during the three and six months ended June 30, 2016.

Advertising and public relations costs decreased when comparing the three and six months ended June 30, 2016 to similar periods of 2015, by $129 and $73, respectively. The decrease is primarily attributable to completion of the Reliant Bank rebranding effort and declining advertising costs associated with the Merger. These decreases have been partially offset by cost increases attributable to our current customer acquisition strategy.

Audit, legal and consulting costs decreased in the three and six months ended June 30, 2016 compared to similar periods of 2015 due to a reduction in merger-related expenses offset partially by increased 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 increased for the six months ended June 30, 2016, compared to the same period in 2015 primarily due to the Merger effective April 1, 2015. The remainder of the increase for the six months and the increase for the three month ended June 30, 2016 compared to the same periods in 2015 relates to our increase in average liabilities which is the base for determining our premiums. The costs associated with the increase in average liabilities was slightly offset by an improved combined rate post-merger.

We recorded a provision for losses on other real estate of $27 and $53 for the three and six months ended June 30, 2016. These provisions related to one property held in our real estate portfolio. We recorded a provision of $90 and $110, respectively, for the three and six months ended June 30, 2015 relating to one property that was held in our other real estate portfolio.

Other operating expenses increased for the six months ended June 30, 2016, compared to the same periods in 2015 mainly due to the Merger effective April 1, 2015. This increase was partially offset by our other operating expenses decreasing for the three months ended June 30, 2016, compared to the same period in 2015. This was primarily 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.

Income Taxes

During the three and six months ended June 30, 2016, we recorded income tax expense of $588 and $1,156, respectively, compared to $902 and $1,086, respectively, for the three and six months ended June 30, 2015. The Company files separate Federal tax returns for the operations of the banking and mortgage 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. 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 three and six months ended June 30, 2016, reflects an effective income tax rate of 20.4% (exclusive of a tax benefit from our mortgage banking operations of $16 on pre-tax loss of $239) and 20.0% (exclusive of tax expense from our mortgage banking operations of $7 on pre-tax income of $105), respectively, compared to 36.0% (exclusive of a pre-tax loss of $32 from our mortgage banking operations with no tax expense) and 32.9% (exclusive of a pre-tax loss of $103 from our mortgage banking operations with no tax expense) for the comparable periods of 2015. During the three and six months ended June 30, 2016, the Company recognized an excess tax benefit of $425 related to the exercise of stock options, thereby reducing our effective tax rate as compared to the three and six months ended June 30, 2015. Also, during the three months ended June 30, 2016, the Bank entered into an interest-free loan agreement and recognized a state tax credit in the amount of $217. 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.

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 three and six months ended June 30, 2016, the Company was transitioning most of its out-of-market mortgage offices to another bank (see Note 12 to the consolidated financial statements included elsewhere herein). The venture incurred net losses of $223 during the three months ended June 30, 2016 and had net income of $98 during the six months ended June 30, 2016, compared to net losses of $32 and $103, respectively, for the three and six months ended June 30, 2015. These amounts are included in our consolidated results. See Note 8 for segment reporting in the consolidated financial statements included elsewhere herein.

COMPARISON OF BALANCE SHEETS AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

Overview

The Company’s total assets were $883,204 at June 30, 2016 and $876,404 at December 31, 2015. Our assets increased by 0.8% from December 31, 2015 to June 30, 2016. The increase in assets from December 31, 2015 to June 30, 2016, was substantially attributable to an increase in net loans of approximately $31.8 million, discussed further below; a net increase in our securities portfolio of $13.9 million discussed further below; and a $4.4 million increase in bank-owned life insurance. These increases were offset by a decrease in our mortgage loans held for sale of $40.1 million; and a decrease in cash and cash equivalents of $3.9 million. The Company’s total liabilities were $777,180 at June 30, 2016 and $779,653 at December 31, 2015, a decrease of 0.3%. The decrease in liabilities from December 31, 2015 to June 30, 2016, was substantially attributable to a decline in Federal Home Loan Bank advances of $10.9 million during the period. The most significant increase in total liabilities related to total deposits, which increased 1.2% from December 31, 2015 to June 30, 2016. These and other components of our balance sheets are discussed further below.

Loans

Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. As previously discussed the competition for quality loans in our markets has remained intense. Our goal is to steadily grow our loan portfolio, focusing on quality. This is not always possible for various factors, including but not limited to, scheduled maturities or early payoffs exceeding new loan volume. Early payoffs typically increase in lowering rate environments as customers identify advantageous opportunities for refinancing. We have been adding experienced lending officers to our staff to help with loan growth as the local market has continued to improve. Total loans, net, at June 30, 2016, and December 31, 2015, were $640,589 and $608,747, respectively. This represented an increase of 5.2% from December 31, 2015 to June 30, 2016.

The table below provides a summary of the loan portfolio composition for the dates noted (including purchased credit-impaired (PCI) loans).


	June 30,					December 31,
	2016					2015
	Amount		Percent			Amount		Percent
Commercial, Industrial and Agricultural	$	136,478		21.0	%	$	143,770		23.3	%
Real estate:
1-4 Family Residential		109,788		16.9	%		110,736		17.9	%
1-4 Family HELOC		52,250		8.0	%		49,665		8.0	%
Multifamily and Commercial		207,426		31.9	%		202,736		32.8	%
Construction, Land Development and Farmland		114,391		17.6	%		89,763		14.6	%
Consumer		15,525		2.4	%		15,271		2.5	%
Other		14,288		2.2	%		5,556		0.9	%

		650,146		100.0	%		617,497		100.0	%
Less:
Deferred loan fees		869					927
Allowance for possible loan losses		8,688					7,823

Loans, net	$	640,589				$	608,747

The table below provides a summary of PCI loans as of June 30, 2016 and December 31, 2015:


	June 30, 2016		December 31, 2015
Commercial, Industrial and Agricultural	$	399	$	1,558
Real estate:
1-4 Family Residential		477		1,016
1-4 Family HELOC		38		40
Multifamily and Commercial		4,482		4,565
Construction, Land Development and Farmland		1,574		1,598
Consumer		—		—
Other		—		—

Total gross PCI loans		6,970		8,777
Less:
Remaining purchase discount		902		1,671
Allowance for possible loan losses		217		247

Loans, net	$	5,851	$	6,859

Commercial loans above consist of commercial and industrial loans made to U.S. domiciled customers. These include loans for use in normal business operations to finance working capital needs, equipment purchases or other expansionary projects. Commercial loans of $136,478 at June 30, 2016, decreased 5.1% compared to $143,770 as of December 31, 2015.

Real estate loans comprised 74.4% of the loan portfolio at June 30, 2016. Residential loans included in this category consist mainly of closed-end loans secured by first and second liens that are not held for sale and revolving, open-end loans secured by 1-4 family residential properties extended under home equity lines of credit. The Company increased the residential portfolio from December 31, 2015 to June 30, 2016. Commercial loans included in the real estate category above include (in typical order of prominence) loans secured by non- owner-occupied nonfarm nonresidential properties, loans secured by owner-occupied nonfarm nonresidential properties, and loans secured by multi-family residential properties. Multi-family and commercial real estate loans of $207,426 at June 30, 2016, increased 2.3% compared to the $202,736 held as of December 31, 2015. Real estate construction loans consist of 1-4 family residential construction loans, other construction loans, land loans, and loans secured by farmland. Construction lending also increased during 2015 and into the first six months of 2016, based on a strengthening local economy.

Consumer loans mainly consist of loans to individuals for household, family, and other personal expenditures under revolving credit plans and other consumer loans. We have no credit card loans although we do offer credit cards to customers through a third party.

Our other loans consist mainly of loans to other depository institutions and were minimal for the periods presented.

The repayment of loans is a source of additional liquidity for us. The following table sets forth the loans repricing or maturing within specific intervals at June 30, 2016, excluding unearned net fees and costs.


	One Year or Less		One to Five Years		Over Five Years		Total
Gross loans	$	193,009	$	305,228	$	151,909	$	650,146

Fixed interest rate							$	450,908
Variable interest rate								199,238

Total							$	650,146

The information presented in the above table is based upon the contractual maturities or next repricing date of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, we believe this treatment presents fairly the maturity and repricing structure of the loan portfolio.

Allowance for Loan Losses

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

At June 30, 2016, the allowance for loan losses was $8,688 compared to $7,823 at December 31, 2015. The allowance for loan losses as a percentage of total loans was 1.3% at June 30, 2016 and December 31, 2015. The allowance was adjusted upward from December 31, 2015 to June 30, 2016. This increase in our allowance for loan losses is directly attributable to our loan growth. Charge-off and general economic activity has continued to improve for our area and our customers and nonperforming assets have continued to decline.

Analysis of Changes in Allowance for Loan Losses


	June 30, 2016			June 30, 2015
Beginning Balance, January 1	$	7,823		$	7,353
Loans charged off:
Commercial, Industrial and Agricultural		(17	)		—
Real estate:
1-4 Family Residential		—			—
1-4 Family HELOC		—			—
Multifamily and Commercial		—			—
Construction, Land Development and Farmland		—			—
Consumer		—			(5	)
Other		(7	)		—

Total loans charged off		(24	)		(5	)

Recoveries on loans previously charged off:
Commercial, Industrial and Agricultural		184			159
Real estate:
1-4 Family Residential		66			8
1-4 Family HELOC		6			21
Multifamily and Commercial		2			385
Construction, Land Development and Farmland		3			3
Consumer		13			—
Other		—			—

Total loan recoveries		274			576

Net recoveries (charge-offs)		250			571
Provision for loan losses		615			(500	)

Total allowance, June 30	$	8,688		$	7,424

Gross loans at end of period ⁽¹⁾	$	650,146		$	575,052

Average gross loans ⁽¹⁾	$	627,694		$	441,558

Allowance to total loans		1.34	%		1.29	%

(1)	Loan balances exclude loans held for sale.

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


	June 30, 2016								December 31, 2015
	Amount		% of Allowance To Total			% of Loan Type to Total Loans			Amount		% of Allowance To Total			% of Loan Type to Total Loans
Commercial, Industrial and Agricultural	$	2,637		30.4	%		21.0	%	$	2,198		28.1	%		23.3	%
Real estate:
1-4 Family Residential		1,079		12.4	%		16.9	%		1,214		15.5	%		17.9	%
1-4 Family HELOC		652		7.5	%		8.0	%		699		8.9	%		8.0	%
Multifamily and Commercial		2,446		28.2	%		31.9	%		2,591		33.1	%		32.8	%
Construction, Land Development and Farmland		1,639		18.9	%		17.6	%		894		11.4	%		14.6	%
Consumer		195		2.2	%		2.4	%		192		2.5	%		2.5	%
Other		40		0.4	%		2.2	%		35		0.5	%		0.9	%

	$	8,688		100.0	%		100.0	%	$	7,823		100.0	%		100.0	%

Nonperforming Assets

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

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


	June 30, 2016			December 31, 2015
Non-accrual loans	$	3,877		$	5,004
Past due loans 90 days or more and still accruing interest		—			—
Restructured loans		3,730			1,706

Total non-performing loans		7,607			6,710
Foreclosed real estate (“OREO”)		475			1,149

Total non-performing assets	$	8,082		$	7,859

Total non-performing loans as a percentage of total loans		1.17	%		1.09	%
Total non-performing assets as a percentage of total assets		0.92	%		0.90	%
Allowance for loan losses as a percentage of non-performing loans		114.21	%		116.59	%

Investment Securities and Other Earning Assets

The investment securities portfolio is intended to provide the Company with adequate liquidity, meet customer collateral needs and , provide flexible asset/liability management and a source of stable income. The portfolio is structured with minimal credit exposure to the Company and consists of securities classified as available-for-sale. All available-for-sale securities are carried at fair value and may be used for liquidity purposes should management deem it to be in our best interest. Unrealized gains and losses on this portfolio are excluded from earnings, but are reported as other comprehensive income in a separate component of stockholders’ equity, net of income tax. Premium amortization and discount accretion are recognized as adjustments to interest income using the interest method. Realized gains or losses on sales are based on the net proceeds and the adjusted carrying value amount of the securities sold using the specific identification method.

Securities are a component of the Company’s earning assets. Securities totaled $147,675 at June 30, 2016. This represents a 10.3% increase from the December 31, 2015 total of $133,825. The increase is attributable to purchasing $15,991 securities available for sale during the six months ended June 30 2016, offset by sales, principal paydowns and maturities of $4,552 during the same period.

Restricted equity securities totaled $7,060 at June 30, 2016. This represents a 13.1% increase from the December 31, 2015 total of $6,244. Restricted securities consist of Federal Reserve Bank and Federal Home Loan Bank stock.

The following table shows the Company’s investments’ amortized cost and fair value, aggregated by investment category for the periods presented:


	June 30, 2016							December 31, 2015
Available-For-Sale	Amortized Cost		Fair Value		% of Total			Amortized Cost		Fair Value		% of Total
U.S.Treasury and other U.S. government agencies	$	4,410		4,434		3.00	%	$	4,918		4,836		3.61	%
State and municipal		99,245		102,453		69.38	%		86,604		87,595		65.46	%
Corporate bonds		2,000		1,980		1.34	%		2,000		1,979		1.48	%
Mortgage backed securities		35,258		35,558		24.08	%		36,617		36,165		27.02	%
Time deposits		3,250		3,250		2.20	%		3,250		3,250		2.43	%

Total	$	144,163		147,675		100.00	%	$	133,389		133,825		100.00	%

The table below summarizes the contractual maturities of securities available for sale at June 30, 2016:


	Amortized Cost		Estimated Fair Value
Due within one year	$	1,273	$	1,278
Due in one to five years		18,758		18,957
Due in five to ten years		13,429		13,808
Due after ten years		75,445		78,074
Mortgage backed securities		35,258		35,558

Total	$	144,163	$	147,675

Premises and Equipment

Premises and equipment, net, totaled $9,088 at June 30, 2016 compared to $9,196 at December 31, 2015, a net decrease of $108 or 1.2%. Asset purchases amounted to approximately $368 during the first six months of 2016 while related depreciation expense amounted to $476. At June 30, 2016, we operated from seven retail branch locations as well as two stand-alone mortgage loan production offices and one commercial loan production office. Two of our bank branch locations, including our main office, are in Brentwood, Tennessee. Our other five bank branch locations are in Franklin, Springfield, Gallatin and Nashville, Tennessee. Our commercial loan production office is in Murfreesboro, Tennessee. As of June 30, 2016 our mortgage loan production offices were located in Tennessee cities of Brentwood and Hendersonville, as well as Timonium, Maryland. During the six months ended June 30, 2016, the Company was transitioning most of it out-of-market branches to another bank as more fully described in Note 12 in the consolidated financial statements included elsewhere herein. Until the Merger, all of our facilities were leased. After the Merger, we own three branch and office facilities located in Robertson and Sumner counties of Tennessee.

Deposits

Deposits represent the Company’s largest source of funds. The Company competes with other bank and nonbank institutions for deposits, as well as with a growing number of non-deposit investment alternatives available to depositors such as money market funds and other brokerage investment products. Challenges to deposit growth include price changes on deposit products given movements in the interest rate environment and other competitive pricing pressures, and customer preferences regarding higher-costing deposit products or non-deposit investment alternatives.

At June 30, 2016, total deposits were $647,851, an increase of $7,843, or 1.2%, compared to $640,008 at December 31, 2015. During the first six months of 2016, we increased non-interest bearing demand deposits by $23.2 million, increased savings and money market deposits by $4.7 million, while time deposits decreased $10.7 million and interest-bearing demand deposits decreased $9.3 million. The primary reason for the decline in interest-bearing demand deposits was the continuing focus on growth of our non-interest bearing deposits and using alternative sources of funds to better manage our cost of funds.

The following table shows maturity of time deposits of $100 or more by category based on time remaining until maturity at June 30, 2016.


	June 30, 2016
Twelve months or less	$	83,803
Over twelve months through three years		20,576
Over three years		12,075

Total	$	116,454

Market and Liquidity Risk Management

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

Interest Rate Sensitivity—Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. In the normal course of business, we are exposed to market risk arising from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we can meet customer demands for various types of loans and deposits. ALCO determines the most appropriate amounts of on-balance sheet and off-balance sheet items. Measurements we use to help us manage interest rate sensitivity include a gap analysis, an earnings simulation model and an economic value of equity model. These measurements are used in conjunction with competitive pricing analysis and are further described below.

Interest Rate Sensitivity Gap Analysis—The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments which are approaching maturity. The measurement of our interest rate sensitivity, or gap, is one of the three principal techniques we use in our asset/liability management effort.

Our policy is to have 12 and 24-month cumulative repricing gaps that do not exceed 15% of assets. We were in compliance with our policy as of June 30, 2016. Although we do monitor our gap on a periodic basis, we recognize the potential shortcomings of such a model. The static nature of the gap schedule makes it difficult to incorporate changes in behavior that are caused by changes in interest rates. Also, although the periods of estimated and contractual repricing are identified in the analysis, the extent of repricing is not modeled in the gap schedule (i.e. whether repricing is expected to move on a one-to-one or other basis in relationship to the market changes simulated). For these and other shortcomings, we rely more heavily on the earnings simulation model and the economic value of equity model discussed further below.

Earnings Simulation Model—We believe interest rate risk is effectively measured by our earnings simulation modeling. Earning assets, interest-bearing liabilities and off-balance sheet financial instruments are combined with simulated forecasts of interest rates for the next 12 months and 24 months. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net interest income in instantaneous changes to interest rates. We also periodically monitor simulations based on various rate scenarios such as non-parallel shifts in market interest rates over time. For changes up or down in rates from management’s flat interest rate forecast over the next 12 and 24 months, limits in the decline in net interest income are as follows:


	Maximum Percentage Decline in Net Interest Income from the Budgeted or Base Case Projection of Net Interest Income
	Next 12 Months		Next 24 Months
An instantaneous, parallel rate increase or decrease of the following at the beginning of the first quarter:
± 100 bp		10%		10%
± 200 bp		15%		15%
± 300 bp		20%		20%
± 400 bp		25%		25%
Non-parallel shifts		15%		15%

We were in compliance with our earnings simulation model policies as of June 30, 2016, indicating what we believe to be a fairly neutral profile.

Economic value of equity—Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity.

To help monitor our related risk, we’ve established the following policy limits regarding simulated changes in our economic value of equity:


Instantaneous, Parallel Change in Prevailing Interest Rates Equal to		Maximum Percentage Decline in Economic Value of Equity from the Economic Value of Equity at Currently Prevailing Interest Rates
+100 bp		15%
+200 bp		25%
+300 bp		30%
+400 bp		35%
Non-parallel shifts		35%

At June 30, 2016, our model results indicated that we were within these policy limits.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as interest rate

caps and floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. Our ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.

Liquidity Risk Management —The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.

Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.

The Company has established a line of credit with the Federal Home Loan Bank of Cincinnati which is secured by a blanket pledge of 1-4 family residential mortgages, multi-family residential, and home equity loans, and available-for-sale securities.

At June 30, 2016, advances totaled $124,871 compared to $135,759 as of December 31, 2015. The decline in FHLB advances is attributable to our decline in mortgage loans held for sale relating to the seasonal reduction of originations of mortgage loans and transitioning most of our out-of-market mortgage offices to another bank.

At June 30, 2016, the scheduled maturities of our FHLB advances and interest rates were as follows (scheduled maturities will differ from scheduled repayments):


Scheduled Maturities	Amount		Weighted Average Rates
2016	$	110,900		0.44	%
2017		1,000		1.03	%
2018		6,000		2.74	%
2019		—		0.00	%
2020		—		0.00	%
Thereafter		6,971		1.94	%

	$	124,871		0.63	%

Capital

Stockholders’ equity was $106,024 at June 30, 2016, an increase of $9,273, or 9.6%, from $96,751 at December 31, 2015. The Company raised $3.5 million of capital through the exercise of Company stock options. The additional capital was pushed-down to the Bank and when combined with the accretion of earnings to capital led to an increase in the Bank’s June 30, 2016 Tier 1 leverage ratio to 10.59% compared with 9.88% at December 31, 2015 (see other ratios discussed further below). Common dividends of $1,489 (declared during the fourth quarter of 2015) were paid during the six months ended June 30, 2016.

Banks as regulated institutions are required to meet certain levels of capital. The Federal Reserve Board of Governors, the primary federal regulator for the Bank, has adopted minimum capital regulations or guidelines that categorize components and the level of risk associated with various types of assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their assets in accordance with the guidelines. We regularly review our capital adequacy to ensure compliance with these guidelines and to help ensure that sufficient capital is available for current and future needs. It is management’s intent to maintain an optimal capital and leverage mix for growth and for shareholder return.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notifications that management believes have changed the institution’s category.

Actual and required capital amounts and ratios are presented below as of June 30, 2016 and December 31, 2015 for the Company and Bank.


	Actual Regulatory Capital					Minimum Required Capital Including Capital Conservation Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2016
Company
Common equity Tier 1	$	92,488		12.56	%	$	37,739		5.125	%		N/A		N/A
Tier I leverage		92,488		10.66	%		34,705		4.00	%		N/A		N/A
Tier I risk-based capital		92,488		12.56	%		48,784		6.625	%		N/A		N/A
Total risk-based capital		101,176		13.74	%		63,511		8.625	%		N/A		N/A
Bank
Common equity Tier 1	$	91,834		12.49	%	$	37,682		5.125	%	$	47,792		6.50	%
Tier I leverage		91,834		10.59	%		34,687		4.00	%		43,359		5.00	%
Tier I risk-based capital		91,834		12.49	%		48,711		6.625	%		58,821		8.00	%
Total risk-based capital		100,522		13.67	%		63,424		8.625	%		73,535		10.00	%

December 31, 2015
Company
Common equity Tier 1	$	84,608		12.02	%	$	31,675		4.50	%		N/A		N/A
Tier I leverage		84,608		9.92	%		34,116		4.00	%		N/A		N/A
Tier I risk-based capital		84,608		12.02	%		42,234		6.00	%		N/A		N/A
Total risk-based capital		92,431		13.13	%		56,317		8.00	%		N/A		N/A
Bank
Common equity Tier 1	$	84,196		11.97	%	$	31,653		4.50	%	$	45,720		6.50	%
Tier I leverage		84,196		9.88	%		34,087		4.00	%		42,609		5.00	%
Tier I risk-based capital		84,196		11.97	%		42,204		6.00	%		56,271		8.00	%
Total risk-based capital		92,019		13.08	%		56,281		8.00	%		70,351		10.00	%

Effects of Inflation and Changing Prices

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

Off Balance Sheet Arrangements

Off-balance sheet arrangements generally consist of unused lines of credit and standby letters of credit. Such commitments were as follows:


	June 30, 2016
Unused lines of credit	$	143,561
Standby letters of credit		10,813

Total commitments	$	154,374

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if the Company complies with the greater obligations of public companies that are not emerging growth companies, the Company may avail itself of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as the Company is an emerging growth company. The Company will remain an emerging growth company for 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 total annual gross revenues equal or exceed $1 billion in a fiscal year. Management cannot predict if investors will find the Company’s common stock less attractive because it will rely on these exemptions. If some investors find the Company’s common stock less attractive as a result, there may be a less active trading market for its common stock and the Company’s stock price may be more volatile.

Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected to take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this filing, as well as the financial statements we will file in the future, will be subject to all new or revised accounting standards generally applicable to private companies. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-public companies.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The information required by this Item 3 is discussed in Part 1 – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Market and Liquidity Risk” on pages 61 to 63.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

Commerce Union and its wholly-owned subsidiary, Reliant Bank, are periodically involved as a plaintiff or defendant in various legal actions in the ordinary course of its business. Neither Commerce Union nor Reliant Bank is involved in any litigation that is expected to have a material impact on our financial position or results of operations. Management believes that any claims pending against Commerce Union 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 Commerce Union’s consolidated financial position.

Item 1A.

Risk Factors.

Investing in Commerce Union involves various risks which are particular to our company, our industry, and our market area. We believe all significant risks to investors in Commerce Union have been outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition. There has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

Item 6.

Exhibits.



10.1		Mutual Cooperation Agreement, dated March 31, 2016, by and between BBMC Mortgage, LLC and Commerce Union Bancshares, Inc.

31.1		Certification pursuant to Rule 13a-14(a)/15d-14(a)

31.2		Certification pursuant to Rule 13a-14(a)/15d-14(a)

32.1		Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002

32.2		Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002

101		Interactive Data Files*

The documents formatted in eXtensible Business Reporting Language (XBRL) and attached as Exhibit 101 to this report are deemed not filed as part of a registration statement or prospectus for purposes of Section 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	COMMERCE UNION BANCSHARES, INC.

August 12, 2016		/s/ William Ronald DeBerry
		William Ronald DeBerry
		Chief Executive Officer
		(Principal Executive Officer)

August 12, 2016		/s/ J. Daniel Dellinger
		J. Daniel Dellinger
		Chief Financial Officer
		(Principal Financial Officer)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company